Markets initially struggled for positive momentum this week as rate cut expectations, particularly in the US, continued to be tempered by hints of sticky inflation against a backdrop of a US economy that continues to defy expectations of an economic slowdown
But corporate news has come to the rescue, in terms of the latest earnings update for Nvidia, which showed that the AI revolution is alive and well, with the resulting rally in tech stocks even lifting Japanese equities to all-time highs. Yesterday saw US, European and Japanese equity indices all at record highs. The Nikkei 225 index in Japan finally eclipsed the all-time high from 1989 this week, with Japanese equities continuing their strong momentum from last year. Gains so far this year are now over 16%. 1989 feels like a long time ago — back then I was busy choosing my GCSE options, riding my new mountain bike, delivering free newspapers for £6 a week and listening to “Steve Wright in the Afternoon” on my Sony radio (which is still working to this day). In 1989, Japanese equities made up 40% of the MSCI World Index; now Japan is just 6%. Meanwhile, US equities, led by companies such as Nvidia, are now 63% of the index.
Nvidia delivered another stellar set of earnings this week, with Q4 2024 revenues up 265% over the same period last year, well ahead of expectations. The company’s share price rose by 16% yesterday, adding $277 billion of market capitalisation in a single day. For some context, the entire market cap of Intel is $183 billion, and of Shell (the UK’s largest company) $205 billion. Nvidia CEO Jensen Huang said that “Generative AI has kicked off a whole new investment cycle” and would “represent an annual market opportunity in the hundreds of billions.” Nvidia stock is now up 58% year to date, with the “Magnificent 7” stocks up 14% so far. The narrow leadership in US equities is also being seen elsewhere — the EuroStoxx 600 index also saw new all-time highs this week, though only four companies — ASML, Novo Nordisk, SAP and LVMH account for 65% of the gains in the benchmark this year.
The minutes of the most recent Federal Reserve meeting were published on Wednesday, coinciding with a time when the market narrative appears to be shifting, with expectations for rate cuts being tempered by the difficulties of the “last mile” of the battle with inflation and the strength of the US economy, which remains on a much stronger footing than the UK or eurozone where growth has been elusive. The meeting minutes reinforced the message that the Fed is in no rush to ease policy. It also stated that “most participants noted the risks of moving too quickly to ease the stance of policy and emphasised the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably to 2%”. A March rate cut is now priced with just a 7% probability — this was fully priced at the start of the year. Expectations for cuts in 2024 continue to decline, with futures now pricing total cuts of 82 basis points, compared to 168 basis points less than six weeks ago.
The potential for the UK and eurozone to cut rates sooner than the US must be increasing given their respective economic trajectories. Bank of England governor Andrew Bailey told Members of Parliament that inflation does not need to fall to 2% before policymakers support a rate cut and indicated that investors are correct to expect policy easing this year. Bailey said that market bets on rate cuts are “not unreasonable” and he was “comfortable with a profile that has cuts in it”. He noted that when and how much policy is eased will be determined by further progress being made on tackling sticky inflation; “We don’t need obviously inflation to come back to target before we cut interest rates…. I must be very clear on that, that’s not necessary.” The Governor also played down the significance of the data last week showing that the UK fell into a technical recession in the second half of last year. Bailey said the figures point to a “very weak recession” and highlighted “distinct signs of an upturn” in more recent data. A June rate cut from the Bank of England is now priced with a 66% probability in swaps markets.
In the eurozone, government bonds rallied after European Central Bank wage growth data showed that collective wage growth in the region slowed for the first time since 2022. Wages increased at an annual pace of 4.5% in Q4 2023, compared to 4.7% in Q3. However, the rate remains above the 3% level the ECB has said is consistent with its 2% inflation target. Eurozone inflation is currently 2.8%, down from a peak of 10.6% in October 2022. ECB President Lagarde said “wages were an increasingly important driver of inflation dynamics in the coming quarters”. Lagarde told EU policymakers the bank would avoid “hasty decisions” on cutting rates.
China has returned from the Lunar New Year holiday with heightened expectations for further support for the market and the wider economy as the hangover from the property slump continues. Chinese Premier Li Qiang called for “pragmatic and forceful” action to boost the nation’s confidence in the economy. We expect to see further measures to support stock markets and the wider economy in the coming weeks. This week has already seen further regulation enforced around short selling, and increased volumes in exchange traded fund trading hints at activity from the “national buying team” of banks and financial institutions.
The People’s Bank of China cut the benchmark 5-year loan prime rate (the rate to which most mortgages are pegged) by 25 basis points to 3.95%. This was a bigger cut than expected; mortgage rates are now at their lowest level in at least 15 years, according to Bloomberg data. The move is clearly aimed at boosting the demand side of the housing market, but for now the bottom in the housing market may not have been reached. Better news came on the consumption side, with data for the holiday week showing that travel and spending exceeded pre-pandemic levels. There were 474 million tourist trips taken during the holiday week, up 19% from 2019. There were 99.5 million rail journeys and 18 million passenger trips by air. Spending was up 8% to $88 billion.
In geopolitics, the news of Alexei Navalny’s death resulted in condemnation of the Russian government from western leaders. Navalny was Russia’s most prominent opposition figure and apparently “fell ill after a walk and lost consciousness almost immediately”. Navalny was serving a 19-year sentence in a penal facility near the Arctic Circle. President Biden said he was “not surprised but outraged” by the news and said the US was considering “a whole number of options” in response. US National Security spokesman John Kirby said, “major sanctions” would “hold Russia accountable for what happened to Mr Navalny”. President Biden also criticised Donald Trump for encouraging Russia to attack NATO allies who spend too little on defence. He said Putin should know that “America will defend every inch of NATO territory”. Russian President Putin, who is a certainty to extend his rule to 2030, in next month’s Presidential elections in which the Kremlin has allowed no real challengers, is yet to comment on Navalny’s death.
Have a good weekend,
Regards,
Anthony.
