Market Update – June 2023

May ended with unanswered questions on the issue of the US debt ceiling with no deal agreed meaning a potential US default was still on the cards heading into June.

This was quickly quashed in June with a deal was finally agreed to allow the debt ceiling to be lifted with just two days to spare. Issues between Republicans and Democrats had led to a negotiating standoff but with the deadline rapidly approaching both sides came back to the negotiation table and agreed to suspend the debt ceiling until 2025. This will allow the US government to continue to borrow to service existing debt.

This positive momentum carried over into the equity markets with the S&P500 and NASDAQ up 5.16% and 4.81% respectively. This means that the S&P500 is up 14.51% year-to-date, and up over 20% from its lowest point in October 2022, a welcome relief after last year. Some concern has been raised around how much of these gains have been contributed by the 5 largest companies in the S&P500, namely Apple (45.92% YTD), Microsoft (39.71% YTD), Alphabet (35.25% YTD), Amazon (52.26% YTD) and Nvidia (179.33% YTD). If the momentum in these stocks was to cool off and reverse we could see a large proportion of this years gains taken back by the markets, however there have been no such signs of a reversal over June with Nvidia in particular continuing to surge.

Another source of optimism arises from the additional evidence that inflation in the US has continued its downward trajectory and provided the Federal Reserve with the confidence required to deviate away from hiking interest rates further. Inflation declined 0.9% to 4% for May, getting closer to the targeted rate of 2%. This led Jerome Powell to opt to freeze interest rates at 5.25% after 10 consecutive hikes, a bullish signal for investors. This freeze on interest rates did come with the caveat that investors should expect to see further hikes this year as the battle against inflation ‘has a long way to go’ and Powell has been consistent in stating his intent to ensure inflation is completely under control before he will pivot.

While the outlook in the US is looking increasingly bullish, the same cannot be said for the UK where inflation is proving to be much stickier than anticipated. The figures released for May showed that inflation remained at 8.7% despite consensus forecasts predicting a decline to 8.4%, the highest of any major advanced economy. This increased pressure on the Bank of England which responded with a 0.5% interest rate hike which raised UK interest rates to 5.0%, a move supported by Prime Minister Rishi Sunak. Bank of England governor Andrew Bailey was clear that he intends to do whatever is necessary to bring inflation down to the targeted rate, even if it results in the economy falling into recession. The FTSE100 was close to flat on the month, with the index declining after the announcement of the inflation rate in May.

After Eurozone inflation increased 0.1% in April to 7% there was an impressive decline of 0.9% in May, beating forecasts of 0.7% and leaving Eurozone inflation at 6.1% signalling that the European Central Bank’s interest rate hikes are having an effect. May’s figure of 6.1% is the lowest level since the beginning of the Russian invasion of Ukraine but this does not mean that the European Central Bank is ready to pivot away from further interest rate hikes. EBC President Christine Lagarde commented that inflation was still ‘too high’ and investors should expect further interest rate hikes to help bring inflation down to the target of 2%. The ECB hiked rates 0.25% to 4% this month, remaining lower than both the US and UK. The EURO STOXX 50 was up for the month at 3.22%.

The first half of the year has been promising for investors, particularly in the equity markets with a strong recovery from last year’s decline. As interest rates approach their peak across developed global markets the fixed-income markets will provide investors with opportunities to secure healthy yields which could see the 60/40 portfolio bounce back strongly over the remainder of the year.

Our June Blog Focus

In this month’s newsletter, we cover the subject of UK inheritance tax. A topic of discussion amongst MPs at present, there are rumblings for a shake-up. Click the link below to read the article.

UK Inheritance Tax. Time for change?

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