Weekly Market Update and Featured Chart #24

This week’s market update highlights the latest economic news and general market performance across the UK, US, EU and Asia.

The key takeaways:

• A new UK Government – In line with predictions, Keir Starmer’s Labour Party won the UK General Election with at least 412 seats and a significant majority, returning to power after 14 years as the opposition. You can read more about the election in Patrick Ingram's recent article here.
• Un change est à la carte; President Macron's Ensemble Party trails in third place after the first round of the French parliamentary election – France looks set for a period of "cohabitation", the first time a Prime Minister will be from a different party to the President in over 20 years.
• US ISM Services index dives below consensus – The measure of economic conditions for the services industry fell to 48.8 in June (down from 53.8 in May), its lowest level since the 2020 Covid lockdowns.
• Fed minutes hint at concern for the labour market – Some members of the Fed commented “there continued to be downside risks to economic growth and upside risks to unemployment” and suggested “job growth may have been weaker than indicated by payroll employment”.
• En-core une fois, European inflation remains sticky – While headline inflation crept slightly lower to 2.5%, core inflation remained at 2.9% and services inflation at 4.1%.

Recent political events have shown that it’s often the speed of change that unsettles markets, not the change itself. The results of the UK election have brought a seismic change in parliament, but this change has been predicted since 2022 and the markets have already priced it in. That’s why the pound has kept remarkably steady against other currencies, which bodes well for the Bank of England’s expected rate cuts. UK stocks bounced this morning on the expectation the Labour majority signals a period of stability – a welcome contrast to the political upheaval of the past few years.

Bond markets are wobbling elsewhere owing to concerns over President Biden’s re-election bid and the outcome of France’s National Assembly election. 

Chart of the week

Source: Parmenion, FE fundinfo

In local currency, Japanese equities continued their good run over the last quarter, with a modest return. However, returns for UK investors were much lower owing to the currency impact of a weakening Yen. This highlights the importance of currency on asset returns - highly relevant at a time of diverging central bank actions towards interest rates.

Holding a diversified portfolio of assets exposed to different regions lowers the risk of being unduly impacted by swings in currency exchange rates. The Yen is often considered a “risk-off” currency, and could offer a degree of defensiveness if US rate cuts eventually arrive in response to a weaker economy.

It’s been a good week for equity markets, with traders somewhat shying away from bond markets amidst a backdrop of political uncertainty.

UK stocks rose after confirmation of the Labour landslide victory. Homebuilders and the UK-focussed FTSE 250 benefitted the most with a notable surge.

Returns for US stocks were tempered by a shorter trading week - the S&P 500 inched forward to close at a record high but there’s been little change ahead of the jobs data release later today.

After a four-day winning streak, the Hang Seng index fell back in response to new tariffs from the European Union, with electric vehicle heavyweights BYD and Li Auto leading the declines.

The Nikkei 225 hit a record end-of-day high, surpassing the previous record set in March. Gains were buoyed by heavy technology and export-oriented shares purchases, as the yen traded at a fresh 38-year low against the US dollar.

Brent crude prices hit their highest level since April, rising above $87 after data showed a decline in US inventories.

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.