Market Update

Monthly Market Roundup cov. February 2024

Monthly Market Roundup
Key takeaways
1

European equity markets continued their upward trajectory in February particularly from AI (Artificial Intelligence) / technology.

2

UK inflation unexpectedly held steady at 4.0% in January, defying forecasts of a rise in the annual rate to 4.2%. Pointing to “encouraging signs” that price pressures were easing.

3

China’s Year of the Dragon began with a welcome surge in consumer spending, helping to boost the country’s sagging economy.

Summary

February provided a positive month for equity markets. The UK market, despite economic challenges, showed strong resilience. US markets ended February up, with the S&P 500 reaching a record high in early February, driven by the “Magnificent 7”. Asian markets performed well, with China and Japan leading the gains, while emerging markets ended the month in a positive territory. In fixed income, government bonds lost ground as investors pushed out their expectations on the timing of interest rate cuts.

  • European markets continue upward trajectory in February.
  • In aggregate, better-than-expected earnings buoyed indices with cyclicals outpacing defensives.
  • Inflation ticks lower but remains sticky.

European equity markets continued their upward trajectory in February. A combination of generally better-than-expected corporate earnings results, particularly from AI/technology, along with reasonable economic data underpinned indices. Consumer discretionary, technology and industrials sectors outperformed the broader market as cyclicals outpaced defensives. Meanwhile, real estate, utilities and consumer staples sectors lagged.

Data showed a decline in headline inflation from 2.8% in January to 2.6% leaving it a touch above expectations. Energy inflation rose as expected, but that was more than offset by continued declines in both food and core inflation. While the fall in core inflation from 3.3% in January to 3.1% left it at a 23-month low, it was higher than consensus was anticipating. Core goods inflation fell from 2.0% to just 1.6%, but the more important services inflation rate only edged down from 4.0% to 3.9%. 

Most policymakers at the European Central Bank (ECB) have stuck to the view that they need more time to be convinced that inflation will fall sustainably to 2%, and February’s inflation data will only have strengthened that conviction.

The sticky inflation theme was enhanced by wage data. It showed that negotiated wage growth only edged down from 4.7% year-on-year in the third quarter last year to a still-high level of 4.5% in the fourth quarter, while the labour market remains tight with the staying at a record low of 6.4%. 

ECB policymakers are hyper-focused on wages, and several members of the Governing Council want to see a clear slowdown in wage growth before they consider cutting interest rates. This is unlikely to be enough to convince them that wage pressures have softened enough to justify rate cuts.

There was a small uptick in the German Ifo Business Climate index from 85.2 in January to 85.5 in February due to a rise in the expectations index. At a sectoral level, conditions improved in services and construction but deteriorated in manufacturing and trade. This news came hot on the heels of an increase in the composite Purchasing Managers’ Index (PMI) data for the eurozone. The increase from 47.9 in January to 48.9 in February was slightly bigger than expected and seems to suggest that the region’s prolonged economic weakness is easing.

The breakdown shows that recovery was driven by a big increase in the Services PMI (from 48.4 to 50.0) whereas the Manufacturing Output PMI fell (from 46.6 to a new 46.2 – a reading above 50 indicates that businesses are growing). However, with the Composite PMI still below the 50 no-change mark, the key take-away is that the economy is still broadly stagnant.

  • Inflation remains unchanged.
  • GDP figures bounce back.
  • Sharp fall in retail sales.

The UK equity market closed higher in February as economic data indicated interest rates might be cut sooner in the year than initially predicted.

Early in the month, the Bank of England (BoE) held interest rates at 5.25% for the fourth consecutive meeting. The Monetary Policy Committee (MPC) said they were open to interest rate cuts but needed ‘more evidence’ that inflation would continue to fall. The governor of the BoE Andrew Bailey added there was good news on inflation but needed inflation at its 2% target level before they could start lowering interest rates.

The Office for National Statistics (ONS) figures showed UK inflation remained unchanged at 4% in January. Consensus estimates had expected a slight increase in inflation with downward pressures on inflation coming from food and household goods, while upward pressures came from energy bills and second-hand car prices as. Following the news, markets priced in expectations that the BoE could start cutting interest rates from June. Core inflation, which excludes energy and food prices, remained unchanged at 5.1%.

The UK fell into a recession at the end of 2023, as UK gross domestic product (GDP) fell by 0.3% in the final quarter of the year. This was following a 0.1% fall in the third quarter of 2023, with two consecutive quarters of contracting GDP being defined as a technical recession. Figures from the ONS showed all main sectors of the economy fell in the final 3-months of the year, as GDP fell more than consensus estimates. The UK economy grew by 0.1% in 2023, compared to 2.5% in the US and 0.5% in the eurozone.

UK wage growth slowed in the three months to December, as ONS data also showed that vacancies continued to decline. According to data from the ONS, average total pay grew at an annual rate of 5.8% (including bonuses) in the three months to December in comparison to a year ago.

UK consumer confidence fell in February following three consecutive rises, shown by a survey done by research group GfK. The consumer confidence index, a measure of how people view their personal finances and wider economic prospects, fell as persistent inflation eroding purchasing power hit consumer confidence. 

Figures from the British Retail Consortium showed retail sales grew at an annual rate of 1.2% in January, down from 1.7% in December and below the 3-month average of 1.9%. ONS figures showed that British retail sales rebounded in January fallowing a sharp fall in December. Sales increased by 3.3% between December and January which was the biggest monthly increase in since April 2021.

  • US equity markets advanced in February with all three major indices registering gains.
  • Jobs data came in ahead of expectations.
  • US inflation cooled to 3.1% from 3.4%.

US equity markets had a positive month in February with all three major indices (S&P 500, Dow Jones Industrial Average and Nasdaq Composite) registering gains. The S&P 500 reached a record high of 5000 in early February and proceeded higher for the rest of the month. Performance was driven by the “Magnificent 7” with Meta platforms and Chipmaker Nvidia top performers following positive earnings releases.

Economic data released over the period was largely positive. US Consumer-Price Index (CPI) showed that headline inflation cooled from 3.4% to 3.1% in January but came in below the expectation of 2.9%. US Core CPI (which excludes food and energy) remained unchanged at 3.9% despite expectations that it would fall to 3.7%.

The US labour market showed signs of resilience with non-farm payrolls for January far outstripping economists’ expectations of 187,000, coming in at 353,000 new non-farming jobs. These results justified the US Federal Reserve’s insistence that it was too soon to cut interest rates. Despite expectations that it would rise, the unemployment rate for January was recorded at 3.7% which was unchanged from the previous figure.

Manufacturing and services Purchasing Managers’ Index (PMI) for February showed improvements in the economy with both indicators recorded at 51.5 and 51.3, respectively. A PMI reading above 50 signals an expansion whereas a reading below 50 indicates a contraction. US fourth quarter Gross Domestic Product (GDP) released in late February showed that the economy had grown by 3.3% which was slightly less-than the 3.3% expectation.

  • Asia Pacific equity markets had a positive month with China and Korea making gains.
  • Japanese equities continued their strong start to 2024 on the back of a weakening yen.
  • Taiwan was strong contributor to regional performance, with semiconductor manufacturers leading the advance.

Asia Pacific equity markets posted a positive month across the board. The strongest performers in the region were China and Japan, followed by Taiwan and Korea.

Market sector performance was generally strong with consumer discretionary, information technology and financials making positive contributions. The materials sector broadly fell in value, so did detract from performance.

Chinese equity markets had a positive month with consumer discretionary, communication services and financial sectors contributing strongly to regional performance. Information technology also provided a positive return.

China’s Year of the Dragon opened with a surge in consumer spending and travel during the holiday period, marking a boost for the country’s sagging economy. Markets rebounded during February, as Chinese authorities took further steps to restore investor confidence, including restrictions on equity net sales, stock purchases by state funds and a clampdown on quantitative based trading.

The People’s Bank of China (PBoC) held interest rates on its one-year policy loans at 2.5% but did announce a reduction in the benchmark mortgage rate, as authorities sought to prop up the struggling property market. All eyes will now be on the forthcoming National People’s Congress meeting, which may see further support for the economy.

Korea’s equity markets delivered a positive returns boosted by information technology and consumer discretionary sectors. Korea beat expectations for economic growth in the fourth quarter of 2023. Korea's exports rose in January, but did slow down a little as we entered February. A rebound in sales to China and a surge in semiconductor chip shipments provided a boost to the trade-reliant economy at the start of 2024. Korea’s financial regulatory body unveiled new measures to improve corporate governance, taking a leaf out of Japan’s playbook to help boost its undervalued markets and tackle the “Korea discount.”

Taiwan markets advanced with information technology companies providing market leadership. Taiwan's trade-dependent economy grew faster than expected in the fourth quarter thanks to strong domestic consumption and a rebound in exports, expanding 1.4% for the full year of 2023. Taiwan is a key hub in the global technology supply chain and home to the world's largest contract semiconductor manufacturer.

Indonesian equity markets reacted positively as Defence Minister Prabowo Subianto declared victory in the presidential vote. The removal of political uncertainty aided market sentiment as Prabowo's comfortable lead mitigated the likelihood of a second round election. The indication from the recent results in Indonesia is that markets may welcome a degree of political surety.

In India, the equity market continued to make progress. Expansionary PMI (Purchasing Managers Index) data reflected a positive outlook for the economy, marked by the strength of the services sector. A score of more than 50 indicates a sector in expansion. The Services PMI climbed to 61.8 reaching a seven-month high.

The manufacturing sector also experienced decent expansion with a reading of 56.7. These economic indicators were reflected in equity sector performance in India with consumer discretionary, energy and industrials leading the gains with materials the laggard. India’s retail inflation eased to a three-month low of 5.10% in January on slowing food price rises and the Reserve Bank of India (REBI) duly kept its benchmark rate unchanged at 6.50%.

Japanese markets gained with strong corporate earnings supporting positive returns. Japan’s economy fell into recession following two back-to-back quarters of negative GDP growth. While real third quarter GDP growth data was revised down to -3.3% on an annualised basis, the economy shrank by a further -0.4% in the fourth quarter of 2023. The yen weakened on dovish comments from the Bank of Japan (BoJ). A weak yen tends to support the export heavyweights within the Japanese market.

Australian stocks were marginally up in local currency terms in February. In its first meeting of the year, the Reserve Bank of Australia (RBA) held the cash rate at 4.35%. It signalled a cautious outlook, not ruling out the possibility of further interest rate hikes. The central bank's tone counteracts recent inflation data that indicates a sharp decline, with CPI dropping from 5.4% in the third quarter of 2023 to 4.1% in the fourth quarter of 2023.

  • Emerging markets (EM) equities had a positive month.
  • Asia was the strongest performing region.
  • China rebounded strongly in February and was the stand-out equity market.

Emerging equity markets made gains on confidence during the month as negative sentiment around China may have peaked. China, which is a key constituent of the emerging markets group, rebounded during February. The strongest performing markets in the region were China and Korea, followed up by Taiwan and India.

Market sector performance in the region was positive across the board with information technology, consumer discretionary, financials and communication services making positive contributions.

Latin American equity markets made steady gains with Chile, Peru and Brazil all making positive returns. The annual inflation rate in Brazil eased slightly to 4.5% in January of 2024 from 4.6% in the previous month, the current equivalent inflation figure in Peru and Chile is 3.0% and 3.8% respectively.

Latin American central banks have been active since the start of the year. Brazil, Peru, and Colombia maintained their pace of interest rate adjustment, cutting by 0.50%, 0.25% and 0.25%, respectively, while Chile accelerated its cutting pace to 1% from 0.75%. Mexico kept its rates unchanged. Latin American countries are looking closely at inflation datapoints in the region and elsewhere. The strength of the US economy continues to keep investors and central banks on their toes.

Chinese equity markets had a positive month with consumer discretionary, communication services and financial sectors contributing strongly to regional performance. Information technology also provided a positive return. Korea’s equity markets delivered a positive return boosted by information technology and consumer discretionary sectors. Taiwanese markets advanced with information technology companies providing market leadership. Taiwan is a key hub in the global technology supply chain and home to the world's largest contract semiconductor manufacturer.

Indonesian equity markets reacted positively as Defence Minister Prabowo Subianto declared victory in the presidential vote. The indication from the recent results in Indonesia is that markets may welcome a degree of political surety.

In India, the equity market continued to make progress. Expansionary Purchasing Managers Index (PMI) data reflected a positive outlook for the economy, marked by the strength of the services sector. A score of more than 50 indicates a sector in expansion. The Services PMI climbed to 61.8 reaching a seven-month high.

The manufacturing sector also experienced decent expansion with a reading of 56.7. These economic indicators were reflected in equity sector performance in India with consumer discretionary, energy and industrials leading the gains with materials the laggard. India’s retail inflation eased to a three-month low of 5.10% in January on slowing food price rises and the Reserve Bank of India (REBI) duly kept its benchmark rate unchanged at 6.50%.

  • Government bonds register losses as hopes of imminent interest rate cuts recede on stronger than expected US inflation data. 
  • Mixed month for corporate bonds but credit spreads continue to narrow.    
  • UK slips into technical recession as pressure mounts on the Bank of England to start cutting the cost of borrowing.    

Government bonds lost ground as investors pushed out the timing of interest rates cuts due to US inflation data coming in stronger than expected. US treasuries returned -1.35%, UK gilts were down 1.22% and German bunds declined by 1.62% (local currency terms, ICE BofA data).

 

Although US price growth dropped to an annual rate of 3.1% in January, it was above the 2.9% expectation. With the labour market continuing to be healthy - more than 350,000 jobs were added in January, helping to drive up average hourly earnings - the timing of the likely first US rate cut is now expected in June 2024.

 

While there was some better news on the inflation front late in the month following the release of the PCE (personal consumption expenditures) price index report - 2.8% core inflation was the smallest year-on-year advance since March 2021 – by the close of the month futures markets were pricing in 85bps of rate cuts (down from 146bps at the start of the month) by the Federal Reserve’s meeting in December 2024.

 

In the eurozone, there was a similar pattern of slowing but above target inflation weighed on sovereign bonds. While CPI data for Germany and France were in line with consensus, inflation for the wider euro area eased less than expected in February. Consumer prices rose 2.6% versus the 2.5% median estimate. Despite this blip, money markets still expect the European Central Bank (ECB) to reduce interest rates in June although the total amount of cuts for the year has been scaled back from 160bps to 91bps.

 

Despite economic weakness, the jobs market in the eurozone remains tight with the unemployment rate staying at a record low 6.4% in January.

 

UK inflation unexpectedly held steady at 4.0% in January, defying forecasts of a rise in the annual rate to 4.2%. Pointing to “encouraging signs” that price pressures were easing, Bank of England governor Andrew Bailey said the central bank might start to cut interest rates before inflation falls to its 2% target. The comments followed similar remarks from the BoE’s chief economist Huw Pill earlier in the month. The UK economy slipped into a technical recession at the end of 2023.

 

The Japanese government bond market was an outlier in February, registering a small gain as negative GDP growth raised question marks whether the economy was robust enough to allow the Bank of Japan to attempt an exit from its negative interest rate policy.       

 

It was a mixed month for corporate bond markets with investment grade bonds, which are more sensitive to interest rate expectations, registering losses. By contrast, high yield bonds delivered positive returns with lower graded credit leading the gains. In terms of performance, dollar, euro and sterling investment grade returned -1.40%, -0.89% and -0.56% respectively (local currency terms, ICE BofA data). Dollar, euro and sterling spreads narrowed from 102bps to 100bps, 130bps to 121bps and from 129bps to 121bps respectively. 

In the high yield corporate market, dollar bonds returned 0.30% and European currency (€/£) bonds gained 0.39% with spreads narrowing from 359bps to 329bps and 394bps to 354bps respectively. 

Read the full roundup below

  • PDF
    Monthly%20Market%20Roundup%20PDF%20February%202024
    PDF

    Monthly Market Roundup cov. February 2024

    By Invesco

    In our monthly market roundup for February, Invesco experts give a rundown on a positive month for global equity markets, as well as an update on fixed income markets.

Related insights