Australia
28 June 2024
Multi-asset
Week to 28 June 2024
Chart of the week
The correlation of equity and government bonds reaches new highs
Source: Insight Investment and Bloomberg as at 28 June 2024. Correlations shown between the S&P 500 Index and ICE US Treasury 7-10 Year TR Index.
- This week’s chart looks at the changing correlation between US equity and government bonds. The long period of negative correlation (the ideal relationship for 60/40 investors) that began in the early 2000s and lasted until the post-COVID inflation surge is now firmly in the rear-view mirror.
- On both a one-year and three-year view, the equity-bond correlation continues to rise, supported by above-target inflation. This reduces the benefit that government bonds offer to multi-asset investors in terms of the amount of diversification on offer. This challenge highlights the advantage of portfolios that diversify across a wider spectrum of asset classes.
Market watch
Source: Bloomberg and Insight as at 28 June 2024.The price movement of each asset is shown next to its name. The data used by the bar chart divides the price movement by the annualised historical volatility of each asset.
Over the past week, several things caught our eye:
- Canadian inflation data rose sequentially and above expectations, leading the market to price in fewer interest rate cuts for 2024. Canadian interest rates were only recently cut from 5% to 4.75% in early June. Elsewhere, monthly Australian inflation data also surprised to the upside.
- The Japanese yen weakened to 38-year lows against the US dollar, prompting Japan’s Ministry of Finance to raise concerns on the move’s impact on the economy.
- French assets remained in focus, with weak equity returns ahead of the first round of parliamentary elections scheduled for Sunday 30 June.
Winners & losers: Japanese equity led returns over the week, with export-oriented companies benefitting from a weaker yen and expected dividend reinvestment from several companies. On the other side, the South African rand depreciated on disagreements around the composition of a potential coalition government.
Asset allocation observation
PCE inflation shows signs of falling back to target
Source: Insight and Bloomberg as at 28 June 2024.
- Core US PCE inflation for May came in at 0.08%, well below the threshold of 0.17% required for the year-on-year figure to hit the Fed’s 2% target. After a string of hotter months, this print boosts hopes for Fed cuts and a soft landing in the US.
- Overall, the portfolio retains a pro-cyclical stance, with relatively high equity exposures, as the current combination of macro forces remains constructive for risk assets. We have, however, continued to maintain the defensive characteristics of the portfolio’s total return strategies component, and this week reduced downside exposure to European equities.
Week to 21 June 2024
Chart of the week
A soft landing still likely but risks lie in both directions
Source: Insight Investment and Bloomberg as at 21 June 2024.
- Since its peak, US inflation has proved stickier than expected, in part due to the resilience of US economic activity. A continued moderation in growth is likely to be necessary for the Federal Reserve to return inflation to target on a sustained basis. With recent economic growth data consistently surprising to the downside, a soft landing still appears achievable.
- The question is whether the Fed can ease policy with sufficient precision to keep the economy from slipping into recession, but with growth sufficiently modest to keep inflation subdued, and on a more predicable trend. June’s below consensus CPI print keeps the dream alive, and that continues to underpin risk assets.
Market watch
Source: Bloomberg and Insight as at 21 June 2024. The price movement of each asset is shown next to its name. The data used by the bar chart divides the price movement by the annualised historical volatility of each asset.
Over the past week, several things caught our eye:
- Narrowness continued in equity markets with the technology sector dragging the S&P 500 to a new all-time high (its 31st in 116 trading days this year). On the back of that, Nvidia briefly surpassed Microsoft to become the largest company in the world with a market cap over $3.3tn.
- The Swiss National Bank cut rates for the second time, bringing its policy rate down to 1.25%. The Bank of England left rates unchanged but struck a dovish tone following the return of headline CPI to its target 2% level.
- Flash PMIs for June gave an early indication of softness in growth, with negative 1-month moves in both manufacturing and services for Germany, France, Japan, and Australia.
Winners & losers: Korean equity (which has a high sensitivity to the semiconductor trade) led the way this week, while the Yen weakened to pre-intervention levels. On the other side, the Rand strengthened following the formation of a coalition government in South Africa.
Asset allocation observation
High quality equity baskets keeping pace
Source: Insight and Bloomberg as at 21 June 2024.
- Within our defensive strategies we have maintained an allocation to a high quality vs low quality equity baskets in 2024. The purpose is to provide protection to our long cyclical exposure for minimal cost. The quality theme this year has in fact been a standout performer, keeping pace with broad equities while maintaing its defensivce characteritics during the pullback in April.
Week to 14 June 2024
Chart of the week
A pivotal year for elections
Source: Insight Investment and Bloomberg as at 11 June 2024.
- 2024 is set be a pivotal year for elections with over 60 countries and regions covering more than 4 billion people scheduled to vote.
- European Union elections have seen a swing towards right wing parties. In response, President Macron has announced a surprise election for the French parliament to be held over June and July. This has led to a selloff in many European assets over the week. So far, there has been limited spillover to other regions.
Market watch
Source: Bloomberg and Insight as at 14 June 2024. The price movement of each asset is shown next to its name. The data used by the bar chart divides the price movement by the annualised historical volatility of each asset.
Over the past week, several things caught our eye:
- US CPI and PPI both surprised to the downside which initially gave markets hope for easier Federal Reserve policy in the coming quarters.
- The US Fed decided to leave policy unchanged at its June meeting but the update was interpreted as slightly hawkish by the markets. Fed officials revised down the number of rate cuts they expect this year from three to one. In the press conference, Fed Chair Powell also tempered expectations for the pace of easing.
- In France, President Macron’s call for snap elections after his party’s disappointing results in the European Parliament elections caught markets by surprise. Uncertainty around the new government and potential policies has led to re-pricing of risk premia across French and European assets.
Winners & losers: The dollar rallied versus the EUR and Latam FX and tech-related equity indices had positive performance while European equity indices had negative performance.
Asset allocation observation
June CPI boosts soft landing hopes
Source: Insight and Bloomberg as at 13 June 2024.
- From a growth perspective, the resilience of the US has long stood out – continued moderation is likely to be necessary for inflation to return to target. Recent data releases showing sticky inflation and slowing activity are a reminder that the soft-landing landing strip is a narrow one. However, June’s CPI print kept the dream alive with soft numbers across the board.
- Most notably, the month-on-month change in core CPI was 0.16% which, when annualised, is right in line with the Fed’s 2% target. While it is clearly too early to declare victory, the macro backdrop remains broadly supportive and we retain our procyclical outlook.
Week to 07 June 2024
Chart of the week
ECB delivers first cut
Source: Insight Investment and Bloomberg as at 7 June 2024.
- This Thursday marked the end of the most aggressive hiking cycle in the European Central Bank’s history, its first cut since 2019, and the first time it has done so ahead of the Fed. With headline CPI decelerating from a double-digit rate to 2.6% at the end of May, we believe a gradual easing in policy should act to support risk assets over the rest of 2024.
- Given this view, we continue to maintain a procyclical investment position with an equity weighting above our long-term average levels.
Market watch
Source: Bloomberg and Insight as at 06 June 2024. The price movement of each asset is shown next to its name. The data used by the bar chart divides the price movement by the annualised historical volatility of each asset.
Over the past week, several things caught our eye:
- The final release of PMIs for May. Most notable was weakness within the US ISM manufacturing, coming in well below estimates at 48.7. Importantly, new orders fell to 45.4, their lowest level in over a year. The rest of the picture remains more constructive, with global manufacturing still in expansionary territory and US services rebounding from a disappointing April print.
- Nvidia reached the $3 trillion market cap level this week, briefly surpassing Apple to become the second largest stock in the US. A slight pullback has seen it fall below that level, but the importance of this company and the wider AI narrative to equities remains clear.
- There was plenty of news flow from emerging markets with election results from South Africa, India, and Mexico all differing from expectations. South Africa’s ANC lost its majority for the first time since Nelson Mandela’s victory in 1994. India’s Narendra Modi also lost his majority, only narrowly securing a third term as prime minister. Contrarily, Claudia Sheinbaum’s victory in Mexico was emphatic, nearly gaining a supermajority.
Winners & losers: USDMXN was the standout mover on the back of the election results, while US fixed income also posted positive returns. On the other side was slight dollar weakness against DM currencies.
Asset allocation observation
Improvements in european manufacturing, but US shows cracks
Source: Insight and Bloomberg as at 4 June 2024.
- The latest round of PMIs shows a somewhat divergent picture for global growth. Europe continues to rebound from low levels, driven by strong improvements in new orders. However, weaker data in the US raises a few concerns over the continued strength of the consumer.
- The US consumer has been a foundation of a resilient growth backdrop and strong corporate earnings, so indications that rate hikes are finally pinching should not be overlooked. The headline US ISM does however continue to trend higher on a 3-month view and remains in a ‘rising’ growth regime, a historically constructive environment for risk assets.
