Weekly comment: Markets consolidate as investors take stock

Market overview – Richard Carter, Head of Fixed Interest Research

Stock markets around the world pulled back last week, trimming year-to-date gains with the MSCI All Country World Index declining 1.4% (+5.9% year-to-date). US inflation data, heightened geopolitical risks and uncertainty around corporate results as first quarter earnings season begins all potentially played a part in the softness. Still, markets have enjoyed a strong run higher over since October and some consolidation is expected.

The unprecedented Iranian drone and missile attack on Israel over the weekend has dominated the news headlines, but the initial reaction in markets has been far more sanguine than some feared. The oil price was lower, European equities higher and perceived safe-haven assets, such as gold, showing no sign of panic.

This is perhaps due to the nature of the attack as 99% of the missiles were thwarted before reaching their targets and early reports state no one was killed. Iranian comments that the issue can now be deemed concluded and several world leaders, most importantly US president Joe Biden, urging against any further escalation has also helped sentiment.

An Iranian attack has been expected for some time after a suspected Israeli air strike on Iran’s consular building in Damascus killed seven guards members, including two senior commanders. The situation in the Middle East remains potentially fraught but the fact that the Iranian retaliation has seemingly allowed the saving of face without causing the kind of damage that would undoubtedly provoke an Israeli response has actually been taken as one of the least bad scenarios.  

Stubborn US inflation

The latest US consumer price index (CPI) for March showed a 0.4% monthly increase and a 3.5% annual rise, both readings coming in above economists’ consensus forecasts. Following higher than expected readings in the first two months of the year, the data suggests that price pressures keeping inflation above central bank targets remain. The next day the producer price index came in lower than forecast in monthly terms, offering some encouragement but overall the picture is one of stubborn inflation continuing to deter the Federal Reserve (Fed) from lowering rates.

A first US rate cut is now being priced into interest-rate markets in September, with the UK seen as delivering a decrease in August. This change in expectations has sent the sterling to US dollar rate lower, closing last week at 1.25 — the lowest level since November. US equity benchmarks dipped 1.5% last week, taking year-to-date gains to 7.9%.

Europe fared a little better, with the MSCI Europe ex UK index falling 0.6%. UK stocks bucked the global decline last week, rising 1.2% to take 2024 returns to 4.7%. UK gilt yields rose, with the 10-year yield rising seven basis points to 4.14%.

First quarter earnings season kicked off with the big US banks reporting a solid set of results, although the initial market reaction suggests that investors are maybe holding companies to a higher bar this time out. After such a strong run higher in US stocks in the last six months it is quite natural that we are seeing a pause as market participants digest recent events and await further corporate updates. Two thirds of US firms will report in the two weeks beginning 22 April.

ECB prepares for summer cut

The European Central Bank (ECB) gave the strongest sign yet that it will lower interest rates in the coming months following its April monetary policy meeting. Rate setters predictably held interest rates unchanged, but ECB president Christine Lagarde said a small minority had argued for an immediate interest rate cut. The next policy meeting in early June is now considered “live” in that a move may occur should data evolve in a manner deemed acceptable by policymakers. 

The ECB was criticised for being slow to act in raising rates in 2022 and this will no doubt be on the mind of rate setters going forward. However, there will be a reluctance to be seen as promising a move to then only have to row it back if data deteriorates and wage growth data still running above 3% is a possible cause for concern. 

Inflation appears to be better behaved and less sticky in the Eurozone than it has been elsewhere, particularly when compared to the US. Given the Fed is now expected to resist making any cuts for some time yet, and the Bank of England faces a difficult balancing act, the ECB could well be the first to make a move.

To listen to all the past Weekly Comment podcasts click here or subscribe via the apps below: