Market Updates

Last week, investors were faced with both disappointing earnings news and encouraging macro data, resulting in a few volatile sessions for stock markets. Mid-week, the S&P 500 had its worst decline since 2022. However, thanks to favourable US economic growth and inflation data, markets were able to recoup part of the losses at the end of the week.

As suspected by the market for some time, Joe Biden has decided to pull out of the US presidential race, endorsing his Vice President, Kamala Harris. While Harris polls better than Biden, she still lags Donald Trump. Even though there don’t seem to be any obvious challengers within the party, the Democrats can still choose other candidates.

Last week, US Treasury yields fell as US inflation came in lower than markets expected. Global bond yields and the US dollar also fell as markets firmed up their view that the US Federal Reserve (Fed) will cut interest rates in September and December.

As expected, the right-wing Rassemblement National (RN) won the first round of the French parliamentary election on 30 June. They came ahead of the left-wing alliance of the Nouveau Front Populaire (NFP), relegating president Macron’s centrist coalition to third place. However, the outcome of the second round on 7 July remains highly uncertain.

On June 30 and July 7, the French public will vote to elect their members of Parliament. There are 577 seats up for grabs, so a party needs 289 seats to have an outright majority to govern. Anything less, in general, would mean that parties may try to work together to form a coalition.

As expected, the European Central Bank (ECB) lowered interest rates by 25 basis points last week. The main refinancing rate is now 4.25%, and the deposit rate is 3.75%. Even though the decision was expected, European equities fell slightly, government bond prices rose (yields fell), and the euro appreciated right after the announcement.

Inflation in the Eurozone rose for the first time this year, adding to worries that the inflation-easing trend may have come to a halt therefore limiting the European Central Bank’s (ECB) ability to cut interest rates. We disagree: we think that inflation progress is just slowing.

There were contrasting trends in markets last week. On the one hand, Nvidia beating earnings expectations once again and raising guidance for the next quarter supported the AI rally and bolstered tech stock more broadly, with the Nasdaq closing 1.4% higher.

Last week, stocks from the US to Europe and the UK closed again at all-time highs, and government bond prices rose as yields fell, after April inflation data in the US came in broadly as expected. Inflation fell slightly, which marked a welcome relief from the rising trend we’ve seen in the first three months of the year.

Given the recent upside surprises in inflation, the market was somewhat relieved that the US Federal Reserve (Fed) Chair Powell made clear that the central bank is not considering raising rates. Powell only confirmed what we, and many others, had suspected: interest rate cuts are not that imminent anymore.

Thursday’s US GDP growth print revealed more inflationary pressures in the first quarter than expected. As such, the market now only expects the US Federal Reserve (Fed) to cut interest rates once or twice, in September and/or December.

In the latest tit-for-tat exchange, Israel struck Iran last Friday in response to Iran’s strike on Israel the previous week. It’s possible that Israel’s limited response could end the round of direct clashes between the two countries, at least for the time being, given that both countries have described their actions as a specific operation in response to the actions from the other (the very definition of tit-for-tat), rather than as an attempt to escalate more generally.