Weekly Comment: Stocks AND bonds up. Time to “sit back and relax”?

Market overview

Just as songs can have a key change, markets can have a narrative change. Is the narrative changing for financial markets? For weeks now, global stock indices have rallied on the back of a strong Q1 earnings season and renewed enthusiasm for the artificial intelligence (AI) trade, while government bonds have languished on concerns central banks will have no choice but to raise interest rates to tackle inflationary forces unleashed by the Middle East conflict. Stocks up; government bonds down – the dominant narrative then. That is until last week.

True, global stock markets maintained their winning ways thanks to more eye-catching results from companies involved in the AI trade (step-up Dell). But government bonds got in on the act too with yields in the US, Europe and the UK all falling. The trigger? A drop in the price of oil following news of peace talks between the US and Iran—Brent Crude fell from the US$100 per barrel level to around US$92.5. Were the now three-month-old conflict to end sooner rather than later, then the hope is interest rates may not need to be raised as high and as fast as previously expected. Cue rallying bond markets.

We’ve been here before

How many times have hopes of a peace deal been raised, usually by US President Donald Trump himself via social media, only for these to be dashed shortly, sometimes just minutes later? What’s different now or is this just a continuation of the conflict’s on-off news cycle and so yet another upwards lurch in the price of oil can be expected?

And right on cue, Monday 1 June saw news reports coming out of Iran that the regime was suspending peace talks. Repeated ceasefire violations by the US and ongoing hostilities between Israel and Hizbollah in Lebanon were cited as reasons behind the decision. The price of Brent Crude jumped to US$97 per barrel. And so, the on-off cycle of the conflict continues. Not that you’d think so from reading Trump’s social media posts. The US President had this to say on Monday: “Just sit back and relax, it will all work out well in the end — It always does!” If only it were that simple.

Weekly market moves:

The MSCI All Country World Index (MSCI ACWI) ended the week up 1.7%, bringing the year-to-date (YTD) gain to 12.4%.

United States:

More all-time highs for US stock markets. The main benchmark ended the week 1.4% higher so that YTD the index is up 11.2%. Growth stocks led the way, rising +2.3% (+8.2% YTD), compared to a more modest 0.7% gain from value names (+13.6% YTD). Small caps were somewhere in between rising 1.8% (+18.3% YTD).

In the US Treasury market, renewed hopes of a peace deal in the Middle East drove yields down: the 10-year Treasury yield ended 12 basis points lower at 4.44% (up 27 basis points YTD), while the yield on the 2-year Treasury shed 11 basis points to 4.01% (up 53 basis points YTD). The performance was all the more impressive given the latest reading of the personal consumption expenditures (PCE) price index. The PCE showed a 0.4% month-over-month (MoM) increase in April. Although this represents a slowdown from March’s 0.7% MoM rise, on an annual basis the PCE is now up 3.8% compared to 3.5% in March.

United Kingdom:

UK large caps underperformed the global index after edging 0.4% lower (+6.6% YTD). Mid-caps fared better courtesy of a 1.2% gain (+5.8% YTD). So too did sterling which ended the week at US$1.35 compared to US$1.34 previously. Meanwhile, gilts built on recent gains with the yield on the 10-year gilt falling another nine basis points to 4.81% (up 34 basis points YTD). It was only two weeks ago that the 10-year gilt yield stood at 5.17%. Better-than-expected inflation numbers for April and a commitment from Andy Burnham that he would stick to the existing fiscal rules should he win any future leadership contest lies behind the turnaround in sentiment.

Europe ex UK:

European stocks had a positive week after the MSCI Europe ex-UK Index finished up 0.5% (+7.4% YTD). At the national level, Germany’s main stock market added 0.9% (+2.5% YTD); France’s gained 1.1% (+2.7% YTD); as did Italy’s (+14.2% YTD); while Switzerland was among the laggards, rising just 0.3% (+5.1% YTD). Like sterling, the euro strengthened against the US dollar, ending the week at US$1.17 compared to US$1.16 previously. In line with its global peers, the 10-year German Bund yield fell 10 basis points to 2.94% (up eight basis points YTD). That was despite the release of minutes of the European Central Bank’s April monetary policy meeting. These suggested a June interest rate rise could be on the cards.

Important information

This material is a marketing communication provided for information purposes only and does not constitute independent investment research. References to financial instruments are for general information purposes and are not subject to requirements applicable to independent investment research.

Any references to securities or financial instruments should not be regarded as a personal recommendation, or as an offer, solicitation or invitation to buy or sell any financial instruments. The views expressed are those of the authors at the time of publication and are subject to change. Past performance is not a reliable indicator of future results.

This material does not constitute tax, legal or accounting advice. You should seek independent professional advice appropriate to your individual circumstances before making any financial decision or engaging in any transaction.

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