February Market Update: Re-setting expectations

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Here's our latest market update. You can also download our summary for investors to share with your clients.

What's moving markets

Interest rate policy has dominated the market narrative for the past couple of years, causing stocks markets to rise and fall based on central bank action (or inaction). Now we’ve hit a peak in interest rates, the focus is on when rates will be cut.

Following a big risk-on rally thanks to FED chair Powell’s dovish speech in December, the Committee are starting to row back on their potential timings, and rate cuts won’t now start until June at the earliest.

That’s because while the US economy continues to look strong, as seen in the resilient Non-Farm Payrolls (workers in goods, construction and manufacturing companies) numbers for January, consumer prices in the US rose by 0.3% in January, surpassing market expectations. With the annual inflation rate climbing to 3.1%, more work needs to be done to contain inflation.

The Bank of England breathed a sigh of relief as January’s inflation rate remained at 4.0% (below an anticipated increase to 4.2%) and  services inflation came in lower than expected at 6.5%. It wasn’t all good news though. The ONS reported the UK fell into a technical recession during Q4 of 2023, as the economy contracted by 0.3%, deeper than market predictions of 0.1%. This was the second consecutive quarterly decline, driven by a drop in output, especially within the services sector.

Japan also fell into a technical recession in Q4 of 2023 as the GDP unexpectedly contracted by 0.1%, defying expectations of 0.3% growth. This downturn marks the country's first recession in five years, largely driven by reduced private spending in the face of rising costs and global uncertainties. Despite this, Japan’s Nikkei 225 hit a record high in February, reaching a peak it hasn’t seen for over 30 years.

In the Eurozone, inflation in Germany, France and Spain fell to 2.7%, 3.1% and 2.9% respectively. The Eurozone as a collective has seen its headline inflation rate gradually fall and it now stands at 2.6% year-on-year, closing in on its 2% target. With a spluttering economy, rate cuts may be on the horizon from the European Central Bank. 

In its latest effort to stimulate the economy, the People's Bank of China cut the 5-year loan prime rate by 0.25% to 3.95%, a historic low and the largest cut since 2019. Chinese inflation fell by 0.8% year-on-year in January, the most in more than 14 years and worse than the forecasted 0.5% fall. The reading was the fourth straight month of decline in CPI, making it the longest streak of drops since 2009.

Asset class implications

February turned out to be a particularly good month for stock markets with several major indices reaching all time highs. The AI tech driven rally is maintaining its pace as a deluge of companies report earnings in line or in excess of forecasts. This puts  the US in the lead, with the FTSE USA index posting a return of almost 6% during the course of the month.

The intervention and stimulus measures from the Chinese government look to finally have taken effect with the CSI 300 rising 10% over the month, and both India and Taiwanese markets continued to march higher, helping  the FTSE Emerging Markets and Asia Pacific Ex Japan indices climb 4.88% & 4.98% respectively during February.

The UK retains its status as the developed market laggard, with a lack of investor interest and outflows from UK domiciled funds affecting the market and disappointing earnings over the latest results season. Overseas investors have been taking advantage of the bargains on offer in the UK, as we saw with the attempted takeovers of Curry’s and Direct Line.

Government bonds and Global corporate bonds (represented by the FTSE Actuaries UK Conventional Gilts All Stocks & ICE BofA Global Corporate) had a tough time in February with the surprise rise in inflation in the US and higher than anticipated wage growth in the UK suggesting that rates will remain elevated. High yield managed to produce gains however, as we saw a contraction in spreads coupled with their less interest rate sensitive nature.

The continued resilience in the US stock market and economy supports the theory that a soft landing is achievable. However, we know that the markets in the US are becoming more concentrated and reliant on a single theme. It’s more important than ever to diversify portfolios across asset classes, regions and market capitalisations to protect from any potential market dislocations, especially when the range of outcomes remains so wide.

FTSE Actuaries UK Conventional Gilts All Stocks-1.111.95-3.291.07-21.89
ICE BofA Global Corporate-1.112.56-1.036.02-8.00
ICE BofA Global High Yield0.464.330.8710.250.87
FTSE All Share0.193.33-1.130.5725.21
FTSE USA5.9811.967.7924.5549.27
FTSE World Europe ex UK2.707.433.0210.7432.69
FTSE Japan3.4311.747.8220.0919.93
FTSE Asia Pacific ex Japan4.984.390.281.75-6.89
FTSE Emerging4.884.141.274.08-4.62

Source: FE Analytics, GBP total return (%) to last month end

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.

Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.