WeeklyWatch – Europe shapes the past and present

11th June 2024

Stock Take

Waving the flag for Europe’s past…and future

Europe was the focus of the world last week, as we remembered the 80th anniversary of the D-Day landings. But it wasn’t just history that had people’s attention – the markets had investors keeping their eyes keenly peeled for the European Central Bank’s (ECB) latest interest-rate decision.

Before they made their announcement, there were indications that the long-running downturn in eurozone manufacturing could be taking a positive turn. Data revealed the slowest decline in new orders for two years, strongly indicating an increase in business confidence.

What’s more, the fall in production costs has allowed manufacturers to reduce their prices, revealing more manoeuvrability for the ECB to reduce their interest rates.

This major announcement was then followed by the news that in May, eurozone business activity expanded at its fastest rate in a year. The eurozone’s dominant services industry swooped in to help as growth in the area outpaced the contraction in manufacturing. In addition, services firms increased headcount at the fastest pace in 11 months. Overall, this boosted predictions that the eurozone economy will continue to have positive growth in the second quarter.

The ECB confirmed a cut in its main interest rate from the all-time high of 4%, down to 3.75%, all done in spite of the small increase in inflation in May. Despite this, the markets backpedalled after a follow-up announcement said that it didn’t expect inflation to return to its target until 2026.

ECB President, Christine Lagarde, stated:

“The cut was not a one-off, but rather the start of a dialling back process.”

Markets are predicting one to two more rate cuts to take place this year, and four in total by the end of next year. Policymakers currently expect that September will be the next possible window for this.

Indian voting rocks the boat

Investors were shaken when early voting revealed that Indian Prime Minister Modi’s BJP-led alliance wasn’t going to secure a landslide victory in the nation’s elections as expected. Their predicted overwhelming victory was expected to have a positive effect on the financial markets, but the voting has shaken things up quite dramatically.

The Nifty 50 Share Index (India’s benchmark) suffered its biggest fall in four years, closing down 6%. However, in the following session, Indian stocks recorded the largest daily rise in more than three years as it became more apparent that Modi was in fact going to retain power for a third term.

US tussles with growth and falls

Across the pond, following a short-lived contraction in the previous month, the US services sector had a resurgence in May and returned to growth. Business activity recorded the biggest monthly rise since March 2021.

However, data released at the start of the week revealed that manufacturing activity within the world’s largest economy had slowed for a second consecutive month and new goods orders decreased by the most in almost two years.

Other industries also saw falls. Construction spending saw an unexpected fall for a second month back in April, and the number of job openings per job seeker dropped to its lowest number in almost three years – an indication that the economy was somewhat sluggish as it entered the second quarter.

Equity markets were left uncertain on how to process the news. Figures seemed to indicate that the US Federal Reserve were gradually overcoming inflation issues and thus accelerating plans for possible interest rate cuts. However, the news also gave rise to concerns about corporate profits being impacted later on.

Towards the end of the week, the crucial US jobs monthly jobs data was released. Last month, employers added 272,000 jobs, which far exceeded expectations of a rise of 180,000. These figures seemed to silence any doubts that cracks were forming in the US labour market. However, global stocks concluded the week in retreat as soon as Fed rate cut probabilities were diminished. Chances of a rate cut in September fell from 81% to 57%, and treasury bond yields increased as the higher-for-longer realisation became reality.

Nvidia soars and shapes the S&P 500 in the process

Despite future concerns about corporate profits, there were no such caveats to the fortunes of AI chipmaker Nvidia when they overtook Apple on Wednesday to secure their place as the second most valuable company in the world. The company has seen a share price surge of 147%, and this alone accounted for approximately one-third of the S&P 500’s total return for this year.

The S&P 500 and tech-dominated Nasdaq Index excelled to record highs. Concerns still centre on the continued concentration of gains in just a handful of large tech companies, but others think the performance is deserved as a result of their secure earnings, domination among their competition and plans to optimise and capitalise on the AI revolution.

Global shares were boosted to nearly reach an all-time high on Thursday, following the success of AI’s impact on markets around the world. Canada stepped forward to become the first G7 country to reduce borrowing costs when their central bank dropped rates from 5% to 4.75%.

Wealth Check

Private education and your finances

Private education has seen a huge soar in price over the years. On average, the cost per child for each term for day pupils is £6,944; for boarding pupils, the average cost is £12,344 per term.[1]

Having said this, there is a big variety across regions. With the cost of living still increasing, many private schools have had to hand over the responsibility for energy and food costs back to the parents.

Additionally, if Labour secure victory at the next general election, they could introduce VAT on private school fees, which will mean another 20% heaped onto the annual costs.

Expect a 5% increase per year – plus school trips, uniforms and travel. Building in 10% per year is a good idea.

How can I pay for private schooling?

Parents looking to fund school fees generally fall into three groups.

  1. Parents who can invest a lump sum, possibly from an inheritance.
  2. Parents who can cover the cost with their income, provided they remain employed in their job.
  3. Parents planning ahead and are looking to set up a regular savings plan.

Which is best to use for school fees? A Cash ISA or a Stocks and Shares ISA?

If you save into any tax-efficient ISA, it means that you’re able to use your full annual ISA allowance of £20,000 a year before tax – £40,000 for a couple.

Your annual ISA allowance could increase by another £5,000 per year, but it’s conditional on the acceptance of the government’s proposal to introduce a new British Stocks and Shares ISA.

Unfortunately, in order to afford the magnitude of school fees, putting money into a cash savings account or a cash ISA is not likely to provide you with the best results.

[1] Schoolguide, accessed April 2024.

By investing in a stocks and shares ISA, there is a better chance for your money to outperform cash holdings in the medium to long term. However, these investments carry more risk through the way they can fall and rise in value.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

An investment in equities does not provide the security of capital associated with a deposit account with a bank, building society or a Cash ISA.

The favourable tax treatment given to ISAs may not be maintained in the future, as they are subject to changes in legislation.

Please note that St. James’s Place does not offer Cash ISAs.

In the Picture

Far-right parties made gains in the European Parliamentary elections; despite this, central parties hold the majority.

The Last Word

“I have confidence in the ability of the French people to make the fairest choice for themselves and for future generations.”

Emmanuel Macron, President of France, as he calls a snap election following the European Parliamentary election.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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SJP approved: 10/06/2024