Last week was a mirror image of the previous one, at least as far as equities were concerned. Global equities were down around 1.8% in both local currency and sterling terms, reversing their gains of around 2% the previous week.
Emerging markets led the decline with a drop of 4.2%, just as they led the previous week’s increases with a 5.6% rise, while the US was once again middle of the pack, falling 1.5%. As for the UK, it was the only market to show an increase of 1.2%, having been – you guessed it – the only market to fall the week before.
The tech sector was once again the main driver of this divergence in regional performance, falling 5.7% and more than reversing its 4% gain the previous week. The volatility of tech highlights the frothiness in some areas – notably anything chip-related – following the strong gains of late.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
How long can the bonanza last?
There was no particular news to knock the chip sector down as much as 7% over the week – in fact quite the reverse with another set of stellar results from US chipmaker Micron. Rather, as with the previous AI cheerleader Nvidia, it has maybe just got to a point where the market is already pricing in all the good news, begging the question of how long the bonanza can last.
Nvidia is down 18% from its high in May. Meanwhile, SpaceX may not have fallen back to earth but is no longer shooting for the stars. Having surged as much as 40% in the first couple of days of trading, it is back down to its starting price.
‘Magnificent Seven’ underperforms
As for the Magnificent Seven more generally, they lost their halo some time ago and are down 5% this year versus a 13% rise in global equities. They are no longer the hot AI story and have been hit by growing worries over the enormous sums they are spending on AI and the debt and equity they are now issuing to finance this. Another concern was also highlighted last week – namely the cost pressures from the surge in chip prices which has caused Apple to announce a 20% rise in MacBook and iPad prices.
None of this is to say the tech bubble – even assuming it is one – is about to burst imminently. Rather, recent developments just emphasise the longer-term uncertainties still hanging over all things AI-related and why it is important not to get too carried away with the latest hot AI theme, sector or company. We believe continued exposure to this area is still warranted but in a diversified manner and to a smaller extent than that arising from a passive holding in global, US or emerging market equities.
Markets, however, are not all about AI and the state of play in the Strait of Hormuz remains a critical factor. The past week saw an outbreak of renewed hostilities between the US and Iran. But this was followed by news over the weekend – according to the US at least – that they have agreed to halt the tit-for-tat retaliation and return to the negotiating table to fill in the yawning gaps in their memorandum of understanding.
Reaching a long-lasting deal was never going to be plain sailing and recent events have borne this out. But with Iran and the US both strongly motivated not to derail the peace negotiations altogether, the markets are now very much assuming that the war is yesterday’s story.
Indeed, crude oil prices have retreated further and are back down close to $70 per barrel, where they were prior to the conflict. Somewhat surprisingly, the cessation of hostilities did not produce a big jump in business confidence in June – optimism did improve a bit in the US and Europe but actually fell slightly further in the UK, possibly down to the uncertainty caused by all the goings-on in Makerfield.
Tariffs: Last year’s story
Tariffs also reared their head again last week but they are so last year’s story as far as the markets are concerned. Trump warned that he will impose a 100% tariff on any European countries that implement a digital services tax on US companies. But with the UK, France, Italy and Spain already imposing such a tax, it is far from clear if and on whom any such tariff would be imposed – so, very much par for the course.
Unlike equities which have been in full-on party mode since their low on 30 March, bonds have had to deal with the continuing inflation concerns of the central banks and have only cheered up over the last month. Their better mood continued last week with 10-year US Treasury and UK gilt yields falling 0.1%, leading to both markets returning around 0.8%.
10-year yields are now down to 4.4% in the US and 4.75% in the UK, 0.3% and 0.4% respectively below their mid-May highs. In the US, this is despite the new Fed Chair Kevin Warsh proving unexpectedly hawkish and the Fed’s favoured measure of headline and core inflation rising in May to 4.1% and 3.4% respectively, reinforcing expectations that the Fed will raise rates later this year.
And in the UK, this has occurred despite the market’s concerns over the fiscal intentions of the so-called King of the North. The presumption now is that Rachel Reeves will be replaced as Chancellor but as to who replaces her, it is still far from clear.
This coming week, the main macro focus will be on June US payroll data on Thursday and to a lesser extent June Eurozone inflation on Wednesday.
Rupert Thompson, IBOSS Chief Economist, part of Mattioli Woods
