Market Opinion - June 2023

Market Opinion - June 2023

In June, global equities experienced a 5.8% rebound in USD terms, while global government bonds slightly declined by 0.1% in USD hedged terms. The following key themes emerged:

1. Economic activity showed signs of softening, although US data remained resilient.
2. Major central banks committed to tightening monetary policies due to persistent core inflation.
3. China implemented rate cuts to key lending rates as its economic rebound lost momentum.

In a significant development, Putin's rule in Russia faced domestic challenges following Ukraine's long-awaited counteroffensive. The Wagner Group, a Russian paramilitary organization, expressed discontent with military leaders and staged a march towards Moscow, although the protest was short-lived. US-China tensions seemed to de-escalate as Antony Blinken, the US Secretary of State, unexpectedly held a meeting with Xi during his trip to Beijing. Stock market participation broadened in June, with all sectors experiencing positive performance after a lopsided May. Saudi Arabia announced further oil production cuts at the OPEC+ meeting, but Brent Crude only rose by 3.1% in June. European natural gas prices saw a significant increase (+38%) but remained around 90% below last year's highs.

In the US, the economy exhibited robust growth in May, with core retail sales (+0.4%) and core durable goods orders (+0.7%) surpassing expectations. Housing activity also rebounded, including home sales, building permits, and housing starts. However, the ISM Manufacturing PMI declined to 46 in June, although the New Orders sub-index rose to 45.6, indicating contractionary conditions. Signs of a cooling labour market emerged as the unemployment rate increased to 3.7%, and initial jobless claims briefly reached levels last seen in late 2021. Headline inflation fell sharply to 4% (y/y), while core inflation only slightly decreased to 5.3%. The Federal Reserve paused for the first time in 15 months, keeping the target rate range at 5-5.25%, but the updated dot plot indicated two further 25bps hikes later in the year.

In Europe, economic activity showed signs of slowing in June, although both the UK and eurozone Composite PMIs remained in "expansion" territory. Revised GDP figures revealed that the euro area experienced a technical recession in the first quarter, while monthly UK GDP data showed a modest expansion of 0.2% in April. In the UK, inflation remained stubbornly high, with the headline rate unchanged at 8.7% (y/y) in May, and core inflation accelerating to 7.1%, the highest reading since 1992. Headline inflation in the euro area decreased to 5.5%, while core inflation slightly increased to 5.4% in June. Central banks in the region continued to raise policy rates, including the European Central Bank (+25bps to 3.5%), Bank of England (+50bps to 5%), Swiss National Bank (+25bps to 1.75%), and even the Central Bank of Turkey (+650bps to 15%). In the political sphere, Sunak and Biden signed the "Atlantic Declaration" to increase UK-US trade and cooperation in critical minerals, defence, and other areas.

In the rest of the world, China's economic rebound slowed down in May, with retail sales and industrial production decelerating. However, the non-manufacturing sector showed expansion (53.2), while manufacturing experienced a modest contraction (49.0) in June, as indicated by the NBS PMIs. The People's Bank of China (PBoC) announced marginal cuts to key lending rates. In Japan, the Tankan Business Conditions surveys signalled a stronger second quarter in both the manufacturing and non-manufacturing sectors. Core inflation in Japan increased to 4.3%, the highest reading since 1981, but the Bank of Japan (BoJ) made no adjustments to its yield curve control policy, maintaining a dovish stance.