Q1 review
Q1 ended with equities markets having their strongest first quarter in five years despite diminished expectations for Federal Reserve rate cuts in 2024. The S&P 500 closed the quarter with five consecutive monthly gains and advances in five of the last six quarters. Gains were led by technology stocks, especially those engaged in developing artificial intelligence. Sectors sensitive to interest rates, like utilities and REITs, faced pressure. Small-caps, biotech, healthcare sub-sectors, financials, housing-related industries, and media also underperformed. Bond markets had an overall poor Q1 with bond yields rising on markets pricing out rate cuts. Risks remain as major central banks continue to shrink their balance sheets through quantitative tightening (QT), which typically reduces financial market liquidity, thereby potentially contributing to higher volatility.
At the beginning of the year, the prevailing consensus anticipated a swift series of rate cuts in early 2024, with six cuts factored in, potentially starting as early as March. Markets are now expecting for three following on from the Fed’s March meeting. The European rate-cutting cycle is also now expected to commence in the middle of the year and the BoE has shown greater openness to easing in light of a potential soft-landing economic scenario. The SNB emerged as the first major central bank to lower rates in March, surprising the market. Overall, ongoing disinflationary pressures have inevitably prompted a shift towards policy easing.
US equity investors remained unfazed by the Fed's decision to postpone and reduce the number of anticipated rate cuts. According to AllianceBernstein, this suggests that investors have come to accept that relatively high interest rates can, in fact, reflect a stronger economy. Earnings growth is now poised to take centre stage. The US dollar's strength is likely to persist through Q2 supported by the structural features of the US economy, including its energy independence.
US indices for Q1 2024
S&P 500 +10.56% QTD
Nasdaq 100 +8.72% QTD
Dow Jones Industrial Average +6.14% QTD
NYSE +8.66% QTD
According to the S&P Sector and Industry Indices, 10 of the 11 S&P 500 sectors were in positive territory in Q1. The best performing sector in Q1 2024 was Communications+15.57%), Energy+12.69%), and Technology+12.48%), whereas the defensive Real Estate sector was -1.36%.
It was a generally good quarter for the mega caps with Microsoft +12.09%, Nvidia +82.46%, Amazon +18.72%, Meta Platforms +37.33% and Alphabet +8.05% leading the charge of top performers, while Apple was -11%. Tesla -29.25% recorded the worst performance of the S&P 500 in Q1.
In Q1 energy stocks were +12.69%. Exxon Mobil +17.35%, BP Plc +7.63%, Chevron +6.87%, Shell +3.57%, Occidental Petroleum +9.23%, Halliburton +9.57%, Marathon Petroleum +36.50% and Phillips 66 +23.58% in Q1. Baker Hughes was -1.29% in Q1.
Basic materials stocks were +8.44% in Q1. Yara International was -1.29%, Albemarle Corporation -8.51%, Sibanye Stillwater -12.89%, Mosaic -8.55%, and Newmont Mining -12.76% in Q1. CF Industries Holdings was +5.34%,Freeport-McMoRan +12.86%, and Nucor Corporation +14.02% in Q1.
European Indices Q1 2024
Stoxx 600 +7.81% QTD
DAX +10.39% QTD
CAC 40 +9.04% QTD
IBEX 35 +10.63% QTD
FTSE MIB +15.12% QTD
FTSE 100 +3.99% QTD
Global Indices
Hang Seng -2.53% QTD
MSCI global +9.62% QTD
Fixed Income
US Treasuries 10-year yield +32 basis points to 4.20%.
Germany’s 10-year yield +30 basis points to 2.30%.
Britain’s 10-year yield to +41 basis points 3.94%.
Bond yields continued to rise through large parts of Q1.This was likely a result of concerns over whether the US would surpass a soft landing with a no landing due to the continuing resilience of the US economy and still tight labour market. An interesting note is that the US curve inversion, the Treasury yield curve that plots two-year and 10-year yields, has been continuously inverted since early July 2022. Normally this does signify higher recession risk, something that the US economy continues to defy.
Commodities
Gold spot +8.25% QTD to $2,233.12 an ounce.
Silver spot +4.95% QTD to $24.97 an ounce.
West Texas Intermediate crude +15.66% QTD to $83.15 a barrel.
Brent crude +11.98% QTD to $87.00 a barrel.
Supply constraints emerged as a key driver for price growth in Q1. Production cuts mandated by the Russian government, in agreement with OPEC+, significantly impacted global output. Supply concerns were further amplified by Ukrainian drone attacks on Russian refineries. Additionally, limitations arose from other key OPEC+ members. Iraq, the cartel's second-largest producer, planned to reduce crude exports to compensate for exceeding quotas earlier. Meanwhile, Saudi Arabia, the largest producer, experienced a second consecutive month of declining crude exports.
However, some mitigating factors emerged on the supply side. The US federal energy outlook projected a rise in oil output from top shale regions to a four-month high in April. Additionally, the return to normal operations of BP's Whiting, Indiana refinery, with a capacity of 435,000 bpd, further bolstered the supply outlook from the US market.
On the demand side, China, the world's largest oil importer, reported a robust 3% year-over-year increase in crude oil throughput for the first two months of 2024. Despite some discrepancies between OPEC and the International Energy Agency (IEA) on future energy demand forecasts (OPEC not seeing a peak in demand as far out as 2045 compared to IEA's 2040 peak), the IEA revised its estimate for global demand growth in 2024 slightly higher to 1.3 million barrels per day. This revision, coupled with the continued increase in US demand throughout Q1, reflected in decreasing stockpiles, further bolstered the upward trend in oil prices.
Gold has experienced a remarkable rally of 15% since mid-February. A critical driver was the anticipation of declining real interest rates. Additionally, bullion’s rally has received momentum from investors actively purchasing call options within the futures market. These positions are expected to benefit by two key factors: voracious demand from central banks and a record-breaking pace of gold buying by Chinese retail investors.
Note: Data as of 4 pm EDT 29 March 2024
The US
US equities ended the quarter significantly up with the S&P 500 up over 10%. The US economy remains resilient, with business activity levels remaining in positive territory. The S&P Global Composite PMI was 52.1 in March, marginally down from February’s 52.5. The S&P services sector PMI fell to a three-month low of 51.7 in March 2024 from 52.3 in February. This drop in service activity was also reflected in the ISM non-manufacturing PMI falling to 51.4 in March from 52.6 in February. It was the second straight monthly decline since rebounding in January. However, the S&P manufacturing PMI came in at 52.5, up from February’s 52.2 and a 21-month high. Inflation appears to be gradually falling. Although headline CPI increased 0.4% in February after gaining 0.3% in January and rising to 3.2% y/o/y in February, a slight uptick from January’s +3.1% y/o/y rise, core services inflation appears to be slowing. Core inflation was +2.8% y/o/y in February, the smallest gain since March 2021, after rising 2.9% in January. The core PCE index came in at 0.3% in February, down from January’s revised 0.4%. The labour market remains tight although it is starting to show some signs of weakness. Nonfarm payrolls rose by 275,000 in February, and the unemployment rate increased to 3.9%, while the participation rate held at 62.5% for the third consecutive month. Average hourly earnings were +0.1% in February and +4.3% y/o/y, still above the level the Fed said is necessary to achieve the 2% inflation target. Consumer demand is still strong with retail sales +0.6% m/o/m in February 2024, following an upwardly revised 1.1% fall in January. However, US consumer sentiment fell in March with the UoM consumer sentiment index edging down to 76.5, the lowest in three months, from 76.9 in February.
The eurozone
European equity markets enjoyed a robust start to 2024, with the Stoxx Europe 600 index scaling new heights in Q1, its best performance since the first quarter of 2023. France’s CAC 40 was up +9.04%, while Germany’s DAX was also higher at +10.39%. The rally was also driven by investor optimism regarding a potential shift in central bank monetary policy.
In Q1, sector performance exhibited a distinct bias towards cyclical sectors over defensive ones. Sector-wise, Stoxx Euro 600’s top performers included Autos & Parts (+15.4%), Technology (+12.6%), Banks (+12.6%) and Media (+11.7%). Conversely, Basic Resources (-5.9%), Utilities (-5.4%), Real Estate (-3.1%) and Food & Beverage (-0.9%) sectors lagged behind.
Despite lingering concerns about a slowdown in the eurozone economy, positive economic data and upbeat corporate earnings reports for Q4 and FY 2023 maintained buoyant investor sentiment. One noteworthy trend was the emergence of ‘Granolas’, a group of European stocks, suggested by Goldman Sachs, to rival the dominance of the US’ Magnificent Seven. The Granolas represent a quarter of the Stoxx 600's market cap and have consistently outperformed the broader European market. These companies collectively generated over €500 billion in revenue over the last 12 months, reflecting an 8% annual growth rate. Additionally, the Granolas boast an average dividend yield of 2.5%, exceeding both the S&P 500's yield and that of the Magnificent Seven.
The Granolas include: GSK with a Q1 return of +17.82%, Roche-6.05%, ASML+30.88%, Nestlé-1.80%, Novartis+2.95%, Novo Nordisk+26.24%, L'Oréal-2.66%, LVMH +13.65%, AstraZeneca+0.74%, SAP+29.38%, and Sanofi+1.34%.
The eurozone economy is still showing signs of stagnation in Q1 with the final March HCOB Manufacturing PMI falling to 46.1 from February's 46.5, but still below the 50 mark denoting growth in activity for a 21st month. The flash HCOB Composite PMI rose to 49.9 in March, up from 49.2 in the previous month. Inflation has also fallen in Q1 with March inflation falling to 2.4% from February’s 2.6%. Unemployment is holding at a record low 6.5%, suggesting that the labour market remains exceptionally tight. Although oil prices have increased since the start of the year, natural gas prices remain low after an unusually mild winter, therefore reducing the risks of energy costs feeding into inflation over the short term.
The UK
UK equities rose over the quarter with the FTSE 100 up almost 4%. Although the Bank of England’s Monetary Policy Committee (MPC) left interest rates unchanged at 5.25%, there are increasing expectations of a rate cut in Q2. Inflation is slowing with headline inflation at 3.4% y/o/y in February 2024 down from 4.0% in January, and the lowest since September 2021. “Core” inflation fell from 5.1% in January to 4.5% in February. Energy price deflation should continue into the end of the year. Consumer food price inflation is set to drop to zero bringing overall inflation to less than 2% in the spring. Services prices have been the most persistent component of inflation. The labour market remains tight, with the unemployment rate for November 2023 to January 2024 at 3.9% and largely unchanged in the latest quarter. Wage growth came in at 6.6%. The UK growth picture is also looking more positive. The ONS estimated that the UK grew 0.2% in January following a fall of 0.1% in December 2023 and there have been fewer strike days in Q1. Business activity is picking up with the Manufacturing PMI increasing to 50.30 points in March from 47.50 points in February of 2024.
Asia ex-Japan
In Asia ex-Japan, equities markets were down in Q1 as investors focused on weak domestic demand from China and the drop in exports there, the sufficiency of the stimulus measures by the Chinese government to spur growth, and the ongoing real estate crisis in China. However, better economic activity during the Lunar New Year holiday and some measures from the People’s Bank of China, which lowered its 5-year loan prime rate for the first time since June 2023, helped. The MSCI Asia outperformed with a gain of +5.62%, led by a remarkable surge of +13.50% in Taiwan’s TAIEX. China's Hang Seng Index, however, was -2.53%. India's MSCI Index also performed well, climbing +6.36%. The MSCI Asia ex-Japan index was +2.4% according to JPMorgan Asset Management.
Emerging markets
The year 2023 saw a significant decline in commodity prices, particularly oil and energy. This trend provided a much-needed relief for policymakers in EM. Disinflation took hold as inflation rates fell below or closer to target levels. Latin American central banks have emerged as frontrunners in easing monetary policy, marking a stark contrast to past practices where these regions tended to move in lockstep with developed economies.
Furthermore, according to Fidelity, emerging markets continue to trade at attractive valuations, as measured by Forward P/E ratios, remaining at or below their long-term averages.
Looking at regional performance within emerging markets, the MSCI Emerging Markets Index delivered a return of +4.57% in Q1 2024. The performance in Latin America, reflected by the MSCI Latam Index, was considerably more subdued at -2.12%, with Brazil's Bovespa Index experiencing a dip of -4.53% and Mexico’s S&P/BMV IPC remaining relatively flat at+0.08%. In contrast, Eastern Europe displayed a more positive picture, with Poland's WIG index climbing +5.46%, Hungary's BUX rising +8.50%, and a particularly impressive surge of +22.72% in Turkey’s BIST 100.
Currencies
The first quarter of 2024 witnessed a significant strengthening of the US dollar against major currencies. The US Dollar Index rose by +3.17%. This may be attributable to the strength of the US economy, which has resulted in the Fed taking a more cautious approach to future interest rate cuts than the market expected at the end of Q4.
In contrast, the Euro experienced a decline of -2.23% against the USD during Q1. The ECB has signalled a more dovish approach, suggesting a possible first cut in June, as inflation continues to approach its target. Similarly, the BoE finds itself in a unique position. While inflation remains a concern, the UK faces the additional pressure of moderating economic growth. The BoE's cautious approach, with a wait-and-see attitude towards potential rate cuts, has positioned it as the last major central bank amongst the three likely to adopt a more dovish stance. GBP was -0.91% in Q1.
Cryptocurrencies
Bitcoin +66.22% QTD +13.62% MTD +66.22% YTD
Ethereum +49.56% QTD +15.92% MTD +49.56% YTD
Bitcoin was bolstered in Q1 by massive inflows into Spot Bitcoin ETFs after the US Securities and Exchange Commission (SEC) approved them on 11 January 2024. Trading volumes for the 10 Spot Bitcoin ETFs launched on 11 January began to pick up considerably in late February, in line with Bitcoin’s surge. The total value invested in Bitcoin surpassed $1 trillion on 14 February for the first time since November 2021. Bitcoin reached a record high of $73,750, with a market capitalisation reaching $1.44 trillion on 14 March 2024 before falling back to around the $65,720 level at the end of March. As of 28 March cumulative Spot Bitcoin ETF volumes reached $181.58 bn according to data from The Block. Ethereum was also bolstered by speculation around potential SEC approval on an Ethereum ETF although the SEC has delayed a decision on this until at least later in April.
Note: As of 5:00 pm EDT 28 March 2024
What to think about in Q2 2024
There are a number of risks to investors in Q2 2024. Economic data over the first quarter pointed to a deterioration in the growth outlook in the eurozone although there may have been a bottoming out in the UK. US inflation is expected to fall further in Q1 but there are concerns about wage growth in a still resilient labour market. Global geopolitical risks are rising. The rerouting of shipping from the Suez to around Africa is impacting supply chains and margins, feeding into second round effects. Oil prices are expected to fall in 2024 on strong US supply and increased production from non-OPEC members. There are also the election cycle risks in Q2 with elections for the European Parliament. The election cycle in the US may also weigh on sentiment. There are also continuing tensions in the Middle East as well as the ongoing war in Ukraine.
The sustained growth rally in US equities throughout 2023 and into Q1 2024 has sparked concerns about the US market potentially being "priced for perfection" compared to other regions. MSCI estimates that the MSCI USA Index is approaching a two-decade high in relative valuation, as measured by the differential between forward earnings and real bond yields. Notably, international stocks, as measured by the same metric, do not exhibit the same level of valuation.
Given the current environment of diminished equity volatility and consequently lower put option premiums relative to historical norms, cautious investors wary of high US valuations might find this scenario opportune. The lower put option premiums offer the potential for acquiring reasonably priced downside protection in the event of increased volatility. Given the growing degree of volatility in bond markets which are seemingly more sensitive to all economic data, shorter duration bonds may continue to be preferred by investors.
Economic and Geopolitical Risk Calendar:
The potential policy and geopolitical risks for investors that could negatively affect corporate earnings, stock market performance, currency valuations, sovereign and corporate bond markets and cryptocurrencies include:
April 2024
7 April 2024 Local elections, Poland.The local elections will serve as a first test of how the new liberal-democratic government is faring and whether the opposition Law and Justice (PiS) party can mount a serious challenge. The Polish central bank chief, Adam Glapiński, who was appointed by the rightwing Law and Justice (PiS) party, is already having to defend the decision to cut interest rates last October, right before the elections when inflation was still in double digits, a move the Tusk coalition has claimed was politically motivated.
10 April 2024 Legislative elections, South Korea.The scheduled elections will be critical for the policy agenda of President Yoon, as the governing party currently holds a minority of seats in the legislature. The South Korean economy has seen improving growth prospects despite inflation ticking up due to higher food prices, with the recovery in exports due to demand for semiconductors. This has helped offset weaker domestic demand brought about by the central bank's high interest rates, currently at 3.5%.
11 April 2024 European Central Bank Monetary Policy Meeting. The ECB has stated that domestic price pressures remain high, in part owing to the strong growth in wages. The unemployment rate is at its lowest since the start of the euro and employment grew by 0.3% in the final quarter of 2023, outpacing economic activity. The ECB will be focused on how wages are developing. However, there is likely to be disagreement as to whether any continuing wage rises should be ignored.
17 April 2024 Legislative elections, Croatia. Prime Minister Andrej Plenkovic (of the governing Croatian Democratic Union, HDZ) on 8 March announced that the Sabor (parliament) will be dissolved on 14 March. The announcement represented a victory for the opposition parties calling for early elections. Polling indicates that HDZ are still in the lead although the SDP has gained about 4% in the polls since February.
17 - 19 April 2024 IMF and World Bank Spring Meetings, Washington, DC, USA. Central bankers, finance ministers, private sector executives, and civil society organisations will meet to discuss issues of global concern, including the world economic outlook, poverty eradication and economic development. Although auxiliary events will take place from 15 - 20 April, the core meetings are 17 - 19 April when both the IMF and World Bank will put forth their new global growth projections.
17 - 19 Apr 2024 G7 foreign ministers’ meeting, Capri, Italy. The meeting will likely have the ongoing war in Ukraine and the Israel-Hamas conflict high on the agenda.
19 April - 1 June 2024 General elections, India. Prime Minister Narendra Modi is seeking re-election to a third term. The election will be held in seven phases over more than six weeks. A coalition led by Indian Modi's party could win 399 of the 543 seats in the lower house of parliament while his Bharatiya Janata Party (BJP) alone is projected to win 342, according to an India TV-CNX opinion poll published on Wednesday. The majority mark is 272 seats. This means that the main opposition Congress party could hit a record low.
30 April - 1 May 2024 Federal Reserve Monetary Policy Meeting. The Fed is expected to keep rates on hold during this meeting. The main focus will likely be on unemployment growth as the Fed will be looking for some slight softening to help justify any credit easing. The Fed could signal that the 3 cuts anticipated in the March meeting may not materialise if progress is not made on inflation. Fed Chair Jerome Powell said that recent readings on both job gains and inflation have come in higher than expected. Atlanta Federal Reserve President Raphael Bostic said rates should likely not be reduced until the fourth quarter of this year and that he anticipates only one quarter-percentage-point cut. The Fed also looks set to slow down its quantitative tightening (QT) somewhat sooner than previously expected although, as Fed Chair Jerome Powell said, it wants to avoid some of the stresses that emerged the last time it was conducting QT.
May 2024
2 May 2024 Local elections, UK. Major urban areas, including London, Liverpool and Manchester, will hold mayoral elections. The election will provide indications of the new UK government expected later this year.
9 May 2024 Bank of England Monetary Policy Meeting, MPC Announcement, Minutes, and Monetary Policy Report publication.Following on from the March meeting, BoE Governor Andrew Bailey said rate cuts were “in play” at future meetings of the BoE Monetary Policy Committee amid signs that tighter policy had quelled the risk of a wage-price spiral. The BoE is expected to once again keep rates on hold in May.
12 May 2024 Presidential election, Lithuania. President Gitanas Nausėda is standing for re-election, and polls put him well ahead of competitors.
29 May 2024 General election, South Africa. General elections will be held to elect members of the 400-member National Assembly, as well as the nine provincial legislatures. The parliament will then select the president. The ruling African National Congress (ANC) is likely to remain in power through a slim majority or through a coalition with several smaller parties. President Cyril Ramaphosa is likely to be elected for a second term (until 2029 ). South Africa’s election authorities have barred former President Jacob Zuma from standing in the country’s May election, heightening political tensions.
June 2024
1 June 2024 OPEC+ Joint Ministerial Monitoring Committee (JMMC).The OPEC+ ministerial meeting is scheduled to meet to discuss adjusting production quotas.
6 June 2024 European Central Bank Monetary Policy Meeting. The ECB is widely anticipated to begin rate cuts during this meeting. Inflation fell to 2.4% in March from 2.6% in February. Core inflation fell to 2.9% from 3.1%. The only potential concern that may hold the ECB in check is the continued strength in services inflation which continues to hold steady at 4.0%, meaning wage growth is keeping prices in the sector under constant pressure.
6-9 June 2024 European Parliament elections, EU. Far-right and populist parties will likely receive increased support over concerns related to immigration rates. Expect to see some politicians, particularly in CEE, focusing on the EU response to the ongoing war in Ukraine.
11-12 June 2024 Federal Reserve Monetary Policy Meeting. The Fed will give a summary of economic projections. The Fed is widely expected by markets to begin cutting interest rates by 25 basis points at this meeting. However, the Fed will need to be convinced that inflation is moving sustainably down to the Fed's 2% target. If wages do not come down fast enough, particularly in the services sector, the Fed will likely hold on a rate cut until the July meeting.
13-15 June 2024 G7 leaders’ summit. The summit will be held in Puglia, Italy. The topics likely for discussion include the ongoing war in Ukraine, the conflict between Israel-Hamas, concerns around economic and energy security, migration flows and the impact these are having on domestic politics in net recipient states.
20 June 2024 Bank of England Monetary Policy Meeting.Given the projected growth in the UK economy over Q1 and the continuing drop in inflation, markets are anticipating the first rate cut to take place during this meeting. However, if the labour market continues to remain tight and wage pressures do not recede sufficiently, the BoE may delay its first cut to Q3.
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