Global markets are laser focused on FED interest rate policy and US elections…

– In June, global equity and bond markets continued to be buoyed by the fact that in the developed world core inflation, which excludes food and energy prices, remained below their levels as at the end of 2023. However, not all economic data was on the up and up in June. Headline inflation numbers, which include both food and energy prices, still proved to be sticky. In the US and Eurozone, while headline Consumer Price Index (CPI) remained relatively flat compared to the previous month, they were still higher compared to the end of 2023.

– Labor markets didn’t provide much relief either. The headline unemployment data, another important gauge for central banks, started to tick up in some of the developed markets. For instance in June the US unemployment came in at 4% vs. 3.9% the previous month and 3.7% by end of 2023. Similarly UK saw a tick up in its unemployment from 4.2% in April to 4.4% in June. It wasn’t all that dire everywhere though. In the Eurozone unemployment came in at 6.4% in May vs. 6.5% as at the end of 2023.

– As of June 26^th, the US equity index S&P 500 was up by +3.8% on the month, pulling up its year to date return to +14.8%. The European stock index Euro Stoxx 50 on the other hand had a down month losing -1.4% over the same period dragging its year to date return down to +8.7%.  Global emerging market equity index MSCI EM was up by +1.7% in June bringing its year-to-date return to +5.7%. The global equity market returns also reflected this relatively optimistic outlook with global equity indicator MSCI All Country World Index (ACWI) up by +1.2% in June reaching +10.5% since the year end.

– Contrary to May, crypto currencies had a negative performance in June partially driven by profit taking. As of June 26^th, both Bitcoin and Ethereum were down on the month by -9.9% and -10.6% giving back some of their gains from May (+13% and +28% respectively). Despite the losses in June, the duo maintained their impressive returns year to date with +43.4% for Bitcoin and +48.5% for Ethereum.

– With inflation still in the back of investors’ minds, the price of gold maintained its price for most of June although it dropped slightly towards the end of the month due to some profit taking. As a brief reminder, investors turn to gold as a store of value and a hedge against uncertainty and inflation. As of June 26^th, the first month futures contract for gold was down by -1.4% on the month pulling its year to date return down to +11.7%.

– In June, crude oil price course corrected and continued its ascent once again. Despite some weakness in global macroeconomic fundamentals and the additional supply provided by US strategic oil reserves, the ongoing conflict in the Middle East, a major oil-producing area, and production cuts by OPEC+ countries continued to threaten the future crude oil supply. This pushed the crude oil prices up.

– As of June 26^th, Borsa Istanbul Index BIST100 was up by +0.8% in local currency terms (-1% in US dollar basis) over the month bringing its year-to-date return in local currency terms to +40.4% (+26.2% in US dollar basis). The year-to-date performance of BIST100 in US dollar terms visibly underperforming its return in local currency is due to the appreciation in the greenback against Turkish Lira by +11.2% since the end of 2023.

– With inflationary data at the core of FED’s interest rate decision process, given the unclear path of inflation and looming presidential election in the US in November, investors should expect more volatility going into summer and likely into the last quarter of the year. As we have noted before, investors can continue to exploit this scenario by a careful underweight in their equity allocations, possibly with a slight overweight tilt to their bonds, and/or other investments such as gold, US dollar and US dollar index which tend to provide a level of protection to portfolios in visible market downturns and during periods of volatility.

In June, global equity and bond markets continued to be buoyed by the fact that in the developed world core inflation, which excludes food and energy prices, remained below their levels as at the end of 2023. This was good news. However, not all economic data was on the up and up in June. Headline inflation numbers, which include both food and energy prices, still proved to be sticky. In the US and Eurozone while headline Consumer Price Index (CPI) remained relatively flat compared to the previous month (3.4% in May vs. 3.3% in June for US and 2.6% both months in Eurozone), they were still higher compared to the end of 2023 (3.1% and 2.4% respectively).

Labor markets didn’t provide much relief either. The headline unemployment data, another important gauge for central banks, started to tick up in some of the developed markets. For instance in June the US unemployment came in at 4% vs. 3.9% the previous month and 3.7% by end of 2023. Similarly UK saw a tick up in its unemployment from 4.2% in April to 4.4% in June. It wasn’t all that dire everywhere though. In the Eurozone unemployment came in at 6.4% in May vs. 6.5% as at the end of 2023.

With the softening core inflation and somewhat resilient labor market and macroeconomic environment, European Central Bank and Bank of Canada became one of the first developed market central banks to drop their benchmark interest rates from 4.5% to 4.25% and 5% to 4.75% respectively while others held steady.

Equity and bond markets rejoiced these first signs of the easing cycle. Although this triggered a renewed hope that the US Central Bank FED could also start lowering its benchmark rates, markets maintained their cautious stance throughout the month which put a lid on some of the returns.

EQUITIES CONTINUED TO MOVE UP IN JUNE

As of June 26^th, the US equity index S&P 500 was up by +3.8% on the month, pulling up its year to date return to +14.8%. The European stock index Euro Stoxx 50 on the other hand had a down month losing -1.4% over the same period dragging its year to date return down to +8.7%. Emerging markets were also up on the month. Global emerging market equity index MSCI EM was up by +1.7% in June bringing its year-to-date return to +5.7%. The global equity market returns also reflected this relatively optimistic outlook with global equity indicator MSCI All Country World Index (ACWI) up by +1.2% in June reaching +10.5% since the year end.

LONG TERM BOND PRICES INCREASED SIMILAR TO EQUITIES DUE TO LOWER INFLATION IN THE US

Similar to May, in June bond prices had an up month like equities. The highlight in June was that the shape of the US yield curve continued to become more inverted (blue line in the graph below) compared to April (red line) and May (yellow). What that means is the longer-term yields have been going down over the last couple months as illustrated below.

Source: Bloomberg

The reason for the increased inversion in the US yield curve (the yield curve is generally expected to be upward sloping as opposed to being inverted) was driven by the markets’ expectation of lower inflation. See the graph below that shows how the bond markets’ 5 and 10 year inflation expectations have been coming down over the last couple months.

As our readers may remember from our previous issues, each implied inflation for a certain maturity is calculated using the US Treasury yield for that maturity which represents the nominal rate and the US Treasury Inflation-Protected Securities (“TIPS”) rate for the same maturity which represents the real rate. Taking the difference between the two (e.g. 5 year nominal interest rate – 5 year real interest rate) then gives the implied (or breakeven) inflation for that maturity expected by the markets (e.g. 5 year implied inflation).

Source: Bloomberg

In line with the drop in long-term bond yields, as of June 26^th, Bloomberg Global Aggregate Bond Index, High Yield Bond Index as well as the Global Corporate Bond Index were all up by +1%, +0.7% and +0.9% on the month bringing their year-to-date returns to +0.3%, +3.9% and +0.5% respectively.

CRYPTO PRICES RETREATED DUE TO SOME PROFIT TAKING

Contrary to May, crypto currencies had a negative performance in June partially driven by profit taking. As of June 26^th, both Bitcoin and Ethereum were down on the month by -9.9% and -10.6% giving back some of their gains from May (+13% and +28% respectively). Despite the losses in June, the duo maintained their impressive returns year to date with +43.4% for Bitcoin and +48.5% for Ethereum.

GOLD WAS SLIGHTLY DOWN IN JUNE

As of June 26^th gold had its first down month since February. With inflation still in the back of investors’ minds, the price of gold maintained its price for most of June although it dropped slightly towards the end of the month due to some profit taking. As a brief reminder, investors turn to gold as a store of value and a hedge against uncertainty and inflation. As of June 26^th, the first month futures contract for gold was down by -1.4% on the month pulling its year to date return down to +11.7%.

CRUDE OIL REVERSED AND CONTINUED ITS ASCENT IN JUNE

Crude oil prices had a down month in May. In June, crude oil price course corrected and continued its ascent once again. As a brief recap, crude oil prices are driven by both demand and supply dynamics. Despite some weakness in global macroeconomic fundamentals and the additional supply provided by US strategic oil reserves, the ongoing conflict in the Middle East, a major oil-producing area, and production cuts by OPEC+ countries continued to threaten the future crude oil supply. This pushed the crude oil prices up. As of June 26^th, the first month futures contract for US crude oil WTI was up by +5.1% on the month, bringing its year-to-date return to +12.9%.

TURKISH STOCKS HAD A POSITIVE JUNE

As our readers may remember, despite the negative outlook in global equity markets in April, the Turkish stock market had a strong month on the back of the mayoral elections which had taken place at the end of March. In May Turkish stocks continued to move up as well. In June, this positive trend continued although to a more limited extent and only in local currency terms. As of June 26^th, Borsa Istanbul Index BIST100 was up by +0.8% in local currency terms (-1% in US dollar basis) over the month bringing its year-to-date return in local currency terms to +40.4% (+26.2% in US dollar basis). The year-to-date performance of BIST100 in US dollar terms visibly underperforming its return in local currency is due to the appreciation in the greenback against Turkish Lira by +11.2% since the end of 2023.

VOLATILITY MAY CONTINUE DUE TO UNCERTAINTY SURROUNDING FED RATE POLICY AND US ELECTIONS

Since late 2023 we have been noting that economists and market players alike could be in for a surprise with not just delayed rate cuts but potentially one or more rate increases. While markets caught up to this possibility in April, they have changed their minds in May and June causing some fluctuation in the markets. With inflationary data at the core of FED’s interest rate decision process, given the unclear path of inflation and looming presidential election in the US in November, investors should expect more volatility going into summer and likely into the last quarter of the year.

As we have noted before, investors can continue to exploit this scenario by a careful underweight in their equity allocations, possibly with a slight overweight tilt to their bonds, and/or other investments such as gold, US dollar and US dollar index which tend to provide a level of protection to portfolios in visible market downturns and during periods of volatility. This scenario could also allow for credit investments, such as corporate and high yield bonds, which are priced off of government bonds, to appreciate particularly for longer maturity instruments similar to what happened in May and June.

To remind our readers once again, the road to success in asset management requires a keen focus on proper risk diversification through use of different investment tools and staying on top of not just local but global markets.

ELA KARAHASANOGLU, MBA, CFA, CAIA

International Investments Director

karahasanoglu@turcomoney.com

ela.karahasanoglu@ekrportfolioadvisory.com

https://www.linkedin.com/in/elakarahasanoglu/