Can stock markets broaden enough?

Can stock markets broaden enough?
  • EXANTE LinkedIn Poll Results
  • Markets in February 
  • Global market indices
  • Currencies
  • Cryptocurrencies
  • Fixed Income
  • Commodity sector news
  • Global Macro Updates
  • Key events in March

Markets in February

Global markets hit record highs in February with the S&P 500, Nasdaq, Stoxx 600, and Nikkei all reaching multi-year highs with technology stocks, particularly AI chipmaker Nvidia, leading the way. Treasury yields were more volatile this month with markets pricing out some Federal Reserve rate cuts this year, although yields rose throughout the month. Markets continued to anticipate economic growth in the US, with inflation cooling in the US, UK and across Europe. The euphoria around artificial intelligence and related tech stocks have led equities to now be heading toward their fifth consecutive monthly advance. The growing influence of a small group of companies in propelling the wider market about concentration levels in global equity markets with the US having the “Magnificent Seven” stocks and Europe its “Granolas”, ie, GSK, Roche, ASML, Nestlé, Novartis, Novo Nordisk, L’Oréal, LVMH, AstraZeneca, SAP and Sanofi is creating some concern in the markets. It appears that investors may be growing worried about future performance given that many companies will have to deal with increasing net interest expenses, weakening pricing power, and a rise in unit labour costs given still historically tight labour markets in the US and Europe.

However, overall, expectations of continuing disinflation and US growth remaining strong are supportive to the markets rosy outlook for March. However, we may see greater divergence in bond markets moving forward as the growth picture and consequent policy outcomes is likely to differ between the US, the UK and Europe. This may fuel FX volatility in March and into early Q2.

The Changing Economic Picture

The US expanded at a slower rate at the end of last year as a downward revision to inventories masked stronger household spending and investment. US GDP increased at a 3.2% annualised rate in the fourth quarter. However, US consumer confidence fell in February with the Conference Board saying its consumer confidence index was 106.7, down from a revised 110.9 in January. February’s decline in the Index occurred after three consecutive months of gains. Business activity levels have also dropped, with the flash S&P Composite PMI falling to 51.40 points in February from 52 points in January. The flash services sector PMI fell to 51.3 from January’s 52.5 as new orders, employment and input prices sub-components all declined. The flash manufacturing PMI came in at 50.3 and 52.9 respectively. The Conference Board’s leading index also deteriorated to -0.4% Month-on-Month (MoM) in January from -0.2% the month before. CPI increased 0.3% in January after gaining 0.2% in December, while in the 12 months through January, the CPI increased 3.1%. That followed a 3.4% advance in December. The January PCE index, the Fed’s favoured inflation gauge, was at 0.3% MoM and 2.4% YoY, below market expectations. This drop in the PCE will bolster expectations of Fed cuts this year. Fed policymakers have continued to urge caution in February regarding the path of expected Fed rate cuts. As a result, investors have pushed out the possibility of a rate cut to June with some investors speculating that the still resilient US economy may lead to a higher neutral rate with fewer rate cuts for 2024 and 2025.

The eurozone economy has managed to avoid a technical recession but its largest economy, Germany, is still experiencing anaemic growth with the German government slashing its growth forecast for this year to just 0.2%, after a contraction in 2023. Business activity appears to be improving with the eurozone's HCOB flash Composite PMI at 48.9 in February, up from January: 47.9 and an 8-month high. HCOB Flash Eurozone Services PMI finally sits at the expansionary border at 50.0, up from January: 48.4 and a 7-month high. However the HCOB Flash Eurozone Manufacturing PMI fell again in February, coming in at 46.1, below January’s 46.6, and a 2-month low. The ECB will be looking at eurozone inflation data due on Friday as it contemplates when that first rate cut may be most appropriate. Spanish inflation fell to 2.9% Year-on-Year (YoY) in February, down from January’s 3.5% and below 3% for the first time in six months, French inflation slowed to 3.1% YoY, down from 3.4% in January, while German inflation fell to 2.7% in February from January’s 3.1%. Eurozone employment growth increased by a further 0.3% Quarter on Quarter (QoQ) in Q4 leaving the ECB to worry about potentially rising wages despite continuing weakness in the core eurozone countries of Germany and France. A positive note for the eurozone is that the energy crisis, following Russia’s invasion of Ukraine, appears to have largely ended as natural gas prices slipped back to 2021 levels with electricity prices also falling. However, there are still risks as the regulated move to increasing green energy and the phasing in of carbon credits in 2026 may still hit energy markets. 

In the UK the economy remains in negative territory and a still tight labour market and high wage growth means the BoE is unlikely to cut rates in the near term. The unemployment rate was down from 3.9% in November to 3.8% in December while wage growth slowed from 6.7% YoY to 6.2% as job vacancies fell by 26,000 last quarter. However, wages are still significantly above the levels that would be in line with the BoE’s inflation target. The UK is in a technical recession as GDP fell by 0.3% QoQ in the final quarter of 2023 as both consumer and government spending receded, yet there are signs of improvement on the horizon with the February flash Composite PMI coming in at 53.3, up from 52.9 in January and the sharpest for nine months.

Global Market Indices

US

S&P 500 +4.62MTD and +6.28% YTD
Nasdaq 100 +4.28MTD and +6.21% YTD
Dow Jones Industrial Average +2.15MTD and +3.40% YTD
NYSE Composite +3.92MTD and+4.28% YTD

Europe

Stoxx 600 +1.84% MTD and +3.26% YTD
DAX +4.13% MTD and +5.07% YTD
CAC 40 +3.89% MTD and +5.45% YTD
FTSE 100 -0.07% MTD and -1.40% YTD
IBEX 35 -0.09% MTD and -0.33% YTD
FTSE MIB +6.09% MTD and +7.47% YTD

Global

MSCI World Index +4.09% MTD and +4.64% YTD
Hang Seng +6.79% MTD and -2.99% YTD

Mega cap stocks had a mixed February with Meta Platforms, Amazon, Microsoft, and Tesla all up this month. Meta Platforms announced earlier this month that Hock E. Tan, CEO of the chipmaker Broadcom and John Arnold, a former energy trading executive at Enron now involved in high-voltage transmission line electricity projects, have been elected to the company’s board of directors, effective immediately. Nvidia surged upwards in February following the release of its Q4 earnings, which showed a 265% increase in revenue from the same period last year. Nvidia’s market capitalization has now increased by more than $700 billion this year. Apple was down this month. It was forced to cancel its electric vehicle ambitions. Alphabetis also down in February with it facing criticism of an artificial intelligence (AI) image generator. 

Energy stocks had a mixed and volatile month as investors weighed ongoing geopolitical risks against solid supply and a still strong dollar. Phillips 66, Energy Fuels, Shell, Halliburton, and Apa Corp (US) are all down, while Marathon Petroleum, Occidental Petroleum Corporation, BP, ExxonMobil, Chevron, and Baker Hughes Company are all up. 

Materials and Mining stocks had to contend with a still strong dollar. However, Nickel prices touched their highest in more than two months on supply concerns from top producer Indonesia. Mining stocks Freeport-McMoRan, Newmont Mining, and Sibanye Stillwater are all down while Nucor Corporation was  upthis month after its board had approved $860 million in funding for the construction of a rebar micro mill in the Pacific Northwest. However, if gold remains range bound, it may restrain growth for Newmont Mining, which is the world's largest gold miner. Sibanye Stillwater warned its annual profit plunged by as much as 91% in 2023, mainly due to a sharp decline in the prices of palladium and rhodium. Materials stocks had a mixed month with Albemarle up this month after posting a better-than-expected adjusted quarterly profit due to its aggressive cost cuts, CF Industries Holdings also up. Yara International is down in February, while Mosaic and Celanese Corporationare relatively flat for the month.

Commodities

Oil prices have been up throughout February on continuing geopolitical risk although they have remained range-bound on higher global supplies. The lack of ceasefire agreement between Hamas and Israel and increasing US and allied strikes on Houthi targets in an effort to combat commercial shipping disruptions in the Red Sea region, have been supportive. Oil has also been up due to signs that China may be increasing demand and on potential production cuts to continue from OPEC. In terms of supply itself, spare capacity has reached a multi-year high.

Gold prices were down in February as yields rose, but remained supported by geopolitical risk in the Middle East.

Currencies

The dollar remained firm in February. GBP is -0.21% MTD and -0.56% YTD against the USD. Despite the UK falling into a technical recession, Sterling remains one of the strongest performing currencies so far in 2024, mostly due to the prospect of higher for longer interest rates in the UK vs the Eurozone and the US. According to Refinitiv, money market traders are betting that the BoE will begin easing policy from August, with only 56 basis points of rate cuts priced this year, implying around two quarter-point moves by the end of 2024. The EUR +0.18% MTD and -1.82% YTD against the USD. With inflation falling in the Eurozone’s largest economies and growth remaining stagnant overall, traders are anticipating that the ECB may move to cut rates in June. 

Cryptocurrencies

Bitcoin +42.59% MTD and +44.53% YTD
Ethereum +45.85% MTD and +45.37% YTD

Bitcoin reached its highest level since November 2021. This month’s surge may primarily be due to the new spot Bitcoin ETFs which began trading in January. These ETFs have already seen over $6 bn in inflows. Bitcoin has also been supported by the upcoming halving, due sometime in April. This reduces the supply of new Bitcoin. However, as the majority of Bitcoin has already been mined, the impact may not be as strong as in prior halvings. The intense rally has Bitcoin on pace for its biggest monthly gain since December 2020. As noted by Bloomberg news, the nine new spot ETFs have more than 300,000 Bitcoin, or seven times the amount of new coins mined since 11 January. After the halving, the number of new coins mined daily will decline to 450 from 900 currently. If this demand stays constant, then the rally in Bitcoin is likely to continue.

Fixed Income

US Treasuries 10 year yield to 4.26%.
German 10 year yield to 2.46%. 
UK 10 year yield to 4.18%. 

Treasury yields shot up again in February on a combination of new issuance and markets accepting that the Fed may only make 3 rate cuts this year, with the first one likely pushed out to at least June. 

In Europe, the ECB has virtually pledged to take any cuts slowly to be certain the eurozone has sustainably achieved its inflation target. ECB President Christine Lagarde has made clear that the ECB won’t cut rates until there is greater clarity around negotiated wage data from Q1, due in May. The ECB has cited concerns about the stickiness of services inflation.

In the UK the Bank of England Governor Andrew Bailey said that bets by investors on interest rate cuts this year were “not unreasonable,” but he has resisted giving a timeline for the first cuts. This may be due to headline inflation remaining unchanged in January at 4%. However, MoM headline inflation fell to -0.6% after recording a surprise uptick in December. Bailey did note that the Bank did not need to see inflation fall to its 2% target before it begins cutting rates. Nevertheless, BoE Chief economist, Huw Pill, emphasised the need for several more months of data while MPC members Megan Greene and Catherine Mann highlighted the ongoing tightness in the labour market and the potential risk that holds for inflation.

Note: Data as of 5:00 pm EST 28 February 2024

Global macro updates

How long will the Fed hold? New York Federal Reserve President John Williams said on Wednesday that even as there's still some distance to cover in achieving the 2% inflation target, the door is opening to interest rate cuts this year depending on the data. "While the economy has come a long way toward achieving better balance and reaching our 2% inflation goal, we are not there yet," Williams said, adding, "I am committed to fully restoring price stability in the context of a strong economy and labour market." Both Williams and Boston Fed President Susan Collins have agreed that the first cut will likely be appropriate “later this year,” while Atlanta’s Raphael Bostic said he’s currently pencilling in a cut for sometime this summer. The market is currently expecting the first cut in June with investors now anticipating 100 basis points of cuts this year. 

Shutdown averted, again? On Wednesday 28 February, Congressional leaders agreed to extend funding for six full bills covering the departments of Agriculture, Justice, Commerce, Energy, Interior, Transportation and Housing and Urban Development through 8 March. The deal would also extend funding for the remaining six annual funding bills, which cover the departments of Labor and Health and Human Services, the Pentagon and other offices, through 22 March. The deal would provide one week of temporary funding and avoid a partial shutdown. The remainder of the US government, including the Defense and Homeland Security departments, would still face a potential 23 March shutdown. The Republican-controlled House of Representatives will hold an afternoon vote later today. If it is approved, it will then be sent to the Democratic-led Senate, where the stopgap, known as a continuing resolution, or "CR," would need to be approved before President Biden can sign it into law.

What to think about in March 2024

There are a number of risks and opportunities for investors as we move into March. Although US inflation is expected to fall further in Q1, there are concerns that the strength of the labour market and the still low rate of unemployment could lead the Fed to worry about excess demand creating inflationary pressures. However, as markets have continued to largely rally since the start of 2024 and corporate earnings have generally been high despite high interest rates, markets will be looking to understand the trajectory for earnings in the months ahead. They will also be looking to see if there is a broadening out from the magnificent seven stocks leading recent market growth. With the election cycle heating up in the US and a last minute attempt still to be made to avoid a government shutdown, the election cycle is likely to cause further party political infighting which may influence policy making with significant geopolitical impact. The continuing tensions in the Middle East with Hamas refusing to accept Israel’s latest ceasefire offer and continued attacks on commercial ships in the Red Sea by Yemen's Houthi group are stoking fears of long-term disruption to global trade and the potential impact this will have on supply chains and the fight against inflation as the costs of shipping increase and company profit margins may be lowered.

Key events in March 

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: 

5 March 2024 Super Tuesday, USA. Approximately one-third of all delegates to the presidential nominating conventions can be won on Super Tuesday, more than on any other day, virtually determining the nominees of each major political party. However, although former President Donald Trump is currently the frontrunner for the Republican party, he does still face a number of criminal charges. The US Supreme Court has agreed to take up an appeal over whether he is immune from criminal prosecution for acts committed in office, with arguments set to begin on 22 April. 

7 March 2024 European Central Bank Monetary Policy Meeting. At present, less than four rate cuts are priced for 2024 and only one rate cut is priced by June. ECB policymakers have stated they are looking for the reduction in inflation to be sustainable. Inflation moderated to 2.8% in January from a peak of 10.6% in October 2022 and is expected to drop further.

10 March 2024 Legislative elections, Portugal. Last November President Marcelo Rebelo de Sousa said that he would dissolve parliament and hold elections in March 2024 following the 7 November resignation of Prime Minister Antonio Costa, who is under investigation for corruption.

15-17 March 2024 Presidential election, Russia. Incumbent President Vladimir Putin is expected to win re-election. The elections will not be considered free nor fair due to the exclusion of genuine opposition candidates.

19-20 March 2024 Federal Reserve Monetary Policy Meeting. The Fed is widely expected to hold rates steady at a target of 5.25%-5.50%. Fed policymakers including governors Lisa Cook and Christopher Waller, have reiterated that the Fed needs to have greater confidence that inflation is on track to return to the Fed's 2% target before agreeing to rate cuts.

21 March 2024 Bank of England Monetary Policy Summary and Minutes. As expected the BoE kept rates on hold at 5.25% in the February meeting. Chief economist, Huw Pill, emphasised the need for several more months of data while Monetary Policy Committee members Megan Greene and Catherine Mann acknowledged some easing in wage pressures but highlighted the ongoing tightness in the labour market. Markets are now pricing in around 100 basis points of cuts in 2024, widely expected to take place in Q3.

While every effort has been made to verify the accuracy of this information, EXT Ltd. (hereafter known as “EXANTE”) cannot accept any responsibility or liability for reliance by any person on this publication or any of the information, opinions, or conclusions contained in this publication. The findings and views expressed in this publication do not necessarily reflect the views of EXANTE. Any action taken upon the information contained in this publication is strictly at your own risk. EXANTE will not be liable for any loss or damage in connection with this publication.

This article is provided to you for informational purposes only and should not be regarded as an offer or solicitation of an offer to buy or sell any investments or related services that may be referenced here.

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