August Market Commentary

By Questa

July 2024 was a whirlwind month in global politics, with significant implications for financial markets. In the UK, Labour’s landslide victory set the stage for a new government, while across the pond, the US braces for a heated presidential race following President Biden’s decision to step down.

Meanwhile, the Bank of England surprised markets by cutting rates, contrasting the Fed’s decision to hold steady, albeit with signals of a potential rate cut in September. Japan, bucking the global trend, raised interest rates amid rising inflation concerns. These political and economic shifts have left their mark on markets worldwide.

Let’s take a closer look.

UK: A New Government and Economic Adjustments

The UK is set for five years of Labour governance following their decisive victory. With inflation forecasted to hover around 2%, the Bank of England took the unexpected step of cutting interest rates from 5.25% to 5%, with further reductions likely on the horizon.

This move signals a return to more stable economic conditions, offering hope to mortgage borrowers facing higher costs. Nationwide’s new 3.99% five-year fixed mortgage rate, though requiring a 40% deposit, reflects this cautious optimism.

Labour’s narrow agenda focuses on economic growth, leaving little room for major tax hikes or service cuts. Chancellor Rachel Reeves faces a tough challenge in steering the UK economy, aiming to stimulate growth by encouraging institutional pension investments in UK businesses.

Her upcoming budget on October 30th is expected to set the tone, particularly with her pointed criticism of the previous administration’s handling of public finances.

Europe: Political Uncertainty and Economic Shifts

In Europe, inflation trends continue to dominate economic discussions. Eurozone inflation dipped slightly to 2.5% in June, maintaining a steady decline. The political landscape, however, remains turbulent, especially in France, where a hung parliament emerged after contentious elections.

The left-leaning New Popular Front (NFP) leads the National Assembly, with President Macron’s centrist bloc trailing. While this outcome may calm investors by preventing extreme policies, it underscores the ongoing instability in French politics.

Germany’s economic performance is mixed, with inflation dropping to 2.2% in June. However, the export sector struggles, particularly with declining orders from China. Despite these challenges, the IFO Institute has revised Germany’s GDP growth forecast upward to 0.4%, anticipating a stronger second half of the year driven by recovering global trade.

United States: Political Drama and Market Volatility

The US political scene saw a major shakeup with President Biden stepping down from the November race, paving the way for Vice President Kamala Harris to face Donald Trump. Financial markets, already pricing in a potential Trump victory, may see reduced volatility as a result. Inflation appears to be cooling, with the Fed holding interest rates steady in July but hinting at a possible rate cut in September.

The tech sector, a major driver of US market performance, experienced a significant setback with a $1 trillion sell-off on June 24th, marking the worst session since 2022. This correction, particularly in the ‘Magnificent Seven’ stocks, raises questions about the sustainability of recent tech-driven gains. Nonetheless, both the S&P 500 and Nasdaq rebounded, buoyed by anticipation of future rate cuts.

Far East: Japan’s Unexpected Rate Hike and China’s Economic Struggles

In Asia, Japan’s decision to raise interest rates caught markets off guard, driven by rising inflation and a weak yen. While the services sector, particularly tourism, continues to bolster growth, companies like Nissan face grim outlooks, with first-quarter profits wiped out.

China’s financial markets remain under pressure despite attempts by the government to stimulate the economy. Policy interventions, including reducing stamp duty and regulating shareholder reductions, have had limited success, with broader economic challenges persisting. The outlook remains cautious as geopolitical tensions continue to weigh on investor sentiment.

Emerging Markets: Navigating Global Headwinds

Emerging markets faced a tough June, with higher interest rates in developed economies and a stronger US dollar leading to capital outflows and currency depreciation. The reliance on US policy changes remains a key concern, with many emerging markets expected to follow the Fed’s lead. The timing of rate cuts will be crucial in determining the pace of economic recovery in these regions.

Latin America, in particular, is in the spotlight as several countries undergo significant elections. Mexico’s historic election saw Claudia Sheinbaum become the country’s first female president, while in Panama and El Salvador, political dynamics continue to evolve with implications for regional stability.

Is Stability on the Horizon?

As we move further into 2024, the global economic landscape remains complex but shows signs of stabilising. The prospect of interest rate cuts, coupled with subsiding inflation, offers hope for a “soft landing” in the months ahead. Despite ongoing political uncertainties and market volatility, particularly in tech stocks, the overall outlook for portfolios remains positive, with equity markets performing well over the past year.