The global financial markets continue to grapple with a complex mix of geopolitical tensions, inflationary pressures, and evolving central bank policies. The past year has seen significant shifts in market dynamics, with varying impacts across different regions. This commentary provides an overview of the key factors influencing financial markets in the UK, Europe, the United States, the Far East, and emerging markets.
UK
The UK financial markets are adjusting to the latest policy moves by the Bank of England which recently increased interest rates to 5.25% in an effort to combat persistent inflation. The FTSE 100 has shown significant gains, bolstered by strong performances in the energy and financial sectors. The housing market has shown signs of cooling as higher borrowing costs start to impact affordability.
The FTSE 100 has shown resilience, supported by the strong performance of energy and commodity sectors. It hit record highs in June and whilst the last week of May saw a slight fall, it has been a very good month overall for UK equities. However, uncertainties surrounding trade agreements and regulatory changes continue to pose risks and a general election will always produce a little turbulence.
The timing of July’s election may well have been based on positive news on inflation and energy bills coming down in the summer months, but it is worth noting that there has been little correlation over the years between the performance of the FTSE100 and which political party is in government. Markets dislike uncertainty which an election can temporarily bring, but they have little medium to long term interest in politics so investment decisions should not be based on the results in July, whatever they are. They will undoubtedly throw up challenges and opportunities for future tax planning over time but we will address these with you as they arise.
The energy price cap will come down to £1568 in July, saving £122 pa for a typical bill which is the lowest level in two years, but bills are still averaging over £400 per year than three years ago. An increase is expected in October as we head into winter, so the good news may be short lived and there may be consumer apathy towards switching energy tariffs given there has been little reason for moving in recent years during a period when the energy regulator has controlled pricing.
Europe
European markets in May 2024 reflect a region still dealing with economic fragmentation. The European Central Bank (ECB) has maintained a cautious stance with a key interest rate at 3.75%, aiming to balance growth and inflation control. The DAX and CAC 40 have experienced mixed performance with manufacturing sectors facing headwinds from supply chain disruptions, plus energy price volatility due to the prolonged Ukraine conflict. However, the tech sector has seen a rebound, driven by innovation and increased digital adoption across the continent.
United States
In the United States, May was marked by significant market movements as the Federal Reserve’s aggressive monetary tightening continues. With the federal funds rate now at 6%, inflation shows signs of moderating, but economic growth has also slowed. The S&P 500 and NASDAQ have experienced volatility, with tech and growth stocks particularly sensitive to interest rate hikes. The labour market remains tight, although wage growth is starting to decelerate. Investors are closely watching the upcoming presidential election, which adds a layer of short term uncertainty to the market outlook.
Far East
The Far East markets have shown resilience of late, despite ongoing geopolitical challenges. In China, the Shanghai Composite has recovered some losses following the relaxation of stringent COVID-19 lockdowns and stimulus measures aimed at revitalising the economy.
However, the tech sector faces regulatory scrutiny, dampening some investor enthusiasm. Japan’s Nikkei 225 has performed well, supported by strong corporate earnings and accommodative policies from the Bank of Japan, despite the challenges posed by a weakening yen and global supply chain disruptions.
Emerging Markets
Emerging markets are navigating a turbulent environment characterised by capital outflows and currency volatility. Countries like Brazil and South Africa are particularly affected by rising global interest rates, which have led to higher borrowing costs and inflationary pressures.
India continues to be a bright spot with strong economic growth driven by robust domestic demand and a thriving tech sector. The strength of the US dollar remains a significant challenge, impacting trade balances and debt servicing costs across emerging economies.
Conclusion
In summary, there are many positive signs for UK investors at the moment although the global financial markets are still navigating a period of heightened uncertainty and volatility. Regional differences highlight the importance of a well diversified portfolio and the need for investors to take a long term view and stay invested.
As we move forward, monitoring central bank policies, geopolitical developments, and economic indicators will be crucial in understanding and anticipating market movements across different regions.