Weekly Market Update and Featured Chart #25

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

The key takeaways:

⚽ New Chancellor Rachel Reeves announces National Wealth Fund plans – the ball's been in Labour’s court for less than a week and they’ve already allocated new funds of £7.3bn towards their flagship growth programme, encouraging investment in areas like green steel and gigafactories. This fund hopes to attract a further £20bn of private sector money into low-carbon investments in the UK economy.

🥅 UK economy rebounds with 0.4% growth – GDP has risen 1.5% so far this year and looks set to beat Bank of England forecasts. Retail bounced back after a decline in April, reporting a 2.9% increase in trade for May.

❄️ US CPI cools to 3% – the Fed is expected to achieve its goal of curbing inflation enough for a rate cut in their September meeting, assisted by a sharp slowdown in rent inflation, now at its lowest level since 2021.

📜 FCA announces new listing rules – effective from 29 July, the Regulator hopes these changes, including increased opportunities for dual-listed share structures, will prove a winner with companies and reverse the decline in UK listings – which are currently down 40% from their peak in 2008. 

🤝 Electoral impasse in France - a hung parliament looms as no new government has formed following France’s two-stage election, with the three major groups yet to agree upon the necessary political compromises for a stable parliament.

The winds of change invariably leads to winners and losers. Time will tell if inflation has finally been defeated, but markets are already beginning to price in this possibility. This shift has benefited the broader market, with money moving out of the large cap US tech stocks, previously safe havens in this high interest environment.

Away from home, political instability persists. In France, political factions must concede ground to form a team for government. Over in the US, President Biden continues to score own goals. This is a ripe backdrop for the UK to attract new fans, as both government and regulators put forward steps to attract capital to our shores.

We can see this in the rise of the pound, a welcome boost for summer travellers and UK investors buying international assets.

Chart of the week

Source: J.P. Morgan Asset Management, Guide to the Markets

It’s no surprise to see UK stocks offering a higher dividend yield than other markets, a well-known characteristic of the FTSE 100. UK stocks now also lead the way in share buybacks, boosting the overall return to investors.

Whilst we’ve been riding a wave of UK optimism, UK listed companies have been bullish for some time. Since 2021, BP and Barclays have reduced their share counts by 17% and 14% respectively.

If positive sentiment brings further investor inflows into UK stocks, they’ll be investing in a shrinking pool of equity – due to both lower listing levels and shrinking equity at the stock level. 

As Southgate’s men prepare for a final on foreign soil, UK stocks are also braced for their moment on the international stage.

US inflation and Market reactions: Thursday’s lower than expected US inflation numbers had significant implications for both currency and markets. The US dollar weakened, causing the pound to extend its July rise. The possibility of the Fed cutting rates as soon as September led to a shift of capital from the tech mega caps into fixed income assets, resulting in a sharp drop in Treasury yields.

Tech sector hit: The pullback in large cap tech names hit the Nasdaq particularly hard, however it remains ahead of the pack in 2024. All of the Magnificent Seven stocks fell on Thursday, and the decline of almost 1% in the S&P 500 marked the worst day for the index since April. However, the broader market saw gains, with 400 constituents of the S&P 500 ending the day higher and the small cap Russell 2000 index rising by more than 3%. This is only the second time since 1979 that the Russell 2000 has gained more than 3% on a down day for the S&P 500.

UK Market gains: Smaller UK companies benefited the most from another week of positive economic news. The FTSE 250 reached its highest level since 2022 and has now outperformed the FTSE 100 this year.

Mixed week for Hang Seng: The Hang Seng index had a volatile week due to strife in the real estate and tech sectors, but recovered 2% on Friday morning in response to the US CPI data.

Japanese Market and currency appreciation: Dollar weakness boosted the Yen, benefiting Japan stocks for UK investors. The Nikkei 225 closed above 42,000 for the first time in history on Thursday, fuelled by foreign investor inflows. However, the next morning saw the index suffer its biggest one-day decline in over three years, due to exports facing challenges and profit-taking.

Oil movements: Oil prices crept up following weaker US inflation but are set to end the week down, as concerns over damage from Hurricane Beryl in Texas’s Midland Basin eased.

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.