The quarter of strength before the quarter of volatility
Global equities remained strong in the second quarter of 2024 driven by the enthusiasm around AI, strong earnings and upward analyst revisions. Asian equities also achieved solid gains with India, Singapore and Taiwan being the best performing markets in the MSCI Index.
We now enter into the 3rd quarter. This is the most volatile as institutional investors break for the summer – the lack of flows allows traders to have a larger impact due to less liquidity.
Starting with the US: Fed’s steady rates and soft landing hopes boost market confidence
The likely timing and extent of interest rate cuts remained a key focus for markets in the quarter. There were initial worries that the US economy might be overheating and strong economic data was greeted negatively by the market. However, hopes of a soft landing for the economy grew as the quarter progressed.
The Federal Reserve left the federal funds target range steady at 5.25%-5.50% for the seventh consecutive meeting in June 2024, in line with forecasts. Policymakers do not expect it will be appropriate to reduce rates until they gain greater confidence that inflation is moving sustainably toward 2%. The Fed made no revisions to GDP growth projections, still seeing the economy expanding by 2.1% in 2024 and 2% in both 2025 and 2026. The unemployment rate is projected at 4% for 2024 but is seen slightly higher at 4.2% in 2025 (vs. 4.1%).
The US economy expanded by 2.9% year-on-year in Q1 2024, slightly below the 3.1% growth in the last three months of 2023. Core consumer prices rose by 0.1% from the previous month in June 2024, moderating from the 0.2% increase in May and below market expectations of a 0.2% increase, marking the softest increase in core consumer prices since at least February 2021. Services price inflation in the US fell to a four-month low of 5% in June 2024, easing from 5.2% in the prior month.
US equities gained in Q2, led by the information technology and communication services sectors. Ongoing enthusiasm around AI continued to boost related companies amid strong earnings and outlook statements. Weaker sectors included materials and industrials. Among financials, numerous US banks announced plans to increase dividends after passing annual stress tests from the Federal Reserve.
Europe: Finally, ECB cuts the rate to rescue the economy
The ECB lowered the three key interest rates by 25 basis points in June, marking a shift from nine months of stable rates after inflation declined by more than 2.5% since September 2023. The main refinancing operations rate was lowered to 4.25%, the deposit facility rate to 3.75%, and the marginal lending rate to 4.5%. However, domestic price pressures remain elevated, indicating continued inflationary challenges. The council aims to keep policy rates sufficiently restrictive, maintaining a data-dependent approach.
The Eurozone economy expanded 0.3% on quarter in the first three months of 2024, recovering from a 0.1% contraction in each of the previous two quarters. This also marks the strongest GDP growth since the third quarter of 2022, with net trade making the largest upward contribution. Exports rose 1.4%, way better than a 0.2% rise in Q4 and imports edged 0.3%, after a 0.6% rise. Meanwhile, household spending rose 0.2%, the same as in the previous period. On the other hand, gross fixed capital formation sank 1.5%, reversing a 0.8% rise in Q4 and government expenditure stalled following a 0.6% rise. In its June forecasts, the ECB projects economic growth to pick up to 0.9% in 2024, 1.4% in 2025 and 1.6% in 2026.
Germany’s economy shrank by 0.2% year-on-year in Q1 2024, the same as in the previous period, entering a technical recession. On the other hand, the British economy expanded by 0.3% year-on-year in Q1 2024, slightly higher than the initial estimate of 0.2%, rebounding from a 0.2% fall in the previous quarter. France’s GDP also grew by 1.1% year-on-year in Q1 2024, accelerating from a 0.8% expansion in the previous three-month period, marking the sharpest economic growth in three quarters.
Eurozone shares moved lower in Q2 as politics was a key focus in the quarter. Equities fell amid uncertainty caused by the announcement of parliamentary elections in France. The information technology sector gained with semiconductor-related stocks performing particularly well.
China: Trade frictions and property downturn slowing economic growth
The Chinese economy expanded by 4.7% year-over-year in Q2 2024, missing market forecasts of 5.1% and slowing from a 5.3% growth in Q1. This was the weakest yearly advance since Q1 2023, amid a persistent property downturn, weak domestic demand, a falling yuan and trade frictions with the West. These figures came as the Communist Party began the Third Plenum, a key political event where various reform measures are likely to be launched, along with recommendations for more support to boost recovery. The economy grew by 5.0% during the first half of the year, with the government targeting a 5.0% GDP growth for the year. In June alone, economic indicators mostly presented a slowdown, with retail sales rising the least and industrial output growth at a three-month low. The urban jobless rate remained unchanged at 5.0% for the third month. On the trade front, exports increased more than expected last month, but imports unexpectedly shrank.
Foreign direct investment (FDI) into China dropped by 28.2% year-on-year during January-May 2024, a record decline for the first five months of the year. About 12.2% of the total went into high-tech manufacturing industries. Producer prices fell by 0.8% year-on-year in June 2024, marking the softest fall in factory-gate prices since January 2023. This was the 21st straight month of producer deflation, reflecting fluctuations in global commodity prices and insufficient domestic demand for some industrial goods. Prices of consumer goods continued to fall, largely dragged down by food and durable goods. Monthly, producer prices shrank by 0.2%, shifting from the first rise in eight months of a 0.2% gain in May. For the first half of 2024, producer prices dropped by 2.1%.
Chinese shares are gaining attention as low valuations for many Chinese stocks encouraged Asia-focused investors to cautiously return to the Chinese market, following concerns about India’s elevated valuations and Japan’s continued currency weakness.
India: A Strong Performance Amidst Political Stability and Economic Growth
The Indian market emerged as a top performer, buoyed by investor optimism following the results of the country’s general elections. Despite the BJP-led National Democratic Alliance securing a parliamentary
majority without a single-party mandate, political developments supported equity market returns. In the second quarter, Indian equities saw robust growth driven by positive investor sentiment pushing benchmark
indices to record highs by quarter-end.
The Indian economy expanded by 8.2% in the financial year ending March 2024, surpassing initial estimates of 7.3%, continuing its trend of strong growth. India maintains its position as the world’s fastest-growing major economy, fuelled by significant output acceleration in manufacturing, construction, public administration, defence and other services. However, the GDP growth rate of 8.2% was notably higher than the 6.3% growth in gross value added in the final quarter, partly due to inflated net indirect tax categories for the second
consecutive quarter.
Reserve Bank of India maintained its benchmark policy rate at 6.5% for the eighth consecutive meeting in June2024, aligning with expectations amid persistent price pressures and a resilient economy. Annual inflation rate rose to 5.08% in June of 2024 from 4.75% in the previous month, well above market expectations of 4.80% to reflect the fastest pace of price growth since February. The RBI Governor highlighted ongoing uncertainties in the inflation outlook, noting deflationary pressures in fuel prices while food inflation remained elevated. Additionally, the RBI revised its economic growth forecast for fiscal year 2025 to 7.2% from 7%. Inflation expectations were also maintained at 4.5%, with projections of 4.9% for Q1, 3.8% for Q2, 4.6% for Q3, and 4.5% for Q4. The RBI also held bank rates steady at 6.75% while maintaining the standing deposit facility rate at 6.25%.
