08/04/2024

Following a very positive first quarter for global equities, the second quarter kicked off with further hesitation due to the possibility of central banks showing a less accommodating stance than that priced in. The better news on the economic front, the fear of persistent inflation and the comments from different members of the Fed have lowered expectations that the first rate cut will take place in June. The rise in tensions in the Middle East, following the attack on the Iranian consulate in Syria, was another major event of the week, with the markets particularly attentive to the rise in crude oil prices. Until now, the stock exchanges had completely ignored the delay in the Fed's rate-reduction process, thanks to the positive corporate earnings season and the fever of artificial intelligence. Over the last few days, however, investors were unable to overlook the new rise in debt yields and reversed the market prices of fixed-income and equity markets. An emerging issue for investors is the impact of the markets on the economy. Thus, the improvement in financial conditions in the last five months has been overwhelming and has neutralized a large part of last year's rate increases. Since October, $13 billion of financial wealth have been added to the United States, so it is not surprising that the economy is accelerating again. This means, however, that rates will have to remain high for a longer period of time.

The S&P 500 closed its worst week since January, despite the strong market recovery on Friday. As we can see, the drop has nothing to do with recession-related risks, but with the increasing likelihood that the Fed may even not lower rates in 2024, as suggested by the chairman of the Minneapolis Fed, Neel Kashkari. The sector bias benefited the oil and communication services companies, while the real estate, health and consumer sectors logged weekly falls of approximately 3%. The week's investment-style bias slightly favored growth over value.

In Europe, Friday was a very negative trading session, ending a week in which the European markets performed relatively better than the US stock exchanges. The stock exchanges in the Old Continent closed the week with drops of around 1.5%, with a better relative performance by the Spanish market. The oil and commodities sectors performed very well and contributed to the British stock exchange logging a good relative performance. European banks also had a good week on the stock exchange, thanks to the higher expectations arising from the recovery of European economic activity. On the other hand, sectors sensitive to interest rates, such as real estate and electricity companies, experienced significant falls during the week in the European markets.

In Japan, equity markets suffered their currency's rally, whereas in China the activity data disclosed at the beginning of the week had a positive effect. In India, as expected, the central bank maintained the interest rates, and investors are keeping an eye on the elections that are scheduled to begin this month. It is believed that Modi's current government will continue in power.

In general, emerging markets showed a better relative performance over the past week. Stock markets in Eastern Europe, which are highly dependent on energy prices, recovered more than 1.5%, while Asian and Latin American equity markets registered slight drops in share prices.

With regard to the upcoming week, in Europe, the ECB Governing Council will maintain all monetary policy instruments, but it will give signs that it is ready to cut rates soon. The March meeting minutes, published last week, indicate that "the arguments considering rate cuts were gaining strength" and that "the date of a first rate cut [was] becoming clearer". However, we believe that the ECB will reiterate that it is expecting additional data on wages negotiated in 2024 to gain greater confidence. We also believe that they will not commit to the pace of rate cuts after the first rate cut. Meanwhile, in the United States, following a March jobs report that exceeded all forecasts and showed a drop in the unemployment rate despite the increased workforce participation, prices will take center stage. If the March CPI surprises again upward, it is very likely that the markets react with additional falls, as this would put the FOMC narrative to test, which claims that the January and February figures were a temporary bump in the road. However, if forecasts are met, the price trend will remain consistent with the core inflation target considered by the Federal Reserve for 2024. Even if the year-on-year headline inflation remains at around 3.0% until the end of the year, the core CPI disinflation should allow the Federal Reserve to cut rates in the summer months.

The equity markets have finally paid attention to the delays in the central banks' easing process and have corrected a small part of the sharp rise experienced by the indices in the last five months. We believe that a consolidation process will be healthy for stock exchanges, as it will balance the technical overbuying and breath fresh air into a market that had been very complacent. The current risks on the economic and geopolitical scenario are still relevant, and they should not be underestimated. In this regard, the macroeconomic environment has remained substantially unchanged: the expectations are a continued deflation and that the world's leading economies will not experience a recession in 2024. This is sufficient for the prices of financial assets to remain stable and for any market correction to be interpreted as a buying opportunity. In the next few days, the corporate earnings season will kick off, a catalyst that could contribute to consolidating investor optimism.