Weekly Comment: Today’s news is tomorrow’s fish and chips paper

Market overview

A larger-than-expected fall in US inflation (at the headline level, the consumer price index (CPI) eased back to 3.5% from 4.2% on a year-on-year (YoY) basis—the market had been expecting 3.8%). A strong start to the Q2 earnings reporting season (take a bow the US banks). Forecast-busting results from companies at the heart of the artificial intelligence (AI) trade (mention in despatches goes to ASML and TSMC). All financial news highlights of the week just ended. All, you would have thought, should have gone some way towards laying the foundations for a positive week for global stocks. And yet global benchmarks ended the week in negative territory. Why? Well, as the saying in the above title suggests, the news cycle never sleeps.

Yesterday’s news

For among all the (relatively) good news stories above, there was a spoiler rumbling in the background. The conflict in the Middle East. Tit-for-tat strikes between the US and Iran have been a feature of the fragile peace agreement that was agreed in April and extended in June with the signing of a memorandum of understanding. Last week however saw an escalation in hostilities, to such an extent that Iran declared the Strait of Hormuz closed once more while the US announced it was resuming its blockade of Iranian ports. Cue a 16% increase in the price of oil, raising concerns that the drop in US inflation in June, itself the product of an MoU-inspired fall in oil prices, would prove to be temporary. That relatively benign inflation print then had already been cast aside as yesterday’s news before it had even hit the newswires.

Tomorrow’s news

Higher oil prices fed the narrative that the next move in US interest rates (and elsewhere) will likely be upwards. The prospect of higher interest rates had been weighing on more growth-orientated areas of the market in recent weeks. For investors, the trouble with higher interest rates is that they lead to increased discount rates when valuing companies’ future cash flows. When discount rates rise, the present-day value of future cash flows falls. It follows that stocks whose best years of growth are believed to lie further in the future stand to be impacted most. The standout growth area in today’s markets? AI. Add in the general risk-off tone to markets last week, and it’s easy to see how strong numbers from the likes of ASML and TSMC weren’t enough to ignite AI-related stocks in general.

Today’s news

Not all stock indices ended the week lower. The UK proved to be an outlier, a nod to London’s lack of meaningful exposure to technology. A healthy weighting in energy and resource stocks would also have helped. UK equities therefore provide something of a hedge against the volatile global tech sector.

The outperformance of UK benchmarks was all the more impressive given the fluid domestic political situation—by replacing Sir Keir Starmer as prime minister, Andy Burnham has become the country’s fifth premier in four years. A commitment from the former Greater Manchester mayor that he will stick to the 2024 Labour election manifesto and the previous government’s fiscal rules seems to have satisfied markets, for now. Bigger tests lie ahead of course but like all leaders, Burnham will be hoping he can exercise a degree of control over the news cycle. Trouble is, that is easier said than done. Just ask his predecessor.

Weekly market moves:

The MSCI All Country World Index (MSCI ACWI) ended the week 1.6% lower, bringing the year-to-date (YTD) gain down to 10.4%.

United States:

US equities outperformed the global index by the slimmest of margins after falling 1.5% over the course of the week (+9.6% YTD).  Large-cap growth stocks were among the biggest losers after declining 3.6% (+1.3% YTD). Value stocks by contrast posted a 0.5% gain (+18.8% YTD), while small caps ended 0.5% lower (+20.2% YTD).  US Treasuries were caught between inflation falling more than expected on the one hand and growing expectations of interest rate hikes in response to rising oil prices on the other. No surprise then that Treasuries barely budged during the week: the yield on the 10-year note edged one basis point lower to 4.55% (up 38 basis points YTD); while the 2-year Treasury yield ticked down three basis points to 4.18% (up 71 basis points YTD).

United Kingdom:

There was no separating UK large- and mid-caps stocks. Both segments of the London market were each up 1%. YTD, large caps (+8.7% YTD) still have the edge over their smaller siblings (+7.1% YTD). Gilts weren’t in such buoyant mood though. The 10-year UK gilt yield increased eight basis points to 4.95% (up 47 basis points YTD). Sterling meanwhile strengthened to US$1.35 compared to US$1.34 previously.

Europe ex UK:

European stocks lost ground, albeit less than the global benchmark. The MSCI Europe ex-UK Index ended down 0.4% (+10.1% YTD). As with the US, YoY inflation in the eurozone dropped, in this case falling to 2.8% in June from May’s 3.2%. The encouraging reading however was offset by the escalating conflict in the Middle East and associated spike in the oil price. At the national level, Switzerland was the standout courtesy of a 0.8% gain (+11.3% YTD). Elsewhere French stocks were flat (+5.0% YTD), while the main German index was down 0.9% (+1.4% YTD) and Italy’s 1.4% lower (+18.7% YTD). German bunds were also under pressure despite the positive inflation news: the yield on the 10-year note rose six basis points to 3.12% (up 27 basis points YTD). Finally, for the second week in a row, the euro was unchanged at US$1.14.

Important information

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