Quilter Cheviot|Weekly Comment

US equities continue to lead the way

Our weekly market overview from Quilter Cheviot

By Richard Carter, Head of Fixed Interest Research

Last week saw more of the same in the equity space, with tech driving US benchmarks to new highs, Europe ending positive but behind global metrics and UK indices declining. The MSCI AC World Index closed Friday up 0.6% on the week, taking 2024’s gain to 2.6%. Government bond yields rose, as the UK 10-year gilt yield moved back above the 4% level to 4.08% — a weekly increase of 17 basis points on the back of stronger than forecast economic data.

There were no major market catalysts last week to alter the course charted out since the start of the year and once more the story was a fairly concentrated push higher among a handful of mega US tech stocks. US tech indices tacked on 2.6% on the week (+6.6% YTD), as broader US equity benchmarks gained 1.4% (+5.5% YTD), continuing the run of American outperformance.

A record US$42bn US Treasury 10-year note auction was met with firm demand, indicating solid investor appetite for government bonds. Demand concerns surrounding burgeoning levels of US government debt last Autumn dampened stock markets, but any fears have largely retreated to the back of investor’s minds in subsequent months, assuaged by a string of robust auction results. The 10-year US Treasury yield increased to 4.18% last week, up 16 basis points, while the 2-year Treasury yield rose 11 basis points to 4.48%.

Growth stocks outperformed value shares and small caps outperformed large caps, as small-cap benchmarks gained 2.4% on the week (-0.8% YTD). In an indication of recent breadth among US equities, equally weighted indices trailed the standard market-weight equivalents for the fourth time in five weeks.

The release of US inflation data this week has the potential to drive some volatility. The Consumer Price Index (CPI) is expected to drop below 3% in annual terms for the first time since March 2021, according to consensus forecasts among economists.

UK extends underperformance

Stock markets in London slipped last week, with large cap benchmarks declining 0.6% (-2.0% YTD). The market has struggled to keep up with European and US peers thus far this year, due to downbeat sentiment on China, little sector exposure to tech companies and meagre domestic growth expectations.

There have been some potentially positive noises on pension reforms in the coming months providing a boost to UK equities, but for the time being they continue to lag peers. Last week the MSCI Europe ex UK gained 0.4% (+2.0% YTD), boosted by strong corporate earnings updates. The benchmark continues to track somewhere in between UK and US equivalents, extending a prevailing theme of 2023.

The latest UK employment figures came in better than expected, easing pressure on the Bank of England (BoE) ease monetary policy to support the economy. The unemployment rate for the three months through November fell to 3.9%, down firmly from 4.2% previously and BoE forecasts for 4.3% in Q4.

Industry surveys also supported an economy surprising to the upside, albeit against modest expectations. The purchasing managers index (PMI) for the services sector was a particular highlight, jumping to 54.3 in January, marking a third expansionary print above 50 in a row. The pound remains fairly stable against the US dollar, ending last week at 1.26.

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