Despite the geopolitical turbulence, the equity markets have yielded excellent results over the past year, driven in particular by technology companies. The general mood on the markets is positive, although accelerating inflation is casting dark clouds on the horizon.
The strong momentum on the equity market has continued, driven by tech companies, although last Friday we saw some selling pressure for a change. Interest rates have fallen slightly from their peak in mid-May but are still higher than at the start of the year.
Currently, the equity market’s gaze is focused on SpaceX’s IPO. Trading in the company’s shares is meant to start on Friday of this week. If the IPO proceeds as planned, SpaceX will rank among the largest American listed companies by market value.
One of last week’s most interesting data disclosures was the US labour market report which was stronger than expected. New jobs created came to 172,000, while the expectation was approximately 88,000. At the same time, April’s figures were revised upward significantly. The unemployment rate remained unchanged at a relatively low 4.3 per cent. The markets interpreted the strong labour market report as predicting rising inflationary pressure, resulting in a slightly higher interest rate level and appreciation of the dollar.
Upcoming weeks will feature two interesting central bank interest rate meetings. The European Central Bank (ECB) will assemble on Thursday this week. The markets are currently pricing in a quarter-point interest rate hike for the ECB’s meeting.
From the market perspective, it currently seems that the central bank is heading for an interest rate hike path to control inflation, which is already on the rise as a result of the war in Iran. The higher inflation is evident mainly in energy prices, which the central bank’s toolkit is not well-equipped to curb. However, the assessment is that the central bank’s objective is now to prevent inflation from spreading more broadly through the economy.
If the price of energy were to remain high, the price of transportation would inevitably also begin to rise, which would have a broad impact on the prices of goods. Fertiliser prices have risen, which may be reflected in more expensive agricultural commodities, with producers attempting to pass the rising costs onto the prices of agricultural products. If the prices of consumer goods were to rise across the board, it could eventually lead to higher pay raise demands in future negotiation rounds.
Although one interest rate hike is the market consensus, the ECB has offered no clear clues about what decisions to expect from its upcoming meeting. The interest rate hike has come up in preliminary comments, but it has not been considered a certainty.
Meanwhile, the US Fed’s meeting will take place during the week of Midsummer – the first meeting with Fed Chair Kevin Warsh in charge. The markets do not consider it likely that the key interest rate will change. They are more interested in what course Warsh will take in his comments on the Fed’s decisions and perspective on economic growth and factors linked to inflation. Earlier in his career, Warsh made comments stating that the central bank should be more reticent in commenting on its activities.
The current year has been relatively robust, but also changeable. In the early part of the year, the markets experienced rotation away from technology companies, which had driven the equity markets, especially in the USA, for some time. However, the war in Iran changed the situation and rotation stalled.
In recent weeks, the global equity markets have put tech companies in the driver’s seat once again. This has reflected especially strongly on the emerging markets where a few South Korean companies and Taiwanese tech companies have surged strongly upward, simultaneously raising the entire market.
The USA has also demonstrated strong performance in recent weeks thanks to technology companies. The situation is, however, slightly different than before when the Magnificent Seven were responsible for the growth. In recent weeks, semiconductor manufacturers have performed strongly, but also some of the Magnificent Seven have shown good performance. A positive aspect is that the top performers differ somewhat from what we have seen in recent years. The stock price increase has again been driven by a small group of market leaders. If these companies face challenges, it may be difficult to find replacements to sustain the stock price surge.
Mandatum’s market review will take a break for the summer and return in August. Wishing you a great summer!
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