Weekly comment: Stocks enjoy best week of the year

Market overview – Richard Carter, Head of Fixed Interest Research

Global equities posted a sizable rally last week supported by solid economic data, with the MSCI All Country World index gaining 3.9% (14.0% YTD). Bond markets were little changed, suggesting the move higher in stocks is more down to shifting sentiment rather than a marked improvement in fundamentals.

US stocks led the way, snapping a four-week losing streak to rise 4.0% (17.5% YTD) as tech-based indices outperformed to end the week up 5.3% (18.0% YTD). Tech-based indices closed around 12% higher than their intraday lows posted less than two weeks earlier. Market declines earlier in the month accelerated after a soft US jobs report, but a string of data since then suggests that the world’s largest economy is holding up ok. Retail sales jumped 1.0% in July for their largest rise in 18 months, suggesting the consumer remains strong.

Inflation has taken on a lesser significance in recent months as the rise in price pressure has returned towards the Federal Reserve’s 2% target. The consumer price index for July showed an annual increase of less than 3% for the first time in over three years. The producer price index also brought comforting news, coming in flat month on month after three months of increases.

Attention now turns to this week’s Jackson Hole symposium, where investors will be carefully following Fed chair Jay Powell’s remarks. This event has a history of key monetary policy announcements and there is a growing expectation that Powell will open the door to a first rate cut in September. While the European Central Bank (ECB) and Bank of England (BoE) have lowered rates this year, the Fed stands out as maintaining its rate at a 23-year high of 5.25%-5.50%.

Fixed income markets have moved to price in rate cuts later this year. The US 10-year Treasury yield decreased six basis points last week to end at 3.88%, despite data being largely positive. In the UK, the 10-year gilt yield fell two basis points to end at 3.92%. The British pound strengthened against the US dollar, closing at 1.29. UK stocks rose 2.1% on the week (10.5% YTD) while the MSCI Europe ex UK closed 2.5% higher (8.2% YTD).

Oil pulls back

 There was some notable selling in the oil market towards the back end of last week as traders weigh up the latest developments in the Middle East and signs of softening demand. Brent crude, an international benchmark for oil, posted a sizable return in the first half of the year as economies continued to perform well and geopolitical tensions remained fraught.

However, worries around the level of economic activity and hopes of a ceasefire in the 10-month old conflict in the Gaza Strip between Israel and Iran-backed Hamas contributed to a 5% drop for Brent in July before trading back near its lowest levels of the year in early August. Slowing economic growth can be seen in many key regions and although a soft landing is still seen as the most likely outcome, there is little denying a lowering of demand.

OPEC+ announced an extension to their supply cuts well into 2025 earlier this summer, continuing a policy that has been in place since late 2022 to support the oil price. The current total cuts amount to around 5.9m barrels per day, roughly 6% of global demand.

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