Monthly Market Commentary - February 2024

Macro outlook:

What’s happened:

A continuation of outperformance among a handful of mega US tech stocks carried global stock benchmarks higher in January, with the MSCI All Country World ending the month up 1%, in sterling terms. The first monetary policy decisions of 2024 from the Bank of England (BoE), Federal Reserve (Fed) and European Central Bank (ECB) resulted in no change in base rates and the updates, taken together, represented a push back against market expectations for interest rate reductions to begin shortly.

UK bond yields rose in January as inflation ticked higher and gauges of economic activity surpassed expectations. In the US, employment and GDP data came in impressively strong, suggesting the world’s largest economy remains a key pillar supporting global growth. January non-farm payrolls were 353k, nearly twice the forecast and the highest figure in 12 months. UK and Eurozone GDP figures are meagre in comparison, although labour markets show little sign of weakness — if anything, the persistence of strong wage growth threatens to sustain inflation at higher levels than central banks desire.   

What’s ahead:

Economic data releases and developments in the Middle East will likely be at the forefront of investor’s minds in the coming weeks. The message from the BoE, Fed and ECB was suggestive of requiring further evidence of slowing inflation and/or economic activity before embarking on loosening monetary policy.

Hostilities across the Middle East since the start of the Israel-Hamas war are rising, with the US warning it will keep targeting militants in the region after three American soldiers were killed. The oil price is one of the most sensitive areas of the market to these tensions and Brent crude oil, an international benchmark, ended January over 6% higher, although it has pulled back someway from its recent high.

The new year got off in much the same vein as 2023, with a handful of large-cap US stocks starring in the equity space and carrying benchmarks higher. A good chunk of market returns of late have been attributed to the Magnificent Seven stocks — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — but, upon closer inspection, there has been notable divergences in recent performance.

For the month of January, Nvidia (+24.2%) and Meta (+10.2%) posted double-digit returns, Microsoft (+5.7%) and Amazon (+2.2%) outperformed the broader market, but the remaining members of the group lagged. Alphabet (+0.3%) managed to eke out a marginal monthly gain, but Apple (-4.2%) and in particular Tesla (-24.6%) experience significant declines. The timing of corporate earnings releases skews the picture a little, as Alphabet was on course for a strong monthly performance before dropping sharply after its market update while Meta jumped around 20% after its results were announced. Taking a step back it’s worth remembering that while these stocks have several key things in common, they also possess substantial differences, meaning treating them as one and the same, under a catchy moniker, can give a misleading impression.    

UK stock benchmarks dropped 1.2% in January, hindered by ongoing concerns regarding the faltering Chinese economy and a falling oil price. Europe ex UK was little changed, moving up 0.4%. After a strong run higher from their October nadir, it appears that stock indices are in a stage of consolidation, waiting for further information on the strength of economic activity and the future path of interest rates before embarking on their next sustained move. 

UK bonds declined in January, with a broad-based Gilt index returning -2.3%. There has been substantial progress made in bringing inflation back to the 2% target but there is a growing feeling that the “last mile” could prove challenging. The latest UK consumer price index reading showed a 4.0% annual increase and there is some uncertainty on how reluctant the BOE would be to lower rates while this inflation gauge remains around current levels.  

Longer-dated and index-linked gilts were the largest decliners, falling 4.9% and 5.2% respectively. Stubborn inflation, a central bank seemingly in no hurry to loosen monetary policy and gauges of economic activity that continue to surprise to the upside are all providing a headwind for bond markets.

That said, we continue to believe that the backdrop is relatively positive for bonds. Inflation will likely gradually trend lower while growth is expected to be sluggish, especially in the UK and the Eurozone. Central bankers will probably continue to push back on market expectations of early rate cuts for the time being but the pressure to ease policy is likely to build as the year goes on.

The ongoing conflict and rising levels of uncertainty in the Middle East have had a notable impact on Oil and Gold markets. As with the invasion in Ukraine, the initial response was to buy oil on fears of a wider regional conflict. Brent crude, an international oil benchmark, ended January up over 6%, and while it has since pared its gains, concerns have gravitated south to the Straits of Hormuz. The Houthis —an Iranian-backed militant group — are frustrating freight shipping through this vital trade artery in solidarity with Hamas.

This Strait facilitates the trade of approximately 15-20% of global oil flows and 12% of traded goods. Large shipping companies have suspended passage through the Strait, opting instead for the three-to-four week longer route around the Cape of Good Hope. The disruption, along with the risk that western military intervention could widen the conflict, threaten to cause major issues with global supply chains which could lead to another spike in goods prices and reverse progress made on bringing down inflation.

For now, it should be noted that the oil market has pulled back of late and is lower year-to-date. Weakening demand together with high levels of spare capacity within OPEC and strong non-OPEC production growth is currently outweighing the geopolitical risk premium in the price.

Gold ended January a little over 1% lower, after reaching an all-time high in US dollar terms in December. Like Oil, for now fundamentals appear to be driving the price of the precious metal more than events in the Middle East. Perceived safe haven attributes are playing second fiddle to the impact of strong US data and the Fed pushing back against market expectations for rate cuts. We are monitoring the situation closely though, as it can rapidly change.

The pound to sterling exchange rate was little changed in January, but some modest downside occurred following the release of the stellar US jobs report. The rate had been trading towards the higher end of its recent range ahead of the event, just below 1.28, but has since dropped back towards the lower reaches to trade at 1.25 — near to its lowest level in over two months.