Introduction
July 2024 was a big month for politics with the UK election decided and some major twists and turns in both the US and France. The Bank of England have cut rates, the Fed kept the rates at the same level but there is an increasing expectation that they will cut them in September. The Bank of Japan put rates up.
UK
We now know that Labour will be in government for the next five years, after their landslide victory.
There is a broad consensus that inflation will remain reasonably under control for the foreseeable future, hovering around 2%. The Bank of England decided on 1st August to cut UK interest rates from 5.25% to 5%, with an expectation that they will cut rates further at some point this year.
There was some evidence that this anticipated return to normality is trickling into the real economy at the end of July with Nationwide becoming the first major lender to offer a rate below 4% since February. Their 3.99% five-year fix comes with a hefty 40% deposit but feels like a stage change bringing more hope to mortgage borrowers, many of whom are remortgaging this year and will face increased costs whatever happens.
The early signs are that Labour will stick to their fairly limited promises, which leaves them with little room to raise taxes or cut services in order to create more headroom. Their focus is purely on economic growth and there is some urgency in the new Chancellor’s agenda around this. Changes to taxes beyond income tax and National Insurance seem highly unlikely so.
In 1997, Tony Blair’s Labour caught the wave of an era of incredible global economic expansion, which no doubt helped them to 13 years of power. Sir Keir Starmer faces a much tougher challenge with economic headwinds each way he turns. One immediate focus for Labour is to stimulate investment and growth by diverting more institutional pension money into UK businesses. Rachel Reeves’ has announced they will introduce a programme of pensions reforms which will seek to achieve this.
Reeves delivered her first budget as Chancellor on Wednesday 30th October. She pulled no punches in the Commons debate when she accused her predecessor of covering up a £22bn overspend in the government finances. To plug the gap, she told the Commons money needed to be found elsewhere. That would include cancellation of some rail and road projects, including the tunnel under Stonehenge, and restricting winter fuel payments to those on pension credits or other means-tested benefits.
Europe
As expected, Eurozone inflation overall was recorded at 2.5% in June 2024, a slight decrease from 2.6% in May. This marks a continued trend of reducing inflation. The main components contributing to this rate include services, with the highest annual rate at 4.1%, followed by food, alcohol, and tobacco at 2.4%, non-energy industrial goods at 0.7%, and energy at 0.2%.
As we predicted, in a turbulent June for French politics the final result was a hung parliament which will calm investor sentiment. The left-wing New Popular Front (NFP) has emerged as the largest bloc, winning 188 seats in the National Assembly. President Emmanuel Macron’s centrist alliance, Ensemble (ENS), came in second with 161 seats. The far-right National Rally (RN) and its allies, who led in the first round, secured 142 seats. Forming the new government will require coalition-building and negotiations among the major political groups. Whilst this might sound like more instability, markets will be relieved that some of the more extreme, expansionary policies of the far right and left groups will be stymied, and a relatively predictable economic policy will be maintained.
Germany continues to be a mixed bag of results. Inflation appears to be coming under control, dropping to 2.2% in June, with energy prices dropping and services, especially hospitality, still going up.
The German export sector has lost its momentum as it goes into the second half of the year, with exports to China notably down, as are incoming orders to its manufacturing sector. The labour market has stagnated, and German insolvencies are at its highest level since 2016.
That said The ifo Institute has raised its forecast for the growth of the German economy for the current year 2024. The gross domestic product is expected to increase by 0.4% instead of the 0.2% forecasted in March. The second half of 2024 is expected to perform significantly better than the first due to the recovery of global trade and industrial production, with household finances strengthening as inflation subsides.
United States
President Biden’s faltering public performances which saw him fall significantly behind Trump in most polls resulted in him standing down from the November Presidential race. His Vice President, Kamala Harris will oppose Trump and offer a contrasting alternative to the controversial former President. Most observers have noted that financial markets have already priced in a Trump victory in late 2024 so this might dampen some market volatility.
Recent CPI and PPI figures suggested cooling inflation. The Fed decided on 31st July to keep interest rates at the same rate, but comments from Fed chair Jay Powell added greater expectations for a cut in September, the last meeting before the US election. “A reduction in our policy rate could be on the table as soon as the next meeting in September” he said, adding “The second quarter’s inflation readings have added to our confidence and more good data would further strengthen that confidence.” This has been widely interpreted as a commitment to a rate cut unless something significantly changes for the worse between now and September. A rising unemployment rate seems to be of equal concern to the Fed now.
Wednesday 24th June saw a slump in tech stocks, which we warned about last month. The $1trn sell off saw US indices endure their worst session since 2022. We are yet to see the results for all of the ‘Magnificent Seven’ and with the US tech market so overheated some sort of correction was probably inevitable. We will see these results are a blip or a trend over time. We have highlighted previously that there are positive signs of growth outside technology stocks, highlighting the importance of a well-balanced and diverse portfolio. Both the S&P500 and the tech heavy Nasdaq rose with the news, recording their best days since February, and Treasury yields dropped in anticipation of future interest rate cuts.
Far East
In China there were some positive movements in specific sectors like technology, but the broader Chinese financial markets struggled with persistent economic challenges and subdued investor sentiment throughout July 2024. Geopolitical tensions remain a concern.
The jury is still out on the success of the Chinese government’s recent policy interventions to stimulate the market, such as reducing stamp duty and regulating shareholder reductions. The successes were short lived, and we will need to see how other policies to bolster economic growth, including infrastructure spending and potential further monetary easing, work out over time. Most Chinese financial market indices were down in July.
Japan’s weak Yen has continued to bolster its exports and fostered an expectation of increased earnings for the second quarter of 2024. The services sector has been the driving force behind Japan’s growth, with tourism and domestic demand a major part of that. Creeping inflation however forced the Bank of Japan’s hand and they put interest rates up on 31st July. The rate increased has been described as unexpected but that more the about the timing than the result. It was clearly a potential outcome at some point this year. Nissan, one of Japan’s best-known companies, has had its profits wiped out for the first quarter and has a bleak outlook for the foreseeable future.
Emerging Markets
Emerging markets experienced a challenging June 2024. Higher interest rates in developed markets and a stronger US dollar exerted pressure on emerging economies, leading to capital outflows and currency depreciation. There is arguably an over reliance on US policy changes and the central banks of emerging market countries are likely to follow after the Fed. A cut in December rather than September would therefore slow down monetary policy normalisation in emerging markets. However low unemployment rates mean domestic demand is helping with consumption and may compensate for a slowdown in US demand.
The 2024 election cycle in Latin America is significant, with several countries holding presidential elections that could influence the region’s political landscape. We’ve summarised the main ones to note below.
In Mexico, Claudia Sheinbaum became the country’s first female president. The former mayor of Mexico City and candidate from the ruling party Morena won the election with a 59% majority.
Dominican Republic President Luis Abinader was re-elected on May 19 for another four-year term, an endorsement of his handling of the economy and tough policies toward migration from Haiti.
In El Salvador, President Nayib Bukele is also expected to run for reelection, bolstered by his tough security policies that have significantly reduced crime rates but have raised concerns about civil liberties. His popularity suggests a strong chance of re-election.
In Panama, former President Ricardo Martinelli is leading the race despite his conviction on money laundering charges, which he is appealing. If he is disqualified, the race could focus on other prominent candidates like Martín Torrijos and Ricardo Lombana, who emphasise anti-corruption and austerity.
Uruguay’s elections will feature a contest between the ruling center-right Coalición Republicana and the center-left Frente Amplio. The first round is scheduled for October 27, with a possible runoff on November 19 if no candidate secures an outright majority.
In Venezuela, elections are anticipated by the end of 2024. The political climate remains tense, with opposition leader Maria Corina Machado barred from running against President Nicolás Maduro. There are significant doubts about the fairness of the upcoming elections.
This election cycle in Latin America will be critical in determining the region’s political and economic direction with major implications for governance, security and international relations. Whilst much of this is just noise from an investment perspective, it will invariably raise questions about stability which always leads to some volatility.
Conclusion
The major themes of 2024 continue but as more elections conclude and inflation subsides there is some greater stability in sight. Cuts in interest rates are the next key milestone for a return to some form of economic normality. Expect to hear the words ‘soft landing’ in future months. Overall, however, portfolios look positive as equity markets have risen over the past 12 months.
And Finally…
Did you know that there are only four countries in the world whose national anthems don’t contain lyrics?
These countries include Spain, Bosnia and Herzegovina, San Marino and Kosovo.
Sources
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Mexico election results 2024 by the numbers
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