Quilter Cheviot|Weekly Comment

Robust performance from stock markets

Our weekly market overview from Quilter Cheviot

By Richard Carter, Head of Fixed Interest Research

A mixed week for markets as major news leaves Europe

Last week, the markets displayed a mixed performance, ultimately closing on a positive note. The MSCI All Country World Index saw a 1.2% increase, contributing to a 10.4% year-to-date (YTD) growth.

In the US, economic readings started on a sombre note with concerns of “stagflation” due to slowing growth amidst high inflation. This was supported by the Institute for Supply Management (ISM), which reported a further contraction in manufacturing activity. However, the mood shifted midweek as the ISM’s services index jumped to 53.2 in May, reaching nine-month high and surpassing expectations, which ultimately went some way to help alleviate fears of stagflation.

Marketwise, the tech-heavy Nasdaq Composite led the charge once again with a 2.4% surge (14.5% YTD), while large-cap also rose by 1.4% (12.8% YTD), both achieving new record intraday highs. In contrast, small-cap fell by -2.1% (0.6% YTD). Growth stocks significantly outperformed value shares, with growth index rallying by 2.7% (16.1% YTD) against the value index’s -0.8% decline (6.8% YTD).

European markets gained momentum following the ECB’s interest rate cut, the first in five years. The MSCI Europe ex UK Index increased by 1.6% (11.7% YTD). The euro remained stable against the US dollar, closing the week at 1.08 USD for 1 EUR.

The UK markets were subdued, with large caps ending the week slightly down by -0.2% (8.8% YTD) and mid cap declining by -0.8% (6.0% YTD). The British pound maintained its value against the US dollar, ending at 1.27 USD for 1 GBP.

Japan’s stock markets showed mixed results. Large-cap decreased by -0.6% (17.7% YTD) and small-cap dropped by 1.0% (10.2% YTD). The yen’s modest rally to 156.8 JPY against the US dollar – up from the previous week’s 157.3 JPY – presented challenges for exporters. Nonetheless, positive PMI data and the first year-on-year increase in household spending in 14 months offered some positive market sentiment.

ECB cuts interest rates for first time in five years

The European Central Bank (ECB) announced a 25-basis point reduction in its deposit rate to 3.75%, aligning with market expectations and positioning itself ahead of counterparts in the US and the UK. The ECB’s Governing Council explained that after nine months of steady rates, a moderation in policy restriction was justified based on an updated inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission.

The ECB revised its inflation forecast for 2024 to an average of 2.5%, up from the previous 2.3% estimate. The forecast for 2025 was also adjusted to 2.2% from 2.0%, while the 2026 forecast remains at 1.9%.

Following the ECB’s lead, Denmark’s central bank also reduced its benchmark rate by 25 basis points to 3.35%.

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