Sabco® Investment's Monthly Market Report - June, 2023

Sabco® Investment's Monthly Market Report - June, 2023

In June, the positive momentum in equity markets continued, driven by several factors. Central banks maintained their focus on tightening monetary policy, but investors found reassurance in the trends of disinflation, expectations of a soft landing for the economy, and optimism surrounding AI-related stocks and big technology companies.

Stock market indices experienced further gains, with the S&P500 and Nasdaq reaching their highest levels in over a year. This resulted in the best first half performance since 2019 for the S&P500 and since 1983 for the Nasdaq. While European stock markets couldn't maintain the outperformance seen in the early months of the year, European indices remained close to their yearly highs. The relatively weaker performance can be attributed to underwhelming economic data in the eurozone, which fell short of consensus expectations, and investors' enthusiasm for artificial intelligence in the US. Share prices in Japan and emerging markets also joined the upward trend, although currency movements partly offset these gains. Despite ongoing monetary policy tightening in the US and Europe, investors took solace in the disinflationary trend and the prospect of slowing economic growth that doesn't indicate a sharp decline. Additionally, monetary easing measures and the increasing likelihood of fiscal stimulus in China provided further support.

Unlike the previous month, the market rally in June was less concentrated on US technology stocks and artificial intelligence. Although these sectors still led the way, they were joined by companies from cyclical or value-oriented sectors. Consequently, the performance of value and growth indices in the US was quite similar during the month, but over the past quarter, growth stocks outperformed value stocks by more than 10 percentage points.

Throughout June, 10-year bond yields remained relatively stable, continuing the trend observed in the second quarter as a whole. The German 10-year bond yield hovered around 2.40%, while the US yield slightly increased but remained within the range it had been moving in for several months (around 3.75%). Interest rates faced a delicate balancing act between the persistently tight monetary policy and the potential for a growth slowdown. Shorter maturities in the US experienced a significant increase, with the 2-year rate rising by 50 basis points in June. This surge was driven by the market's revised assessment of the Federal Reserve's future interest rate path, and the 2-year rate nearly matched the level of around 5% reached prior to the banking sector turmoil in March.

Corporate bond spreads saw slight increases for both investment-grade and high-yield bonds, reflecting concerns about a possible recession and its impact on corporate earnings.

Many central banks responded to persistent core inflation by raising their policy rates further in June. Notable rate hikes included the UK and Norway (+50 basis points compared to the expected 25 basis points), Switzerland (+25 basis points), Sweden (+25 basis points), Australia (+25 basis points unexpectedly), and Canada (+25 basis points following a pause since January).

As anticipated, the European Central Bank (ECB) raised its deposit rate by 25 basis points to 3.5%, reaching the highest level since 2008. The ECB also confirmed that it would cease reinvestments under its bond purchase program (APP) starting in July. Notably, expectations for core inflation were significantly revised upwards. ECB President Lagarde attributed this upward revision to the strength of the labor market, particularly in the service sector. She stated that it is highly likely that interest rates will be raised again in July.

Contrary to expectations, the Federal Reserve left its policy rate unchanged (within a range of 5.0% and 5.25%) after 10 consecutive rate hikes over 15 months. The central bank aims to assess the impact of previous rate increases and observe further confirmation of the disinflationary trend. However, it is worth noting that the median expectation of Fed members for the evolution of policy rates this year (indicated by 'the Dot plots') increased to 5.6% by year-end, suggesting the possibility of 50 basis points of additional rate hikes.

China's central bank unexpectedly reduced several key interest rates, including the important medium-term lending facility. The medium-term lending facility was cut by 10 basis points to 2.65%, indicating concerns about the weaker-than-expected recovery.

The euro strengthened against most currencies in June, as the ECB is currently perceived as the most hawkish central bank. The US dollar weakened against the euro, shifting from 1.07 at the beginning of the month to nearly 1.10. The overall smooth agreement on the US debt ceiling had little impact on the currency.

The Japanese yen weakened by almost 6% in June, resulting in a loss of over 12% against the euro since the beginning of the year. The Bank of Japan left its monetary policy unchanged, including interest rates and yield curve control, and Chairman Ueda stated that the extremely accommodative monetary policy would continue for some time.

Oil prices experienced a slight increase in June. After surprising the market with a production cut in early April, the OPEC+ cartel announced an additional production cut of 1 million barrels per day in early June. Saudi Arabia is set to bear the entire burden of this cut. Tensions within the cartel surfaced, with African members displaying little enthusiasm for voluntary production cuts, while Russia continued to increase its oil output. The recovery in Chinese oil demand after COVID-19 lockdowns was weaker than expected. Meanwhile, the gas price rebounded from its lowest level in over two years (around 25 euros per megawatt-hour) to above 40 euros over the past month, despite record-high inventories for this time of year. Market uncertainty regarding supplies persists due to the permanent closure of gas fields in Groningen and temporary outages in Norway.

Gold prices weakened slightly due to persistently hawkish comments from central banks. Commodity prices, including gold, were also affected by signals of weakening economic activity in China. Notably, commodity prices experienced significant declines during the second quarter.