30th January 2024
Tech booms on AI hopes
It was a positive week for the S&P 500, which soared to a record high, propelled by the continuing boom in valuations for large technology companies. Against a backdrop of geopolitical risks and uncertainties, the bullish outlook on AI technology has kept momentum.
What’s more, a belief that US interest rates have peaked was bolstered by figures released on Friday, showing US core Personal Consumption Expenditures (PCE) inflation was 2.9% in December, down from 3.2% in November.
PCE inflation uses a different set of data compared to the more traditional Consumer Price Index (CPI) inflation measurement. Although CPI tends to be more widely reported, PCE is the main source used by the Federal Reserve in deciding interest rates.
Despite this, it’s too early to get too excited about a potential interest rate cut, says Mark Dowding, Chief Investment Officer at BlueBay:
“Overall, we think a robust economy, coupled with favourable disinflation trends, means the Federal Open Market Committee (FOMC) can afford to be patient and bide its time in the monetary loosening process, and we expect [FOMC Chair] Jerome Powell to take a similar tone.”
Geopolitics playing on investors’ minds
The tech boom is contrasted by the backdrop of uncertainties facing markets this year. These include the 2024 presidential election, where the stage is almost set for a rematch between Joe Biden and Donald Trump. While this will likely have the biggest impact on the US, it’s worth noting that there are several elections due this year, including in the UK, India and Russia.
Geopolitical tensions are also escalating, evident in the ongoing conflict in Ukraine, events in Israel and Gaza, and persistent Houthi attacks on international shipping. Additionally, an Iran-backed Iraqi militia has claimed credit for killing three US servicemen and injuring many more injured at a military outpost on the Iraq–Jordan border over the weekend.
Economic recovery continues in China
Shifting focus to Asia, in what has become a somewhat rare occurrence recently, Chinese equities concluded last week in positive territory.
The Shanghai Composite saw a 2.8% rise in local currency terms, while Hong Kong’s Hang Seng Index performed even better with a 4.2% increase. This positive momentum followed the People’s Bank of China (PBOC) announcing a cut in the amount of cash that domestic banks must hold in reserve. The intention is to stimulate increased lending to both businesses and consumers, thereby supporting the country’s economic recovery.
Despite the market’s positive response to the PBOC’s move, a Hong Kong court ordered the liquidation of the real estate giant Evergrande over the weekend. This development underscores the fragility of the current Chinese financial landscape.
Inflation falling in Europe?
Positive developments emerged in Europe as European Central Bank (ECB) President Christine Lagarde noted the process of bringing inflation down was working, although it remains premature to consider rate cuts for the time being.
Her optimistic assessment appeared to rule out an imminent cut to rates, reassuring markets. As a result, the MSCI Europe ex UK experienced a notable 3.2% increase over the week.
Lagarde is just over halfway through her eight-year term – it’s worth noting that over half of ECB staff said they felt she was performing poorly or very poorly in a poll of 1,159 members of staff at the central bank released last week.
Energy sector boosts UK
The FTSE 100 rose last week, in good news for investors in UK companies. Unfortunately, some of this was down to a case of ‘bad news being good news’. Continuing worries of wider instability in the Middle East and recent attacks by Houthi rebels in Yemen have helped lift oil prices; this in turn has helped the performance of energy companies, which make up a large sector in the FTSE 100.