Weekly comment: US stocks hit new highs as Europe declines

Market overview – Richard Carter, Head of Fixed Interest Research

US stocks hit new highs as Europe declines

Global equities eked out a small gain last week although there was a notable divergence between US and European stocks, with the former moving up to a new record high while the latter came under pressure as political uncertainty ramped up. The MSCI All Country World Index gain 0.4% on the week, taking the YTD (year-to-date) return to 10.8%.

For US stock benchmarks last week was a case of more of the same, as technology stocks continued to drive indices higher on the tailwind of enthusiasm surrounding Artificial Intelligence (AI). Tech-based benchmarks advanced 3.3% on the week (18.3% YTD) whereas a broader based index of US equities ended 1.6% higher (14.6% YTD).

Sentiment was boosted by a flat consumer price index (CPI) reading for May in month-on-month terms, as the annual figure fell back to 3.3%. After four consecutive readings coming in above consensus forecasts earlier this year, the latest reading was slightly lower, providing some comfort to investors by suggesting price pressures are not starting to gather upwards momentum once more. 

A narrowing in US stock market breadth has become more apparent in recent weeks and the already significant gap between the performance of benchmarks constructed on market capitalisation terms compared to equal-weighted equivalents has widened.

UK stocks declined 1.2% on the week, trimming YTD returns to 7.5%. Economic data showing growth stagnated in April weighed on the mid-cap space which is more sensitive to domestic drivers. Mid-cap benchmarks fell 2.1% to take the YTD return to 3.8%.

Leading political parties published their manifestos for next month’s general election, with the Conservatives promising further tax cuts to the tune of £17bn while Labour has pledged £7.4bn of tax rises, largely from tightening taxation on non-doms, widening the windfall tax on oil and gas companies and charging VAT on private school fees. Labour still holds a sizable lead in opinion polls.

The UK bond market gained last week as the 10-year gilt yield dropped 21 basis points to end at 4.05%. The pound was little changed against the US dollar at 1.27.

France to go to the polls

French president Emmanuel Macron has made the surprise move of calling a snap legislative election for later in June following a strong showing for right-wing and far-right parties in recent European elections. This increase in political uncertainty was readily apparent in markets as equities declined while French bond yields jumped to their highest levels of the year.

France’s leading stock benchmark fell 6.2% on the week, taking the YTD return to 2.1%. German equities also declined, although the size of the drop was less with a 3% weekly fall leaving the market up 7.5% YTD.

In the fixed income space there was a significant widening in the French/German spread as the French 10-year yield gained 20 basis points on the week while the German equivalent fell 26 basis points on perceived flight to safety flows.

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