Investment Viewpoint: how did equity and fixed income markets fare last week?

Written by Bernard Swords, Chief Investment Officer, and Elizabeth Geoghegan, Head of Fixed Income Strategy

13 May 2024

Simplify the complex with clear and concise market insights direct from our investment experts every week.

Equity markets with Bernard Swords, Chief Investment Officer

It was another good week for equity markets. What drove this? 

  • The world index is up almost 3% month-to-date. Indices are now close to their year highs. Falling bond yields and the impact of a good results season are the reasons behind this. 
  • The interest rate sensitive sectors, Utilities and Financials, have been amongst the best performers. But they have been joined by IT and Communication Services as results here continue to please. The results season is almost over so there will be no further impetus from here. 
  • Bond yields could fall further but they have travelled a long way already. The most likely outcome for equity markets is a pause over the next couple of months. But barring some major risk-off event, the upward journey is likely to resume after the summer lull.
  • Elsewhere, there was some reassuring news from the euro area: the retail sales report showed a 0.8% month-on-month increase, higher than expected, and there were upward revisions to the previous month’s figures as well. Retail sales are now up year-on-year for the first time since the first half of last year. A resurgent consumer is important to the euro area economy as the manufacturing sector across the globe is still struggling.
  • There were also reassuring noises from ECB Council members. Two of the more hawkish members were speaking last week. Mr Holzman, the Austrian Governor, expressed concerns about the impact of cutting too fast or too aggressively on the exchange rate and hence imported inflation but was not against cutting. 
  • Mr Wunsch from Belgium said he now fears that the costs of keeping policy tight for too long are looking bigger and that the ECB should have some fixability around the inflation target. He seems set to support a cut. Our Chief Economist Dermot O’Leary remains of the view that the ECB will be the first to cut and it will happen in June. 

Fixed Income with Elizabeth Geoghegan, Head of Fixed Income Strategy

In contrast to equities, fixed income continues to do less well. How is the outlook for the asset class evolving? 

  • Fixed income markets are down for the year. However, it seems the themes that have been driving markets may be losing a little bit of steam, as evidenced by the positive month-to-date performance of fixed income markets.
  • This year fixed income markets have been under pressure due to the repricing of rate expectations, or the pricing out of cuts from the central banks, predominantly in the US. 
  • This has led to the underperformance of US fixed income versus European fixed income on a regional basis. While on a sector basis, the fact that the moves have all been rate related has meant that government bonds and in particular long duration government bonds have underperformed corporate bonds. 
  • However, a few items of late have brought somewhat of a pivot, mainly the recent surprise non-farm payrolls release, which signalled a little weakness in the economy, and also the latest comments by the Fed that the next move will likely be a cut rather than a hike. 
  • This seems to have reduced the pressure on any further pricing out of cuts, giving relief to fixed income markets, and leading to a slight reversal of trends. 
  • We were previously experiencing the underperformance of US and long duration government bonds. However, month to date,  the assets which have benefitted the most have been the US fixed income market relative to Europe, and then long duration government bonds relative to corporates.
  • From a strategy perspective, the seeming pause in rate repricing is a positive and aids a more constructive stance for longer duration assets. The recent non-farm payrolls have been a very strong catalyst for fixed income, but one would need a few more data points of reassurance to ensure that there isn’t more volatility on the horizon over the next few months. 

The week ahead: what to watch out for

All eyes will be on US data this week. The inflation reports (CPI and PPI) will be released as well as some important growth indicators, including retail sales and industrial production. In the euro area, industrial production data will be released, while in China data releases include industrial production and retail sales figures.

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