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Article | 03 July 2024 | Investments
Unexpected election results in India, Mexico and South Africa temporarily shook markets. In India, Narendra Modi secured a third term, but lost his parliamentary majority. Mexico’s Claudia Sheinbaum won a landslide victory, to become the country’s first female president. While in South Africa, the ANC was forced into coalition with the business-friendly Democratic Alliance, after losing its parliamentary majority for the first time in 30 years.
President Emmanuel Macron also upset financial markets when he called a snap election in France, following a surge in support for the far right in European elections. A victory for the far right in France could spark fears over debt sustainability and potentially also endanger the integrity of the European Union. The news caused a sharp sell off in French equities and bonds over June.
Economic activity appeared to stall in Europe and Japan, with flash estimates of purchasing managers’ indices (PMI) far lower than forecast. However, US economic momentum accelerated further, with the S&P Global US Composite PMI rising to a 26 month high of 54.6 in June.
Global equities advanced over June, with the MSCI All Countries World Index rising 2.1% in local currency terms. A surge in technology stocks drove US indices to fresh peaks (S&P 500 +3.5%; Nasdaq +6.0%), with Nvidia briefly becoming the largest listed company in the world. Japanese stocks also moved higher (TOPIX +1.3%) but European shares lost ground, dragged lower by the impending elections in the UK and France (FTSE 100 -1.3%, CAC 40 -6.4%). Emerging market equities fared far better (MSCI EM +3.6%) although Chinese stocks slumped (CSI 300 -3.3%) with onshore stocks touching a four month low, amid concerns over the country’s growth outlook.
Government bonds rose, with sentiment lifted by slower US inflation. The 10 year US Treasury returned +1.3%, while the 10 year German Bund rallied 1.5%. French government bonds were the exception, amid growing fears that a far right government could massively increase government borrowing. Corporate bonds also recorded positive returns, although they lagged government debt, with both investment grade (Bloomberg Global Investment Grade Index) and high yield bonds (ICE BoA Global High Yield Index) returning 0.6%.
The US dollar strengthened further, after the US Federal Reserve left interest rates on hold in June and suggested that investors should expect rates to remain higher for longer. The US Dollar Index rallied 1.3% over June. In contrast, the euro weakened against the dollar but strengthened against the Japanese yen. As widely expected the European Central Bank cut rates by 25 basis points, although it indicated that further cuts would be data dependent. After the Bank of Japan kept rates on hold at 0-0.1%, monetary policy remains more accommodative in Japan than in western economies.
Oil prices advanced, rising 5.8% to close at $86.40 a barrel. Gold prices closed the month little changed at $2,326.80, while copper prices fell sharply amid concerns over the growth outlook, particularly in China.
The Vix Index slid 3.7% over June to close at 12.4, remaining well below the 20 level which is usually viewed to be an indicator of market stability.
Issuance of sustainable debt, including green, social, sustainable and sustainability-linked bonds, has hit a record level so far in 2024. Demand has been boosted by high interest rates with investors able to demonstrate their environmental credentials while also locking in an attractive yield.
