Soft serve
What happened in June.
Economic data was weaker around the world in June, putting the ‘soft’ back into the soft landing and unwinding concerns that some economies (eg the U.S.) may run ‘to hot’ for inflation to fall. Developed market central banks (the ECB, BoC, Riksbank etc) have now started their rate cutting cycle to support growth as inflation pressures fade, but the pace of policy easing will be more modest compared to expectations a few months. Australia is proving the exception to this view, as inflation is looking more stuck than sticky, creating a bias for further tightening.
Politics was firmly on the agenda in June as elections were called in the UK and Europe. In the UK, the election outcome is less about who will win, but by how much, given the hefty lead in the polls by the Labour party. Meanwhile in Europe the outcome of the European Parliamentary elections resulted in a decisive shift to the right. The result led to a snap election being called in France, with the far-right and far-left leaning parties performing strongly in the first round of voting.
In the U.S., the election campaigning is gathering pace but neither candidate is laying out any plans to reduce spending or meaningful raise taxes to address the ballooning fiscal deficit. A less fiscally prudent U.S. government could spark another period of rising inflation.
Fixed income markets have languished over the first six months the year. Easing inflation pressures and the onset of rate cutting cycles should mean lower yields on core government bonds. However, politics have complicated the picture as markets may re-price the inflation outlook given long-run spending plans of incoming governments. Core government bond yields are likely to remain range bound and investors wary of adding too much duration to portfolios until the outlook is clearer.
Equity markets moved higher in June and the MSCI World Index rose 2.4%, helped by the better performance of U.S. and Japanese markets as Europe lagged. Emerging markets outperformed (4.3%) supported by the AI exposed markets in Taiwan and Korea which are large weights in the index.
However, the narrowness of the U.S. rally is again in focus as the AI names dominate performance. Over the second quarter, the U.S. S&P 500 was up 4.3%, but the equal weighted index has fallen 2.6% over the same period. A broaden out in the U.S. market is expected given the improving earnings outlook in the non-AI related names and relatively better valuations. Similarly, while the European market has been buffeted by politics, the cyclical improvement in the economy and over discounted nature of the equity market provides ample opportunity for active stock selection to generate returns.
For the full summary of what happened in June check out our monthly market review on the website.
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Kerry Craig, Executive Director, is a Global Market Strategist. Based in Melbourne, Kerry is responsible for communicating the latest market and economic views from our Global Market Insights Strategy Team.
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Kerry Craig, Executive Director, is a Global Market Strategist. Based in Melbourne, Kerry is responsible for communicating the latest market and economic views from our Global Market Insights Strategy Team.
Expertise
Kerry Craig, Executive Director, is a Global Market Strategist. Based in Melbourne, Kerry is responsible for communicating the latest market and economic views from our Global Market Insights Strategy Team.
Expertise
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