The upward trend on the global equity markets since the beginning of May came to an end last week, when better-than-expected purchasing managers’ indices (PMIs) slightly propped up interest rates and dampened investors’ risk appetite.
The PMIs, which measure companies’ business confidence, were released on Thursday in Europe and the USA. The indices exceeded expectations, but the reaction on the equity markets was negative, and the rise since May levelled out. The reason the markets levelled out was the “good news is bad news” rationale: when things are going well in the economy, inflationary pressure is greater and central banks remain under pressure to keep interest rates high. News that is considered negative under normal circumstances, on the other hand, eases inflationary pressure and increases the likelihood of interest rate cuts.
The US PMIs exceeded expectations particularly in the services sector, where they have been trending downward since the start of the year. Europe’s manufacturing figures, however, have been in deep waters for some time, but are now picking up.
The recent decline in interest rates in the USA also levelled off last week. The nation’s 10-year bond is now in the region of 4.5 per cent, whereas the German Bund is around 2.6 per cent. Finland’s 10-year government bond is now at an even 3 per cent. Corporate bond spreads also contracted further last week.
The strong performance of tech companies has increased the share of the market’s largest companies within the entire market. The three biggest S&P 500 companies now together account for 18 per cent of the index’s market value, while historically the average has been around 10 per cent. In the same vein, the ten largest companies make up some 35 per cent of the entire market, compared to the historical average of 20–25 per cent. In the USA, the largest tech companies have generated the majority of market yields this year too.
On a global level, yields have been spread out a bit more evenly this year, due to China’s and emerging markets’ stronger performance than last year. In Europe, too, sectors with a weaker performance in the medium term have picked up and balanced out regional return differences.
Perhaps the most highly anticipated event of the week was tech company Nvidia’s earnings report. The company’s result and revenue vastly exceeded expectations and its stock soared to record-high figures by the end of the week. Nvidia’s strong performance was not enough to prop up the entire market, however.
This week lies in anticipation of the euro zone’s preliminary inflation figures for May, to be released on Friday. The expectation is that overall inflation would accelerate slightly to 2.5 per cent, and that core inflation would remain at 2.7 per cent. If that proves true, the figures would be rather moderate in relation to the 2 per cent considered as the medium-term target.
It is a good idea to keep an eye on inflation news, given that the European Central Bank (ECB) will hold its meeting next week, on Thursday, 6 June. The ECB is expected to announce its first interest rate cut. If the inflation news is significantly worse than expected, investors are wise to pay close attention to the central bank representatives’ comments on the future outlook.
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