Written by Ilaria Massei
Equity markets were mostly down last week, with some bright spots in Continental Europe where the MSCI Europe Ex-UK equity index rose by +0.5% and in the UK where the FTSE All Share increased by +1.6% in GBP terms. Fixed Income markets were overall positive, with the Bloomberg Global Aggregate up +0.3% in GBP terms.
Over the past few weeks, the market narrative in the US has partially shifted from strong growth and a healthy economy to disinflation and expectations of lower interest rates in the near future. With inflation and the job market coming under control, markets now anticipate that the central bank in the US, the Federal Reserve, will likely cut interest rates in September. On the corporate front, two of the larger companies in the S&P 500, part of the so-called “magnificent seven,” reported some disappointing earnings results last week. Tesla’s revenues fell short of expectations, and Alphabet’s heavy investment in AI raised concerns about future profitability. This news further fuelled a shift among investors from mega-cap US technology giants to small-cap stocks. As a result, the Russell 2000, an index tracking around 2,000 small-cap companies in the US, rose by +4.0% in GBP last week. The prospect of lower interest rates suggested by weaker economic data should benefit smaller companies, which typically carry more debt and are therefore more sensitive to changes in interest rates.
While the largest shift has been into the Russell 2000 and small caps in the US, the UK has also benefitted from this rotation, leading to a resurgence of UK Equities last week and more broadly this month to date. The FTSE 100 posted a positive +1.6% return last week, making it the best-performing equity market. Meanwhile, the FTSE 250, which tracks mid-sized UK companies, has performed even better on a month to date basis, rising by +5.5%. UK stocks, which have been out of favour for a long time, are now benefiting from renewed political stability, earnings growth, valuation adjustments, and dividends.
Another notable development last week was observed in Japan, with a significant shift in the Yen’s trajectory. For many years, the Bank of Japan’s low interest rate policy, aimed at stimulating the economy, led to a depreciation of the currency against most major currencies. However, the Yen has recently started to strengthen, likely helped by suspected but not yet confirmed government actions to support it. While such measures may have a short-term impact, a clearer indication from the Bank of Japan that the interest rate gap between Japan and other countries is closing could provide the catalyst needed for a more sustained recovery of the Yen.
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