MARKET UPDATE 10/04/2024

Market sentiment: Jittery. After a strong first quarter that ended with many major stock market indices at, or near, all-time highs, investor sentiment has become wary. Confidence in the number of interest rate cuts from the Fed this year is wanning, with market pricing in just two or three (from five or six at the start of the year). Last week Fed chair Jay Powell warned that he needed ‘greater confidence’ that inflation is falling to the 2% target level, before he would be able to vote for rate cuts.

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This follows a month-long run of stronger than expected economic and inflation data. The recent jump in oil prices, with Brent at $92 a barrel briefly last Friday, adds to the inflation risks. We may be seeing the return of the ‘higher for longer’ interest rate theme, that so discombobulated global stock market between August and October of last year.

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European central banks are at greater liberty to cut interest rates this summer, due to weaker growth than in the U.S. However, over the longer term the Fed dominates global interest rate policies. The Bank of England and ECB, for example, will risk plunging domestic currencies if they are too much ahead of the Fed in interest rate cutting.

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The longer that interest rates remain at cyclical highs, the higher the risk that a hard landing for the economy follows, which threatens companies earnings growth. The VIX index of implied volatility for the S&P500 index rose from 13 at the end of March, to 16 as of end of Friday. This is still low relative to the five-year average of around 20, but the direction of the index suggests investors are nervous, and caution is important.

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Investors should remain invested across a range of asset classes, in order to reduce portfolio risk. Multi-asset balanced funds offer high levels of diversification, and can be considered building blocks for long-term investors.

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U.S economic data. Last week’s non-farm payroll showed that 303,000 new jobs were created last month, the consensus estimate had been 200,000. Unemployment remains low at 3.8%, and while year-on-year wage growth is falling, at 4.1%, it continues to be higher than the average wage growth seen in the decade before the pandemic. This comes after stronger than expected core personnel expenditure (CPE) inflation data, the Fed’s preferred measure of prices, and a strong ISM manufacturing activity survey on the 1st April.

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That such strong economic numbers are occurring after the sharp rise in interest rates over the last two-and-a-bit years is, to many economists, astonishing. Lavish government spending, whether in industrial subsidies or the pandemic-related stimulus packages, is now thought to be a key driver of demand.

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All eyes are on tomorrow’s CPI inflation data, lasty months’ 3.2% was up slightly on February’s 3.1%.

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FTSE 100 at a new high (briefly). The FTSE 100 index briefly broke through its all-time high last Tuesday, recording an intra-day high of 8,016, before falling back. It has been one of the strongest of the major stock market indices over the last month, helped by the global rally in value stocks (eg, financials and mining stocks), as well as from the increasing attention given by U.S investors to cheaper stock markets overseas. The index remains cheap on price/earnings multiples.

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However, U.K investors should be careful of taking on more exposure to what may already be an overweight position, given the ‘home bias’ tendency that many of us

Have in our investing.

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Copper, gold and mining stocks. Mining stocks are rallying. Copper prices are at their highest level since January of last year, reflecting an expected increase in demand. Meanwhile, the gold price continues to reach new highs (currently at $2,355 an ounce, from a recent low of 1,628 last October 17th). This reflects the same geopolitical fears that are supporting the oil price. However, that its price continues to rally, despite the pull-pack in expectations for Fed interest rate cuts this year, has surprised investors.

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Oil at $92 a barrel. On Friday Brent crude briefly touched $92 a barrel, having hovered around $80 during January and February. Rising geopolitical tensions are partly behind the recent jump in oil prices, concerning the Middle East and Russia /Ukraine. In addition, the strong U.S economic data -mentioned above- coincided with news of the first expansion in Chinese manufacturing activity for six months, and investors are forecasting stronger oil demand over the second half of the year. Meanwhile, supply growth is slower than had been expected. In March the IEA forecasted an overall deficit of crude oil production this year, having earlier expected a surplus. Production growth outside of OPEC has been slower than expected, while OPEC and Russia are keeping to output curbs agreed last year.

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Jamie Dimon warns of U.S budget deficits…is anyone listening? Large budget deficits, and the effects of past stimulus packages, may lead to higher inflation and interest rates than financial markets expect. So warns the CEO of JP Morgan, the largest U,S bank by assets, in his annual letter to shareholders released on Monday. However, neither Biden nor Trump show any concern over the deficit, which at 6.1% of GDP is at its highest as a percentage of GDP outside wartime and recession (and compares with 4.7% for Japan, 4.2% for the U.K, and 3.1% for the Euro zone). And investors appear sanguine on the supply issue, with the Fed’s unwinding of some of its bond holdings acquired under quantitative easing barely raising an eyebrow amongst fixed income investors. Dimon may well be right, but who is listening?

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