6th Febuary 2024
Tech stocks step up the tempo
Market observers will have identified a familiar pattern last week: interest rates remained high, and large technology companies increased in value.
Last week it was the turn of key players Meta and Amazon to make headlines. Meta drew particular attention following its announcement of substantial growth in fourth-quarter profits and the intention to pay its first-ever dividend. This dual revelation contributed to a 20% increase in the company’s value over the course of the week.
While not as striking, Amazon’s robust performance also helped boost its share price, reaching notable levels reminiscent of its historic highs during the COVID-19 bubble.
These results helped drive the S&P 500 to another good week, as it ended up 1.9% in local currency.
Interest rates remain steady
The Federal Open Market Committee (FOMC) met last week, opting to keep interest rates at their current – relatively high – rate for a while longer. Markets were relatively unfazed by the news.
Indeed, the Committee is having to play a careful balancing act at the moment, as noted by Mark Dowding, Chief Investment Officer at BlueBay:
“Although [Federal Reserve chair Jerome] Powell sought to downplay the idea that rates will decline as early as March, the market has shown [an] appetite to front-run the Fed, and a narrative gaining traction is that where the market leads, the Fed will now follow.
“The Fed will have known that removing the bias would invite near-term rate cutting speculation. In this context, if the desire was to downplay and not feed these expectations, the FOMC could have retained the existing bias for a little longer, yet it chose not to do so.”
Certainly, employment data stands out as a key indicator for any decision the FOMC makes. In the previous week, the Bureau of Labor Statistics disclosed an addition of 353,000 jobs to the US economy in January, showcasing the remarkable resilience of the nation’s economic landscape. This figure shocked analysts, as their projections were generally hovering around 200,000.
While these statistics may be encouraging for Joe Biden as he embarks on an election campaign, they present a different perspective for the Fed. Such high numbers will reduce the rush to bring down interest rates. Chair Jerome Powell emphasized this sentiment over the weekend, stating: “The danger of moving too soon is that the job’s not quite done.” The wait for an interest rate cut is likely to be a little longer than previously expected.
UK interest rates also at a standstill
It’s probable that British interest rates will remain at their current, high, level for some time yet. Last week the Bank of England’s (BoE) Monetary Policy Committee chose to keep interest rates at 5.25%. Governor Andrew Bailey highlighted the question the Bank was asking itself was: “How long do we need to hold this position for?”
According to Hetal Mehta, St. James’s Place Head of Economic Research, the UK is likely to be behind its EU and American counterparts in this regard. She said:
“The BoE has confirmed what most market participants had taken as a given: that the MPC as [a] whole doesn’t have a hiking bias anymore. However, today’s vote split was not consistent with market expectations at this stage of the inflation cycle. While much progress on overall inflation has been made, services inflation – rightly so – is concerning the BoE. We still think the BoE is likely to be behind the ECB and Fed in cutting rates.”
Overall, the FTSE 100 ended the week down 0.3%.
Unstable markets and declining equities in China
Shifting focus to China, share prices experienced another tough period. A fortnight ago, Chinese equities saw an increase, influenced by policy tweaks by the People’s Bank of China.
Nevertheless, heavy selling pressure resurfaced in the past week, causing the Shanghai Composite to shed 6.2% in local currency terms. Local indices have now reached their lowest point in five years, prompting the China Securities Regulatory Commission to issue a statement indicating its intention to step up market stabilisation measures. However, the statement lacked detail, and only time will reveal how successful their actions may be.