Central banks commit to higher for longer

• Markets in June
• Global market indices
• Currencies
• Fixed Income
• Commodity sector news
• Global Macro Updates
• Key events in July

Markets in June

With two days left in the first half, the S&P 500 is up 14% with the tech-heavy Nasdaq 100 having gained almost 38%. June saw equities rallying with investors still buying into the growth narrative around AI. In fact, mega-cap stocks have largely driven year-to-date performance. Markets breathed a slight sigh of relief after the Federal Reserve's stress test showed the lenders have adequate capital to survive an economic slump. However, in an increasingly uncertain economy with regulatory changes expected, the return to shareholders may be limited in the near-term. And the banks aren’t completely out of the woods yet. US Fed chair Jerome Powell has said that the Fed is watching the situation in the banking industry "very carefully" to address potential vulnerabilities, such as in the commercial real estate sector, despite deposit flows having settled. According to Reuters, he said on Thursday, "We are very reluctant to say if the sector's turmoil is over.”

At the ECB’s annual conference in Sintra, Portugal, Powell said, “although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough,” and he attributed the strength in the labour market as the cause for possible rate rises at the next two meetings. 

The question remains whether the US will be able to avoid the recession that the continuing inversion of the yield curve has indicated later this year as tightening credit conditions constrains the corporate real estate market and private sector spending as interest-rate sensitive sectors come under increasing stress. Markets will be looking very closely at Friday's release of the Fed’s preferred inflation gauge, the personal consumption expenditure index. It is estimated to have risen 3.9% last month from a year earlier, with the core index, excluding food and energy prices, likely to have risen 4.7%, Powell said in a speech in Spain on Thursday 29 June. If those estimates are correct, it would show that the Fed has made no progress in relieving underlying price pressures, putting it under further strain moving forward.

Global Market Indices

US: 

S&P 500 +4.75% MTD and +14.04% YTD
Nasdaq 100 +5.00% MTD and +36.81% YTD
Dow Jones Industrial Average +3.09% MTD and +2.35% YTD
NYSE Composite +4.91% MTD and +2.85% YTD

Europe:

Stoxx 600 +0.95% MTD and +7.33% YTD
DAX +1.82% MTD and +14.55% YTD
CAC 40 +2.64% MTD and +12.55% YTD
FTSE 100 +0.73% MTD and +0.65% YTD
IBEX 35 +4.76% MTD and +15.72% YTD
FTSE MIB +6.09% MTD and +16.58% YTD

Global:

MSCI World Index +4.25% MTD and +11.31% YTD
Hang Seng +5.14% MTD and -3.08% YTD

Mega cap stocks had a positive June with Amazon, Microsoft, Apple, Meta Platforms, Alphabet, Nvidia, and Tesla all up.

Apple stock climbed to a record high in June and was on the cusp of a $3 trillion market capitalization.

Microsoft and Activision Blizzard are continuing trying to allay antitrust concerns that a proposed $75 billion merger of the two companies would unlawfully concentrate power. The lawsuit filed by the Federal Trade Commission (FTC) against Microsoft argues that the deal would give Microsoft, maker of the Xbox console, exclusive access to Activision’s “Call of Duty.” Microsoft CEO Satya Nadella said that making Activision games exclusive would make "no strategic sense." 

Energy stocks had a split month due to concerns about softer Chinese demand and questions about further state support to increase domestic demand. However, concerns over falling supplies following on from wildfires in Canada, the OPEC+ agreement to limit supplies further, rising tensions around US and Iran negotiations. Energy Fuels, Apa Corp (US), Phillips 66, Marathon Petroleum, Baker Hughes Company, Occidental Petroleum Corporation, BP, Shell, Chevron, ExxonMobil, and Halliburton were all up.

Materials and Mining stocks had a mixed June, falling as investors focused on the prospect of a global economic slowdown due to tighter interest rate policies, but rising after China confirmed it is on track to meet the government’s 5% economic growth target, while market concern about the volatile political situation in Russia eased. Mining stocks Freeport-McMoRan, Newmont Mining, and Nucor Corporation are up, while Sibanye Stillwater is down. Materials stocks were mixed with Albemarle Corporation, Mosaic, Celanese Corporation and CF Industries Holdings up, and Yara International down. 

Commodities

Oil climbed towards the end of June as the second straight weekly draw from US crude stockpiles was bigger than expected, with US crude stockpiles falling 9.6 million barrels last week, according to the Energy Information Administration. Leaders of the world's top central banks reaffirmed that they see further policy tightening needed to tame inflation with Fed Chair Powell suggesting further hikes at consecutive Fed meetings, while ECB President Christine Lagarde confirmed expectations the bank will raise rates in July, calling such a move "likely." The 12-month backwardation for global benchmark Brent and WTI - a pricing dynamic indicating higher demand for immediate delivery - both fell to their lowest levels since December 2022. However, with OPEC+ due to implement its supply cuts from 1 July and Chinese industry experiencing further profit softening as margins remain squeezed, unless there is more Chinese state support to meet the 5% growth targets, oil may be restricted by a strengthening USD.

Although metals have had a challenging June with copper, zinc, lead, and tin all down, gold has remained range bound throughout June but fell to a four-month low towards the end of June on the comments from Fed Chair Powell about there being future rate rises ahead. It appears that the market is finally pricing in the greater likelihood of further rate hikes this year with rates remaining higher for longer and pricing out the number of rate cuts it previously expected over this year and next.

Currencies

The dollar strengthened in June pulling both GBP/USD and EUR/USD lower reflecting lower risk appetite. The EUR +1.96 YTD against the USD and the GBP is +4.48% YTD against the USD. Sterling got a slight push on the unexpected 50 basis point rate rise at its June meeting although markets are now focused on the level of the terminal rate and the impact this may have on UK economic growth prospects. The EUR/GBP rose to its highest since 31 May on 28 June as both the ECB and the BoE agreed that rates will stay higher for longer. However, with inflation coming down at a faster pace in the Eurozone, there may be further shifts ahead in the EUR/GBP rate. 

The USD will continue to maintain its position as the world’s dominant reserve currency over the next decade according to a survey by the Official Monetary and Financial Institutions Forum (OMFIF), a UK central banking think-tank. It found that reserve banks managing close to a combined $5tn of assets expect the dollar to continue to decline as a proportion of global reserves at a “gradual” pace, but that it will still account for 54% of the total in 10 years’ time, compared with 58% currently.

Cryptocurrencies

Bitcoin +11.03% MTD and +81.62% YTD
Ethereum -1.82% MTD and +52.84% YTD

Bitcoin has surged throughout June, despite the SEC cracking down on cryptocurrency exchanges Binance and Coinbase Global. The most recent price jump is due to BlackRock, the world’s largest asset manager, filing a petition to the SEC to issue a Bitcoin ETF. This has raised expectations that demand for Bitcoin will continue to grow. It now occupies about 50% of the total crypto market.

Fixed Income

US Treasuries 10 year yield to 3.71%.
German 10 year yield to 2.32%. 
UK 10 year yield to 4.32%. 

Yields have had an upward path through most of June as central banks continued to tighten policy meaning that the gap between equity and bond yields has compressed over the last year. Short-term bond yields in particular have surged as central banks have made clear that they are intent on keeping rates higher for longer. There appears to be a growing yield inversion in US Treasuries signifying a greater likelihood of recession. 

Note: As of 5pm EDT 28 June 2023

Global macro updates

Central banks going higher for longer. At the annual ECB conference in Sintra, Portugal, Federal Reserve Chair Jerome Powell, European Central Bank President Christine Lagarde and Bank of England Governor Andrew Bailey all said they had a ways to go in reining in too-high inflation. They have signalled their readiness to increase interest rates and keep them high, as they warned that tight labour markets are still pushing up wages and prices. Fed Chair Powell said, “Although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough.” He added that “the labour market is really pulling the economy.” ECB President Christine Lagarde said the ECB was “not seeing enough tangible evidence of underlying inflation stabilising and moving down.”

Europe’s drawn out disinflation. The ECB will focus on the eurozone inflation report on Friday, which is expected to show that headline price growth slowed to 5.6% in June, down from 6.1% in May. It is clear that the ECB will raise rates in July by at least 25 basis points. However, as noted by Bank of France Governor Francois Villeroy de Galhau, “We will have a significant slowdown but in our view not a recession, so disinflation without recession.” He stressed that it is how long the European Central Bank keeps rates elevated is more important than the actual level, though rates are close to levels needed to get inflation headed to a 2% target.

Crypto’s partial resurgence. Bitcoin surged ahead in June as investors saw the appeal of a Bitcoin ETF, or exchange-traded fund. Global financial institutions like BlackRock, Fidelity, and Invesco have applied with the US Securities and Exchange Commission (SEC) to launch ETFs. The SEC has previously denied fund companies applications to launch ETFs that hold spot Bitcoin. According to Barrons, the SEC has cited insufficient surveillance for fraud on crypto trading platforms, hence their lawsuits against Binance and Coinbase for allegedly operating outside the law.

Key events in July

1 July 2023 Spain assumes the Presidency of the EU Council. Spain takes over from Czechia in the six-month rotating presidency of the Council of the EU. 

4 July 2023 Shanghai Cooperation Organisation (SCO) Leaders’ summit. India will hold the SCO virtually. The other member states – China, Russia, Kazakhstan, Kyrgyzstan, Pakistan, Tajikistan and Uzbekistan – have been invited. In addition, Iran, Belarus, and Mongolia have been invited in their role as Observer States.

5-6 July 2023. OPEC 8th International Seminar, Hofburg Imperial Palace in Vienna, Austria. Ministers from OPEC Member Countries and other oil-producing and oil-consuming nations, as well as industry leaders, academics, analysts, energy experts and journalists from specialised media are expected to attend. It is likely to be focused on discussions on energy security, energy sustainability, and supply. 

11-12 July 2023 NATO Summit. The NATO Heads of State and Government meeting will take place in Vilnius, Lithuania. The summit will define the security challenges facing the Alliance in light of the various campaigns in Ukraine and the June short term threat to Russian President Vladimir Putin’s leadership, and scenarios related to the Wagner group’s movements into Belarus. Expect to hear news on Ukraine’s application and Turkey’s thoughts on Sweden’s application.

14-18 July 2023 G20 Meeting of Finance Ministers and Central Bank Governors. The meeting will take place in Gandhinagar, Gujarat, India. 

23 July 2023 Spanish second round legislative election. Elections are being held after Prime Minister Pedro Sanchez on 29 May signed a decree to dissolve parliament and trigger snap elections. The legislative elections outcome remains uncertain, with no party likely to obtain a majority on its own, although right-wing parties are likely to perform well.

25-26 July 2023 US Federal Reserve Monetary Policy meeting. The Fed has announced that another 50 basis points of rate rises this year is likely with the market now largely expecting a resumption in hikes in July by another 25 basis points. Much will depend on incoming GDP and CPI data. 

27 July 2023 ECB meeting and monetary policy decision. The ECB is expected to raise rates again at the July meeting by 25 basis points. However, eurozone consumers’ inflation expectations have fallen to the lowest since 2016, falling to 6.1 in June, down from 12.1 the prior month. Nevertheless inflation does not appear to be falling uniformly across the Eurozone, with German headline inflation rising 6.8% on the year in June as prices increased by 0.4%, above market expectations of 0.3% and Spanish headline inflation falling to 1.6% in June from a year earlier, down from 2.9% the previous month. That’s the weakest pace of inflation in more than two years. However, the ECB is likely to focus on what is happening with core inflation with wages, particularly in the service sector, continuing to provide inflationary pressure. 

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