Weekly Comment: Did the football world cup end Wall Street’s winning run?

Market overview

What do cats and the main US stock market have in common? They both have nine lives. The old feline proverb speaks for itself. As for the US index, a nine-week winning streak that had seen the market shrug off the on-off news cycle of the Middle East conflict, volatile oil prices and heightened geopolitical tensions, finally came to an end last week. No shortage of contenders as to what brought the run to a halt. One stands out though, the upcoming FIFA world cup...Referee!

Contender#1: Middle East conflict

Rewind to the last weekend of May and the chances of a peace deal between Iran and the US were looking as good as they had been since the conflict started. And, for a change, it was not just US President Trump talking up the prospects of a deal. This time, Iran too had confirmed progress was being made on key issues, including the reopening of the Strait of Hormuz, a vital shipping channel through which 20% of global oil and gas production passed pre-conflict.

Days later, however, Iran announced it was suspending talks citing Israel’s ongoing offensive in Lebanon and US ceasefire breaches. The oil price, which had started the week at around US$92 per barrel, rose to the US$97 level. Enough to end the winning streak? On its own, surely not. After all, the on-off cycle of the conflict has been a constant during the nine-week run.

Contender#2: An AI wobble?

Shares in Broadcom suffered a double-digit percentage fall following the release of the chipmaker’s second-quarter results. At the headline level, there was much to like: a 48% year-on-year increase in revenues and a 53% jump in operating profits. What the market wasn’t too keen on was the company’s third-quarter guidance, forecasting US$16bn in AI-related chip sales. The problem being the market had pencilled in US$17.7bn. Cue the tumbling share price. Context is everything though. For the shares had been on a tear in the run-up to the results. So much so, the shares ended the week down just 2%.

What does this mean for the wider AI trade that has powered markets these past few months? A quick roll call of go-to names suggests Broadcom was something of an outlier: bellwether stock Nvidia posted a 2% rise for the week, while the likes of Samsung, Oracle, Arm and Applied Materials all posted double-digit percentage gains. And continued enthusiasm for all things AI was there for all to see after Alphabet successfully completed an US$85bn equity raise. Further tests of market appetite for the AI trade continue to come thick and fast. Next up, the much-anticipated market debut of Space X this week at a mooted valuation of US$1.75tn. For now, it seems, the AI trade still has legs.

Contender#3: The FIFA World Cup

The 23rd football (or is that soccer?) world cup is due to kick off on 11 June. The football fiesta, which is being held in the US, Mexico and Canada, was one reason put forward for Friday’s blowout US non-farm payrolls report. 172k jobs were added in May, more than double the 85k that had been expected. At the same time, the March and April figures were upped by a combined 93k. The strong numbers increased market expectations that the Federal Reserve will raise rates this year. Bond yields rose, while stock markets fell.

What’s that got to do with the world cup? Of the 172k jobs added in May, 70k were in the leisure and hospitality sectors. One possible explanation for this hospitality jobs surge is that firms have been hiring ahead of the world cup to accommodate the legions of fans expected in the US over the coming weeks. And that’s how the world cup may have played its part in ending the US stock market’s winning streak.

Weekly market moves:

The MSCI All Country World Index (MSCI ACWI) ended the week down 2.2%, leaving a year-to-date (YTD) gain of 9.9%.

United States:

The main US stock market recorded a 2.5% loss (+8.4% YTD), its first for nine weeks. Growing expectations that interest rates will need to be raised this year following the stronger-than-expected employment report saw growth (-4%) underperform value (-0.7%) stocks. Small caps (-2.9%) were somewhere in between. YTD, growth is up +3.9%, value +12.9%, while small caps top the lot with a +14.8% gain.

US Treasuries were on the backfoot thanks to the robust economic data. As well as the non-farm payrolls, the Institute for Supply Management’s manufacturing Purchasing Managers’ Index (PMI) also beat expectations. At 54.0, May’s PMI reading is the highest in four years. No surprise then that the yield on the 10-year Treasury ticked nine basis points higher to 4.53% (up 36 basis points YTD), while the 2-year Treasury yield increased 14 basis points to 4.15% (up 67 basis points YTD).

United Kingdom:

UK large caps outperformed their global peers after edging 0.4% lower (+6.2% YTD)— the market’s energy and resources bias working in London’s favour. Mid-caps fared worse but still outperformed global stocks— despite a 1.5% loss for the week, mid-caps are up 4.3% YTD.

Gilts gave back some of their recent gains: the yield on the 10-year note increased nine basis points to 4.90% (up 43 basis points YTD). Similarly, sterling weakened against the US dollar, ending the week at US$1.33 compared to US$1.35 previously. The weakness perhaps a nod to the approaching Makerfield by-election which is due to be held on 18 June. Opinion polls indicate Labour’s Andy Burnham is likely to win. If Burnham does win, he is expected to launch a bid to replace Sir Keir Starmer as prime minister. The UK domestic politics premium reasserting itself then.

Europe ex UK:

As with the UK, European stocks outperformed by virtue of not falling as much as their global counterparts. The MSCI Europe ex-UK Index ended down 0.5% (+6.9% YTD). At the national level, France stood out with a 0.5% weekly gain (+3.2% YTD); while Germany’s main index lost 1.4% (+1.1% YTD); Italy’s finished down 0.3% (+13.9% YTD); and Switzerland’s ended 1.1% lower (+3.9% YTD). The euro weakened against the US dollar, finishing the week at US$1.15 compared to US$1.17 previously. Finally, with the European Central Bank expected to raise interest rates this week, the yield on the 10-year German Bund yield was always going to be under upwards pressure and so it proved, rising 10 basis points to 3.04% (up 18 basis points YTD).

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