Stock market performance was muted in June, with investors pausing for breath as the second quarter drew to a close. It was a quarter in which investors’ appetite for ‘risk assets’ like company shares surged, as semiconductor stocks pushed global markets higher. Beneath the exuberance though, markets saw significant macroeconomic shifts. The oil price plunged, the US central bank signalled its willingness to use higher interest rates to fight inflation and the US dollar rebounded.
We believe that the strong run by semiconductor companies is likely to come under intense scrutiny in the coming months and we are positioned for a broadening out of the stocks driving market performance. We remain focused on inflation, interest rates, global economic growth momentum and the outlook for company earnings. We believe all of these factors could influence the performance of investment assets like stocks and bonds.
UK
The FTSE 100 returned 1.0% in a volatile month dominated by political upheaval. Prime Minister Keir Starmer announced his intention to step down following Andy Burnham’s decisive victory in the Makerfield by-election. Burnham is now almost certain to take over as Prime Minister. UK inflation came in at 2.8% in May – below the 3.0% expected by most investors. This was driven by easing price pressures for ‘core’ goods, and for food, alcohol, and tobacco. The Bank of England held rates steady at 3.75%, although the voting split signalled an increased willingness to raise rates to combat inflation.
Europe
European stock markets had a strong month, with the MSCI Europe (excluding the UK) index returning 3.0%. The signing of a memorandum of understanding between the US and Iran, and the resumption of tanker traffic through the Strait of Hormuz helped ease investor concerns about energy prices. This provided relief for Europe, which is heavily dependent on energy imports. During the month, the European Central Bank (ECB) hiked rates by 0.25% to 2.25%. The bank’s governing council said the crisis was putting upward pressure on prices and the outlook is for inflation to rise. The ECB is expected to hold rates steady in July, but investors are pricing in another increase after that.
US
During the month, the S&P 500 fell in dollar terms (-1.0%), but the stronger dollar meant the value of the index rose in sterling terms (+0.6%). There was a strong sell-off in artificial intelligence (AI) and semiconductor-related stocks in early June, but the US market benefited from a relief rally following the reopening of the Strait of Hormuz. The new Chair of the US Federal Reserve (the Fed), Kevin Warsh, headed up the central bank’s rate-setting committee for the first time. He signalled he is ready to raise rates to fight inflation and stated the committee will “deliver price stability”. May’s payroll numbers came in at 172,000, which was more than double the consensus expectation, and unemployment held at 4.3%.
Japan
Japanese stocks eked out a modest gain in June, with the MSCI Japan index rising 1.2%. However, this headline figure masked a volatile month. Shares fell sharply early on amid a global sell-off triggered by US jobs data but then rallied after the Bank of Japan raised rates to 1.0%. This is the highest level in more than three decades and sent the Nikkei 225 index above 70,000 for the first time. Robust export data and the US-Iran ceasefire supported positive sentiment among investors, while a second global semiconductor company sell-off late in the month briefly unsettled technology stocks before a swift recovery.
Asia Pacific (ex-Japan)
The MSCI Asia Pacific (excluding Japan) index edged up by 0.1%, but beneath this headline return, there were sharp contrasts in fortunes. The MSCI Hong Kong index was down 7.1%, dragged lower by negative sentiment towards mainland China. Meanwhile, South Korea continued to perform strongly, with the MSCI Korea index up 1.9%, despite the mid-month turbulence. This positive return underlined how sensitive North Asia’s technology companies are to investor sentiment about AI.
Emerging Markets
Emerging market stocks were little changed in June, with the MSCI Emerging Markets index edging up 0.1%. However, there were significant differences in the performance of individual countries. Taiwan again led gains, despite the two sharp sell-offs in semiconductor stocks. China extended its declines, while Indonesia – which is facing a potential downgrade to ‘frontier market’ status – remained the weakest market globally. Meanwhile, India posted modest gains.
Bonds
Shorter-dated bonds, which are more sensitive to shifting economic conditions, saw considerable price movements during the month. This was as investors grappled with inflation expectations, Middle East oil flows and interest rate forecasts. Once the Strait of Hormuz reopened and oil prices fell significantly, this led to investors reassessing expectations for inflation and the likelihood of rate rises in the UK and European Union.
Meanwhile, Fed Chair Kevin Warsh’s tough talk on inflation, and signals from other US central bankers about the potential for higher interest rates caused the dollar to strengthen and the yields² on shorter-dated bonds to rise.
