Simplify the complex with clear and concise market insights direct from our investment experts every week.
Equity markets with Bernard Swords, Chief Investment Officer
February was a good month for equity markets – what drove this performance?
- The world index delivered 4.7% in euro terms. The two drivers were the AI theme, given a boost from the results from Nvidia, and some recovery of nerves in the Chinese market on the hope of some policy developments next month.
- As a result, the US was the strongest region followed by the Emerging Markets in Asia. The euro area was the main laggard rising less than 2% in February. A lacklustre results season and low exposure to the AI theme were the main handicaps for the euro area.
- The rising belief in an early adoption of AI and the consequent capital spend this would entail fed through the sector performances. As a result, IT and the cyclical sectors (Industrials and Consumer Discretionary) led in the month. Defensives were the real laggard with the interest rate sensitive ones (Utilities and Property) the weakest.
- Equity markets are performing much better in 2024 than people expected. The impact of AI on economic growth and company profitability is the hottest topic at the moment.
- However, with the results season out of the way, the focus on this is likely to decline and with it the current euphoria. It will have an impact but probably not at the speed to justify recent price moves and thus caution is advisable at the moment.
Fixed Income with Elizabeth Geoghegan, Head of Fixed Income Strategy
It was a different story for the fixed income markets. How did they fare in February?
- Fixed income markets were down in the month of February. On a regional basis, US fixed income markets sold off more than European fixed income markets, whilst on an asset class basis sovereign bonds sold off more than corporate bonds.
- Unsurprisingly, the driver of these moves has been the thematic which we have focused most on and this is the repricing of rate expectations. As I mentioned in last week’s edition of Investment Viewpoint, markets have moved to reflect expectations that are much more in line with central bank expectations.
- In January this was more prominent in Europe than in the US, leading to an underperformance of European fixed income relative to US fixed income. However, in February US fixed income markets corrected more. Looking specifically at US Treasury bonds, the US two-year yield experienced the biggest one-month rise in seven months.
- Corporate bonds also sold off, but the moves were less severe as corporate bond spreads tightened over the month of February. This spread tightening, coupled with the fact that corporate bonds are lower duration, and have a higher starting yield, helped to offset the impact of rising rates for the month.
The week ahead: what to watch out for
The European Central Bank meets on Thursday. Given the way rates have moved in the last two months, it will come as no surprise that the prospect of rate hikes this week is off the table in terms of expectations. There has been a lot of commentary from central bankers, and it seems that ECB officials are converging around a first reduction in June. Staying with the euro area, big data points to be released this week include retail sales and producer prices.
Across the Atlantic, the US non-Farm Payrolls will take centre stage but there is also the ISM non-Manufacturing survey. Will there be any slowing in the US data? People will also be listening to Fed Chair Powell’s semi-annual testimony to Congress. Meanwhile, in China, the National People’s Congress will have its annual meeting – and this is where the economic targets for the year are set, and fiscal policy is outlined.
