Political shockwaves – Damien’s Market Update – June 2024

I closed out my last episode of Damien’s market update by summarising that investors were in a sweet spot where optimism over corporate earnings, anticipated rate cuts, declining inflation, and easing geopolitical tensions were driving rallies across various asset classes. The 10-year US treasury yield has dropped from 4.7% to 4.4%, reflecting a broader bond rally, and gold prices have returned to their all-time highs. 

However, one potential risk loomed large in the shape of Nvidia’s Q1 earnings report. In the end  Nvidia’s earnings exceeded the market’s already lofty expectations and the company’s share price rallied as a result. Nvidia share price has since soared helping to push the S&P 500 to new all-time highs while the chipmaker has become the largest public company in the world, overtaking Microsoft. 

But Nvidia has been only part of the investment story over the last month. Politics has also taken a grip of some global stock markets. For example, June started with significant volatility in Indian equities as the election results approached. The Indian stock market surged 3% initially, believing BJP would secure a strong majority, but crashed 6%  in a single day when results showed otherwise, only to rebound as a coalition government was formed under Prime Minister Narendra Modi. This political manoeuvring caused short-term market disruptions but ultimately the Indian stock market has since resumed its 2024 rally, as a result of political certainty.

At the opposite end of the scale, European equities have endured a dismal 10 days of political uncertainty. This was sparked by the snap election called by French President Emmanuel Macron on Sunday 9th June. The bold move is Macron's attempt to halt the rise of France’s far right, which enjoyed a strong performance in recent European elections. The move caused a stock market sell-off in France but the shock waves have been felt across European stock markets. France’s stock market (as measured by Euro Stoxx 50) is down around 6% since Macron’s political gambit as concerns grow that the country could face a financial crisis if either the far right or far left win the election due to their extensive spending commitments. European equities more broadly, as measured by the Euro Stoxx 50 are down around 3%.

European equities were gaining a lot of positive attention from investors, especially after the European Central Bank cut interest rates, but Macron has since muddied the waters.

Of course while the UK’s FTSE 100 has been unfazed by developments in Europe it has faced its own challenges after Prime Minister Rishi Sunak called a snap general election, set for July 4th. Despite the shock announcement, the FTSE 100 and sterling showed little reaction initially. 

History shows that a UK election can be positive news for UK stock markets, particularly mid-cap stocks, if the election result goes as predicted and a majority government is formed, as is predicted. But the FTSE 100 has fallen 2% since the election was called. It’s also unlikely the the Bank of England will come to the rescue this week and boost investor sentiment with a base rate cut.

Interestingly, US bonds have continued their rebound in June with the 10 year US treasury yield tumbling from the 4.5% level to 4.21% as US inflation fell in line with market expectations. However the bond picture has been more mixed in Europe, especially in France as investors weigh up the potential future borrowing of whoever wins the election. 

In summary, bond investors have seemingly joined equity investors and major central banks in dismissing a second wave of inflation. Which means bonds are starting to contribute positively to investors’ portfolio returns. US equities are once again setting new all-time highs, while most other major developed equity markets remain within 2% to 5% of the highs they achieved in May, with political uncertainty playing a significant role in the pullback of certain markets. With important elections in Europe and the UK due in early July, it’s likely that volatility will be a thorn in those areas of your portfolio for a while yet.