Quilter Cheviot|Weekly Comment

Stocks extend their push higher

Our weekly market overview from Quilter Cheviot

By Richard Carter, Head of Fixed Interest Research

Global equities enjoyed another move higher last week, with European stocks outperforming. The MSCI All Country World Index advanced 1.7%, taking year-to-date gains to 8.4%.

A stronger than forecast set of earnings updates and growing belief that central banks will soon embark on cutting interest rates were the driving forces behind a 3.4% rally in the MSCI Europe ex UK (9.9% YTD). German benchmarks led the way, posting a weekly gain of 4.3% (12.1% YTD) and moving up to a new all-time high.

It was also a good week for UK stocks, rising 2.8% to take the 2024 return into double-digit territory (10.7% YTD). After a slow start to the year where UK equities lagged their international peers they have experienced a strong catch up of late, ending last week with a higher year-to-date return than US benchmarks, in local currency terms.

The latest UK economic data has shown welcome strength, with 0.6% GDP growth in the first quarter signalling the mild recession is over. A strong performance from the services sector was a key contributor, and with inflation easing and interest rate cuts seemingly pencilled in for the summer the outlook appears increasingly favourable.

While growth remains fairly lacklustre compared to the likes of the US, it still represents the fastest pace in two years and raises hopes that 2024 could be the year that economic stagnation subsides and the economy returns to consistent, if unspectacular, growth. The short, shallow recession appears to be over and there is a growing clamour for interest rate cuts to stimulate growth and get business moving again.

Although the Bank of England kept interest rates unchanged at 5.25% following last week’s policy meeting, there were suggestions a move lower could occur at its next meeting in June. Governor Andrew Bailey hinted that rates could even require being lowered more than markets currently expect, although incoming data would provide further guidance. Deputy governor Dave Ramsden voted for a 25 basis point rate cut, joining Swati Dhingra who also voted for a reduction at the two previous meetings. Before this, no member had voted for a rate cut since March 2020, at the height of the Covid-19 crisis.

The pound ended the week little changed at 1.25 against the US dollar. The 10-year gilt yield fell 6 basis points on the week, ending at 4.16%.

US economy slowing?

An unexpected rise in the US weekly jobless claims piqued the interest of some investors last week, supporting the recent nonfarm payrolls data in pointing to a cooling of the labour market. A reading of 231k for the weekly jobless figure was the highest level since November. There was further evidence of a slowdown the following day when the University of Michigan showed a sharp dop in its consumer sentiment index, which fell to a six-month low of 67.4.

While these figures are certainly not a cause for alarm, they do suggest that economic activity is slowing in the world’s largest economy. Inflation data remains seemingly prohibitively high for the Federal Reserve to lower interest rates and provide some easing, although that picture could change this week with the release of the producer price index (PPI) and consumer price index (CPI) for April.  

US stock benchmarks closed up 1.9% last week (10% YTD), marking a third consecutive week of gains. Tech indices lagged a little, rising 1.2% (9.1%) as value shares outperformed.

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