Weekly Market Update (and Chart of the Week) #5

This week’s market update highlights the latest macro news, record stock market returns, central bank rate cut expectations and general market performance across the UK, US and Asia.

Here’s the key takeaways:

• The Fed resets expectations – the current view from the Fed is that it won’t consider easing until it sees data showing decreasing inflationary pressure. Market expectations for rate cuts diminished, with June seen as the likely month for cuts to start.

• UK sees a record budget surplus in January – a positive development for Chancellor Jeremy Hunt ahead of a potential final fiscal statement before a general election. The ONS reported that tax revenue exceeded spending by £16.7 billion. 

• A 30-year wait for Japanese stocks – the Nikkei 225 surged on Thursday, reaching heights not seen in over three decades. This was driven by increased investor confidence, buoyed by Japan’s triumph over deflation and its promising path to sustained growth. The rally reflects a remarkable turnaround to one of the world’s most attractive markets. 

• UK continues its bumpy recovery - the S&P Global UK Composite PMI for February increased to 53.3 from 52.9 in January, surpassing expectations. The private sector (supported by a strong service sector) is now in its fourth month of expansion, the fastest since May 2023. However, manufacturing production declined for the twelfth month in a row. 

• More stimulus needed in China – the People's Bank of China latest effort to stimulate the economy saw it cut the 5-year loan prime rate by 0.25% to 3.95%. A historic low and the largest cut since 2019. The CSI 300 rose for an eighth day on Thursday, capping its longest run of gains since July 2020.

What does that mean for me and my clients?

With less macro news, company fundamentals rather than inflation and interest rate expectations drove investor returns this week. However, markets remain sensitive to the latest economic developments and prudence remains key. Concentration risk remains ever present, so diversification is paramount. 

Chart of the week

Source: QUICK, BofA Global Research

The chart above shows the number of Japanese companies that have stated they’ll initiate share buybacks and the value of those buy backs in JPY. 

Why’s this worth sharing?

This week saw Japan's main market, the Nikkei 225, hit its highest level since 1989. We’ve been tactically overweight in Japan for some time and there are several reasons to remain positive. One is that we’re finally seeing the third arrow of Abenomics aimed at corporate governance coming through. The chart shows this with the increase in buy back activity, meaning companies are choosing to share cash with shareholders rather than hoard it on the balance sheet. 

The Fed couldn’t stop the AI driven market charge this week, despite pouring cold water on any immediate rate cuts. Nvidia, ‘the most important stock in the world’ according to Goldman Sachs, reported another quarter of stellar earnings that blew past analyst expectations (actual $24bn vs $21.9bn expectations.) The jump in shares on Thursday added an eye watering $277bn to Nvidia’s market cap, the biggest single-session increase of market value in history!

The AI party continues for now, but heightened expectations and market sentiment relying on a single stock flashes warning signals. I’m reminded of the quote from Warren Buffet that says ‘Be fearful when others are greedy, and be greedy when other are fearful.’

In China, efforts to plug the on-going market retreat seemed to take effect this week. With the PBoC lowering lending rates, banning major institutions from reducing equity holdings at the beginning and end of trading sessions and warning firms that profit from short selling.

The FTSE 100, fell marginally this week on the back of mixed results for the banking behemoths Barclays and HSBC, with the latter reporting a 80% drop in profits due to its holdings in a Chinese bank. 

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.