Quilter Cheviot|Weekly Comment

European rally lifts stocks into positive territory

Our weekly market overview from Quilter Cheviot

By Alan McIntosh, Chief Investment Strategist

Global stock indices posted decent gains last week, as a strong move higher in European bourses propelled the MSCI All Country World Index to a 1.3% advance. The benchmark is now up for the year (+1.0%) thanks to resilient corporate earnings, the announcement of additional stimulus measures in China and a dovish undertone to the communication following the first European Central Bank (ECB) meeting of 2024.

The MSCI Europe ex UK index rose 3.2% on the week, taking year-to-date gains to 1.5%. French stocks (+3.6%) were the standout performers in Europe, as luxury goods companies lifted the benchmark to a new record high. LVMH shares rallied over 12% after the firm announced a 10% increase in turnover in the three months to December, surpassing analysts’ expectations and displaying signs of encouragement in the face of the Chinese economic slowdown.

The main economic event in Europe last week was the ECB monetary policy decision. Although the key interests were kept unchanged at their highest levels on record, the rhetoric from ECB president Christine Lagarde did little to push back on market expectations for interest rate reductions in the coming months. An acknowledgement from Lagarde that the disinflation process was working as rapid wage growth was showing signs of slowing was welcomed by financial markets that are expecting a first interest rate reduction to come in April or June. 

European government bond yields ended the week a little lower, with the 10-year German bund yield sliding 4 basis points to end at 2.30%. UK yields increased a little, as the 10-year gilt yield rose 3 basis points to end at 3.96%, up 43 basis points year-to-date. UK large-cap stocks outperformed global peers but lagged their continental equivalents with a 2.3% gain on the week, leaving the benchmark down 1.2% year-to-date. The pound and euro ended the week little changed against the US dollar, at 1.27 and 1.09 respectively.

Escalating tensions

Reports over the weekend that three US service members were killed by a drone attack in Jordan marks the latest escalatory step in an increasingly fraught situation in the Middle East. The White House blamed “radical Iran-backed militant groups” for the deaths which were the first time US troops have been killed in an attack since the Israel-Hamas war in Gaza began in October. US defence officials said at least 34 service members were injured in the attack at a military base, which the Islamic Resistance in Iraq claimed was in retaliation for Biden’s support of Israel in the war.

Oil prices jumped higher on Monday in response, with Brent crude, the international benchmark, rising over 1% to trade above US$84 a barrel — its highest level since early November. Market participants are closely watching developments in the region as more than 30 attacks by Houthi rebels on international and commercial vessels sailing through the Red Sea since mid-November threaten to disrupt a critical shipping lane for global trade.

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