Financial Markets Recap: Technology and political developments take central stage

This week, financial markets navigated a mix of influences, with technology and political developments grabbing the spotlight. While the US dollar strengthened, and gold prices surged, stock markets witnessed some profit-taking. The overall sentiment leaned towards safe-haven assets like gold due to economic uncertainties and geopolitical tensions.

Microsoft shares were down 0.53%, while CrowdStrike stock declined 9.39% in the US, reflecting cautious investor sentiment after an IT outage caused widespread chaos including flights and banks. Crowdstrike, a cybersecurity firm with thousands of customers globally, admitted that a defective software update had caused the glitch, hitting airlines, banks, hospitals, media outlets, and businesses, bringing many to a halt.

Gold, the traditional safe-haven asset, has been and is still seen on a remarkable upward trajectory in recent months, achieving its all-time highs, surpassing $2400 per ounce during the week. This surge has been driven by a confluence of factors, including geopolitical tensions, economic uncertainties, and a resurgence of investor interest in precious metals.

While the ECB’s wait-and-see approach is understandable, the central bank’s future actions will depend on how inflation evolves and how effectively it is managed. Additionally, investors are keeping an eye on any signs of a potential economic slowdown in the Eurozone, which could influence the ECB’s monetary policy stance.

Shifting Tides: A Market in Transition

Equity markets experienced a volatile week, with an initial rally followed by a decline led by weakness in technology stocks and chipmakers. This highlights a key theme: a potential leadership rotation away from tech and towards cyclical sectors like financials, industrials, and energy.

US Yields and the Soft Landing Narrative

The relationship between stock prices and yields has undergone a significant shift. While they rose in tandem earlier in 2024, recent weeks have seen a decline in rates due to moderating inflation and expectations of central bank cuts, particularly from the Federal Reserve. This reinforces the “soft landing” scenario where inflation eases without triggering a recession. However, unexpected inflation data could disrupt market stability.

Decoding Market Rotations

• Stocks vs. Rates: The recent decline in rates reflects market expectations of a soft landing. The Dow outperformed the tech-heavy Nasdaq as investor confidence in economic growth grew strongly despite existing concerns about recession.

• Mega-Cap Tech vs. Broad Market: The dominance of mega-cap tech companies like Apple and Microsoft appears to be waning. The S&P 500 equal-weight index, which gives equal weight to all companies, outperformed the standard index, indicating broader market participation. This trend of lagging sectors catching up could continue due to their lower valuations and higher projected earnings growth.

• Small-Caps vs. Large-Caps: Small-cap stocks experienced a significant surge, potentially fueled by growing confidence in rate cuts, economic resilience, and potential pro-growth policies under a different US administration. This aligns with the view of cyclical and economically sensitive investments benefiting from a more accommodative Fed policy. However, sustained economic growth is crucial for this trend to hold.
• Disciplined Diversification: The recent market rotation underscores the importance of a well-diversified portfolio across sectors and asset classes to manage risk.

• Long-Term Perspective: Investors should maintain a long-term focus and avoid making impulsive decisions based on short-term market fluctuations.
• Professional Guidance: Consulting a financial advisor can help investors tailor their investment strategies to their individual risk tolerance and financial goals.

Oil Performance

Falling oil inventories, geopolitical tensions in the Middle East, seasonal demand and expectations of lower interest rates have all coincided to push oil prices higher in recent weeks. However, the current rally is not expected to be sustained. West Texas Intermediate and Brent are expected to fall to $78 per barrel and $82 per barrel, respectively, in the early part of 2025 as the market enters a surplus and geopolitical tensions ease.

But the market will be volatile as hurricanes, uncertainty in the Middle East, policy in China, and statements from OPEC all have the potential to move prices. US oil futures on Thursday held to gains after jumping 2.6% in the previous session as crude inventories fell for the third week in a row. US commercial crude inventories fell by 4.9 million barrels last week, though gasoline stocks rose by 3.3 million barrels and motor fuel demand weakened by 615,000 barrels per day.

Looking Ahead: Key Events and Potential Impact

This week’s economic releases, including the Bank of Canada interest rate announcement and US second-quarter GDP data, will shed light on the health of the economy and central bank actions, further influencing market sentiment.

GBP/USD: A Tale of Two Central Banks and Political Upheaval

The Pound (GBP) strengthened against the US Dollar (USD) last week, driven by a shift in yield spreads favoring the UK currency. Expectations of a Bank of England (BoE) rate cut in August faded, while markets grew more confident of a September rate reduction by the Federal Reserve. The GBP/USD exchange rate reached a 12-month high above 1.30 before retreating slightly.

Central Bank Divergence: Some analysts see a sustained GBP/USD move above 1.29 as potentially leading to a medium-term climb to 1.40, reflecting the differing monetary policy stances. However, others remain bearish on the Pound, forecasting a decline to 1.21 over the next year due to the UK’s weaker growth-inflation outlook compared to the US.

UK Inflation Remains Sticky: Headline UK inflation remained unchanged at 2.0% in June, defying expectations of a slight dip. The core rate also held steady at 3.5%, with the services sector inflation staying stubbornly high at 5.7%, exceeding the BoE’s comfort zone. This reduces the likelihood of an August rate cut, potentially supporting the Pound in the near term.

US Political Storm Clouds Gather: Beyond central bank policy, US political developments significantly impacted the USD. Markets perceived an increased chance of a Donald Trump victory in the November election, following an assassination attempt. This, along with growing pressure on President Biden to withdraw from the Democratic nomination, weakened the USD. Eventually Biden has announced, Sunday, his withdrawal from the Presidential race.

Trump and the Fed: A Delicate Dance:

Former US President Donald Trump publicly called on the Fed to maintain interest rates, creating a complex situation. We can highlight the potential impact as follows: If the Fed lowers rates in September, it could be seen as negative for the USD initially, but also signal resistance to political pressure, ultimately benefiting the USD in the long run, especially under a potential four-year Trump presidency.

USD Rebound Potential: The possibility of a USD rebound is a main topic of discussion if expectations of a Trump victory or a dovish Fed are disappointed.

ECB’s Interest Rates Remain Unchanged

In a move largely anticipated by markets, the European Central Bank (ECB) decided to maintain its current interest rates last week. This decision comes amidst ongoing concerns about inflation in the Eurozone. The ECB’s stance suggests they believe inflation is on track to moderate in the medium term, potentially paving the way for future rate adjustments depending on incoming economic data.

Key Implications for the Eurozone

The ECB’s decision to hold rates is likely to have a stabilizing effect on European markets. Investors were expecting this outcome, and the continuity provides some certainty in a period of global market flux. This could bolster investor confidence, particularly in sectors sensitive to interest rates, like financials and real estate.