As the second-quarter earnings season in the US picked up momentum, optimism surrounding moderate inflation’s potential to avert a severe recession propelled equity markets higher for the week. However, technology stocks lagged behind the broader market due to mixed earnings announcements affecting the sector.
Last week saw stocks continuing their upward trajectory, building on the impressive gains of 2023, bringing the S&P 500 within 6% of its all-time high. Corporate earnings releases provided an additional boost as quarterly results indicated that companies were effectively navigating the challenges posed by high but declining inflation and robust yet moderating demand. Notably, 79% of S&P 500 companies that reported earnings so far exceeded earnings per share forecasts. Nevertheless, investors should remain cautious, recognizing that we are still early in the earnings season, and results may become more nuanced in the upcoming weeks.
In the UK, inflation in June fell to its slowest pace in over a year, leading to a weaker pound against other currencies and a lift in the stock market. However, with inflation still at 7.9%, well above the Bank of England’s 2% target, there remain concerns. Economists had anticipated a drop in the Consumer Price Index (CPI) rate to 8.2% for the 12 months to June from May’s 8.7%, indicating a move away from the 41-year high of 11.1% seen in October. The pound fell against the dollar, euro, and yen, as interest-rate futures suggested that investors no longer expect UK rates to peak above 6%.
China reported that its economy grew at an annual rate of 6.3% in the second quarter of the year, which fell well below most economists’ forecasts, raising concerns about the country’s post-pandemic economic rebound falling short of expectations. Quarter-on-quarter, GDP expanded at a slower pace of 0.8%, compared to the 2.2% growth recorded in the first three months of 2023.
In the US, value stocks outperformed growth stocks, with the Dow Jones rising 2.1% and the S&P 500 climbing 0.7% over the week. In the UK, the FTSE 100 Index gained 3.08%, partly due to the depreciation of the British pound against the US dollar, as the index includes many multinational companies with overseas revenues. Homebuilders, landlords, and real estate-related services were among the top gainers, as investors considered the possibility of limited increases in UK borrowing rates. The STOXX Europe 600 Index also rose, ending the week up 0.95%, as revised figures showed that the Eurozone narrowly avoided slipping into a recession in the first quarter of the year. In Japan, the Nikkei 225 Index declined by 0.3%, while in China, the CSI 300 and the Hang Seng Index fell by 1.98% and 1.74%, respectively.
In fixed income markets, the yields on two-year US Treasury notes increased during the week. However, the yield on the benchmark 10-year US Treasury note remained relatively stable, leading to a further inversion of the yield curve as investors priced in the likelihood of another Federal Reserve rate hike. In the UK, yields on 10-year government bonds declined following the reassuring inflation figures, with the yield ending the week at 4.27%.
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