Macro backdrop
Throughout the second quarter of 2024, inflation and interest rates remained at the centre of investor’s minds. Yet there was a more positive outlook compared to previous periods, with indications that inflation is returning to central banks’ targets. Signalling a shift towards a loosening of monetary policy, the European Central Bank cut its base rate by 0.25%, a move that, while cautious, indicates a potential new direction.
The Bank of England soon followed suit, lowering their base rate to 5%, however, the prospects of a return to the low interest rates we saw through the 2010s appear to be some way off, if completely consigned to the history books altogether.
The U.S. economy appeared to have held up well from a structural perspective, with the Federal Reserve of Philadelphia forecasting a 2.1% annual growth for Q2. The U.K., however, experienced no growth in April after a mild recession and a brief recovery phase, reflecting the economic slowdown across much of the Eurozone—part of a deliberate strategy to mitigate inflation by dampening demand.
China’s economy rebounded significantly from 2023’s downturn, showing strong signs of revival into Q2, with industrial production and consumer activity driving growth forecasted to exceed 5% (source: Deloitte).
Equity markets
Equity markets experienced gains in Q2 with the U.S. and U.K. markets rising around 6% and 7%, respectively economic patterns. Global markets, however, continued to bounce around, not making any real upward progress.
Moving into Q3, markets across the globe are experiencing a significant sell off as investors look nervously towards a potentially overvalued US market. A spiking of geopolitical tensions in the Middle East does not do much to assuage investor fears either, however signalling that this is more of a correction than a full-scale crash event appears to be the party line across institutional investors.
It appears that the spike in recent levels of volatility has been caused by the following issues that have shaken investor’s confidence:
1. Changing attitudes to interest rate movements: Recent global monetary policy shifts have caused significant market volatility and concerns about economic slowdowns. Japan’s central bank raised interest rates from 0.1% to 0.25%, triggering the largest two-day drop in the Japanese stock market’s history. The rate rise was instigated on the back of the Yen’s strengthening against the US Dollar. Conversely, the UK’s central bank lowered the base rate to 5%, which, despite positive inflation data, led to a stock market decline, signalling wider economic slowdown fears.
2. Concerns over tech stocks: Weak earnings in the US tech sector led to a $1 trillion market cap loss, with fears of recession prompting a potential emergency Federal Reserve rate cut. This turmoil affected Asian and European markets, especially chipmakers, wiping out this year’s gains in major Asian stock markets in a single day.
3. Geopolitical flare-ups: Tensions in the Middle East escalated with Hezbollah’s recent attack on Israel, prompting retaliatory strikes and increased US military presence in the region. This has raised investor anxiety over global trade impacts, as the situation teeters on the edge of further escalation, with diplomatic efforts underway to prevent all-out war. The potential ramifications for investors could be significant given the importance of the region’s shipping lanes to global trade.
Outlook
As the ‘Fear/Greed’ index tips over into the ‘Fear’ category, the full extent of the sell-off remains to be seen, however, as always, our advice will be to remain invested and wait for the correction to subside, whilst keeping our gaze fixed on longer-term growth patterns. It is not uncommon for markets to experience these types of events and if history is anything to go by, the market tends to end up landing on its feet, righting itself and returning to normal order pretty fast.
This said, we are definitely still locked in a period of high volatility for equities and bonds. Recent events will only serve to increase the clamour for interest rates to be cut, with Central Banks now likely experiencing mounting pressure to abandon inflation targets, only time will tell how strong they will be in holding off on these demands and whether they can strike a balance between thwarting inflation and pressing the accelerator on desperately needed economic growth.
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Dan Freestone is a Paraplanner in our expert Investment Management team. Dan provides support to the team, researches products and funds and produces technical reports detailing our Advisers’ recommendations for clients.
If you would like to discuss the above subject in further detail, feel free to contact Dan or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.
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