The recovery from the summer sell-off in equity markets continues as recent growth data has remained positive and the US Federal Reserve is now poised to cut policy rates.
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Most major markets have recovered the losses suffered during the summer sell-off (see Exhibit 1). If your timing was fortunate and your holiday long enough, you could have returned from the beach to find the level of many equity indices close to where they were when you set up your Out of Office reply.
Not all indices have made up their losses fully, notably the NASDAQ 100 and MSCI Japan, but one needs to keep things in perspective. The 5% shortfall for the NASDAQ still leaves it as one of the best performing markets, with a return to date of 18%.
Further yen gains to cloud Japanese market
The gap for Japan, however, is more understandable, and perhaps more likely to last. Its previous gains were to a great degree a function of the prolonged weakening of the Japanese yen. This always seemed at risk from monetary policy tightening by the Bank of Japan. So, it was if anything surprising that the yen had not strengthened by more, and sooner.
When the BoJ finally did move, the jump in the yen was all the greater and all the more disruptive. The voluminous yen carry-trade investments that had accumulated were unwound quickly, setting off more global market turmoil than had been expected.
With the US Fed now poised to cut rates at its next policy-setting meeting, perhaps by as much as 50bp, the outlook for the yen is for further gains, and hence for Japanese equities to underperform in relative terms.
Analyst forecasts largely unscathed
Despite the recent extreme market volatility, analysts’ earnings expectations have changed little.
At the end of July, consensus estimates were for earnings growth in 2024 vs. 2023 of 16% for the NASDAQ 100, and 5% for the Russell Value index. Today, those figures are 13% and 4%, respectively. They have actually risen for some other markets (see Exhibit 2).
There is thus little sign of a notable change in expectations for earnings from tech company investments in artificial intelligence, nor of a recession that would weaken earnings more broadly.
Fundamentals – Growth
In our view, the balance between the fundamental and technical factors behind the sell-off was always weighted towards technical factors. Our outlook for growth and inflation today is not much different from the one we had in July. Recent economic data supports that view.
Although slowing, US growth is still positive, and we see only a small risk that the slowdown goes as far as a recession. Markets have been comforted by better-than-expected housing data and the services sector purchasing managers’ index (PMI). While the PMI for manufacturing disappointed, this is in keeping with the sector’s broader global weakness.
Recent European data was mixed, as has been the case for many months. The recovery is continuing, but not at as robust a pace as investors had hoped for. Most services sector PMIs have improved, particularly in France thanks to the boost from the Olympic Games.
The manufacturing sector, however, continued to deteriorate, with already low (sub-50) readings for the PMI falling even further. The notable exception here was the UK, which has managed to buck the trend, outperforming even the US (see Exhibit 3).
Exhibit 3
Mixed readings from the latest Purchasing Manager Indices
Data as of 26 August 2024. Sources: FactSet, BNP Paribas Asset Management.
Fundamentals – Inflation
While there has been no new data in the US recently, the July reading of the Fed’s preferred inflation gauge (the Personal Consumption Expenditure (PCE) price index) will be released on 30 August. It is expected to show a continued benign inflation environment, as the July CPI figure had done a few weeks ago.
More importantly, at the Jackson Hole central banks’ symposium, Fed Chair Jerome Powell said “the time has come” to cut policy rates. The market needed little encouragement to price in around 100bp in cuts by the end of the year.
All that glitters
Gold prices, which had already gained significantly this year thanks to gold’s value as a hedge against inflation, budget deficits and geopolitical risk, received a further boost from the weakening US dollar, reflecting Fed communications about the path of policy rates.
Gold remains one of the preferred asset classes for our multi-asset team.
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