29th April 2024
Markets last week
Global equity markets rebounded, marking the best week of 2024 so far
Robust growth in cloud computing and Artificial Intelligence (AI) drove strong earnings for US mega-cap technology companies
The technology sector surged, rebounding from a pullback which started in late March
Consumer staples struggled due to the narrow US economy and reduced consumer purchasing power particularly impacting lower income households
Q1 US Gross Domestic Product (GDP) growth fell short of expectations at 1.6%
Persistent inflationary pressures were evident in the US personal income and spending report, which also reflected cost of living strains
Hong Kong and Chinese equities surged on positive corporate earnings and GDP growth, the recent ban on short selling has bolstered the market
UK equities enjoyed broad-based gains across all sectors as a number of big banks reported earnings, painting a positive outlook for the sector
Upcoming events include Q1 Eurozone GDP growth, with a return to expansion anticipated, and the US rate decision, where we expect a more hawkish tone from Chairman Powell.
Analysis
Equity markets rebounded across the globe delivering the best week so far this year. It was a particularly busy week for corporate earnings with several of the US mega-cap technology companies and prominent cloud and AI players reporting for the first quarter. These reports revealed robust growth in cloud computing, surpassing expectations, along with increased contributions from AI to revenue growth. Notably, these companies have pledged to ramp up their investments in AI and cloud technologies, underscoring the transformative potential of these trends. Technology went from being the weakest sector the week prior to the best performing sector last week, although it remains off its peak from late March.
Elsewhere, consumer staples have struggled to achieve the holy grail of both volume and price growth. While several company specific factors have hampered performance, a common recurring theme has been a narrow US economy, with lower income households struggling. One leading consumer staple company alleged that the lower income bracket in the US has seen as much as a 50% decline in purchasing power due to the combination of high inflation over the last two years and reduced Supplemental Nutrition Assistance Program benefits, negatively impacting sales.
While the US economy at a headline level remains resilient, lower income households are straining under the weight of sticky inflation and high interest rates. This was clear again in the personal income and spending report released on Friday where personal spending continues to rise faster than income, exhibiting current cost of living pressures.
US GDP growth for the first quarter of 2024 was weaker than anticipated coming in at 1.6% vs consensus expectations of 2.5% and falling from 3.4% in the prior quarter. Lower than expected economic growth in the US may not be such a bad thing as there is a consensus that the US economy is running too hot and that a slowdown in the pace of growth is necessary for inflation to ease enough for the Federal Reserve (Fed) to begin moderating monetary pressures. Simultaneously personal consumption expenditures (PCE) inflation (the Fed’s preferred measure) came in mildly hotter than anticipated ticking up from 2.5% year on year in February to 2.7% for March. Bond yields continued their upward trajectory although the moves were minor compared with the week prior. The 5% level on the two-year note remains a key level of support and a notable reference point for the market. The two-year yield closed the week at 4.98%.
Hong Kong and Chinese equities sprang higher compounding the signs of recovery in recent weeks. Hong Kong equities rose 8.1% in GBP terms and are now in positive territory for the year, up 5.6%. Corporate earnings in the region have been strong, GDP growth surprised to the upside and the ban on short selling has bolstered the market. Increased fiscal stimulus could fuel a robust economic recovery but subdued private demand and limitations on monetary assistance pose challenges. The difficulties still facing China’s real estate sector also stand out.
UK equities had a good week with the FTSE All Share up 3% taking year-to-date gains to 4.5%. The rally was broad based with gains across all sectors. Some of the UK’s big banks reported their earnings and although there was some minor disappointment on net interest income, a dynamic also seen in the US, the results in totality were positive and paint a strong outlook for these banks. The UK market is at all-time highs but is cheap on a fundamental basis, i.e. Price/Earnings comparisons vs history and compared with other markets.
The Week ahead
It is another busy week for corporate earnings with one of the US mega-cap ‘Magnificent Seven’ due to report as well as Chinese banks and an embattled real estate developer.
Tuesday: Eurozone GDP and inflation data
Our thoughts: Good news for the Eurozone economy and the European Central Bank (ECB); economic growth is anticipated to have moved back into positive territory for Q1 2024 coming in at 0.1% from -0.1% in Q4 2023. Simultaneously inflation in April is expected to fall to 0.6% month on month from 0.8% in March, core inflation is also expected to have fallen. Futures are pricing in an 88% chance that the ECB will cut rates in June.
Wednesday: US rate decision
Our thoughts: US Fed officials have become noticeably more hawkish since the end of March following sticky inflation data. Chairman Powell is likely to strike a more hawkish tone possibly indicating that the three cuts the Fed initially anticipated for 2024 will not all be possible. We do not anticipate that he will indicate the possibility of another hike.
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