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Markets and macro insights with Bernard Swords, Chief Investment Officer
How did equity markets fare this week?
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Equity markets corrected slightly last week with the world index down just over 1% in local currency terms. There were different drivers in the different regions. In the US, growth concerns were the main feature. Walmart issued a disappointing update after a poor retail sales report from the previous week. The services Purchasing Managers’ Index (PMI) also dipped below 50. This raised investor’s concern over economic momentum in the USA. We would be more sanguine given the strong note the US economy ended on in 2024. As a result, some slowing in the economy would be expected and we do not think there is anything more than that going on at the moment. On a positive note, it should give some support to the US bond market.
What were the different drivers in the euro area?
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The euro area also paused last week, down 0.4%, but remains the best performer on a year-to-date basis. Some of its recent strength has been due to increased hopes of peace moves in the Ukraine war and what this could mean for energy prices and consumer confidence in the euro area.
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In addition, there were hopes of an economic boost from reconstruction efforts in Ukraine. The unfolding week threw cold water on those prospects. Firstly, there are no concrete arrangements for a settlement, and the details of any proposals are unknown. A further sobering factor is the actual cost of reconstruction.
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Whether or not a viable settlement is reached, it seems clear that the euro area will in future be facing a higher bill for defence costs. This will not have a positive influence on euro area bond yields.
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The impending German elections also induced caution during the week. Will a market-friendly, stable government be produced? The result has been reassuring as it was in-line polls, so no surprises and there is a way forward for a grand coalition.
What are sector updates from equity markets?
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Defensive sectors (Healthcare, Consumer Staples, Utilities, and Property) took the lead last week and were up in absolute terms. Periods like last week are reminders to us that although the background to equity markets might be good, the global economy is growing at trend and interest rates are flat to down, it is not ebullient. The global economy is not growing above trend, so keep some defensive exposure and aim for structural growth rather than cyclical growth.
What are current prospects for interest rate cuts?
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The minutes of the January FOMC (interest-rate-setting committee of the Federal Reserve) were in line with recent statements from Chair Powell indicating a ‘pause’. The Federal Reserve is in no hurry to cut rates further but does maintain an easing bias.
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Most of the comments in the minutes indicated a hold until data or events recommend otherwise. Members saw the “current high degree of uncertainty” as a reason for a “careful approach” to any policy change. They viewed inflation as still “somewhat elevated,” and want further progress on inflation before reducing rates.
What do euro area survey and index results indicate?
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In the euro area, the main business survey, the Purchasing Managers’ Index (PMI) was released, the composite index was unchanged at 50.2, while the manufacturing survey improved to 47.3, but there was a slight deterioration in the services survey. These figures still show the euro area economy close to stalling.
The week ahead: what to watch out for
This week will highlight inflation data. The Consumer Price Index (CPI) from the euro area and the Personal Consumption Expenditures (PCE) from the US will be key. All eyes will be on Nvidia’s Q4 results and on the results of the German election.
