Holiday homework
The summer break is synonymous with rest, sun and traffic jams caused by flocking holidaymakers, but – as history has shown us – there will be no let up in hostilities on financial markets. Europeans can still remember the painful episode of the sovereign debt crisis in summer 2011. After bubbling away for months, this crisis erupted on markets from 20 July, after the European agreement on aid for Greece, which ratified the country’s partial debt default and was swiftly followed by Moody’s placing Spanish debt on the watchlist. As a consequence, European stock market indices plummeted by over 20% in less than three weeks.
In 2015, it was China that upset the peace of holidaymakers. Faced with a slowdown in growth and – already back then – setbacks in the real estate sector, on 11 August, Beijing decided on a sharp devaluation of the yen, which was greeted by widespread surprise. This was followed by panic on Asian stock markets that rapidly spread to western markets, culminating on 24 August in a “black” Monday that saw the CAC 40 lose close to 9% during the day.
Less spectacularly but more recently, there was also the incident of Jerome Powell’s statements at the Jackson Hole Symposium on 26 August 2022. In an exceptionally short speech for this type of meeting, the Fed chief doubled down on his determination to combat inflation and to continue full speed ahead with monetary tightening. It was a cold shower for markets which – after a difficult start to the year – had started to recover and received a positive surprise from inflation figures for the month of July. This heralded a surge in interest rates: in two months, the US 10-year rate moved from 3.0% to over 4.2%.
Will it be the same story this year? Of course, it’s hard to predict all eventualities in the coming weeks, particularly in such an uncertain political environment – in both Europe and the US. However, there are a few points to keep an eye on. On the political front, the Democratic National Convention from 19 to 22 August will officially nominate the party’s candidate for the presidential election. Usually a formality, the convention is uniquely important this time following the withdrawal in extremis of Joe Biden.
Still in the US, we should also be on the lookout for changes in economic momentum. Firstly on 25 July, with the publication of initial estimates for Q2 GDP growth. The consensus is for a slight re-acceleration after disappointing Q1 figures. However, if growth remains well below an annualised rate of 2.0% for the quarter, the expectations of markets and the Fed for 2024 – for 2.3% and 2.1% growth respectively – will be very difficult to achieve. Next, various employment statistics due for the last week of July will also need close monitoring and will culminate in the Bureau of Labor Statistics’ report on employment that is expected on 2 August. The US labour market is now deteriorating rather rapidly after a welcome phase of normalisation; any confirmation of or acceleration in this trend would raise the prospect for rate cuts but would also fuel serious worries on the trajectory of the US economy at a time when markets have fully excluded the risk of recession. A scissor effect that is rarely positive.
Lastly, on the corporate front, a keen eye should also be kept on the quarterly earnings publication season that is already under way, with a focus on the tech giants: Alphabet will set the tone, publishing on 23 July, followed by Microsoft on 30, Meta on 31 and Apple and Amazon on 1 August. As always, Nvidia will give the finale, reporting a few weeks later on 28 August. Despite recent market rotation in favour of small caps and discounted stocks in particular, the “magnificent six” tech stocks[1] remain by far the largest contributors to global stock market performance over the last 18 months. Any disappointment, with earnings or the outlook for the coming quarters would undoubtedly have a significant impact on the direction of stock market indices. In contrast, any upside surprises could give a renewed boost to equity markets which have recently appeared to run out of steam.
None of the issues cited are likely to cause stress episodes such as those seen in 2011 or 2015, at least at this stage. For all that, after a very positive start to the year for equities, characterised by strong underlying disparities among individual stocks and dominant outperformance of the tech giants, they may define the themes that will determine market direction in the second half of the year.
Final version of 22 July 2024 – Enguerrand Artaz, Fund Manager, LFDE
The opinions cited are those of the fund manager. LFDE shall not be held liable for these opinions.
[1] “Magnificent Seven”: expression referring to seven US technology stocks, which are the leaders in their respective sectors and whose stock market performance has been exceptional, resulting in high market capitalisations: Alphabet, Amazon, Meta, Apple, Microsoft, Nvidia and Tesla.