César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
US presidency debate: first round
THE WEEK IN REVIEW
The S&P 500 i eked out a 0.6% gain on the week and the Nasdaq ii was basically flat. On closer inspection, the S&P 500’s performance remained highly dependent on a small number of AI-related stocks, with indexes weighed down by a late-week tumble in the share price of the largest AI chip maker. Despite jitters over the French election, the Stoxx Europe 600 iii actually did slightly better than the S&P 500, rising 0.8% (in euros), helped by a good performance from French and UK equities. US Treasury yields ticked up at the end of last week as the timeline for Fed rate cuts continued to be re-assessed. European bond yields also rose slightly, although spreads on long-term French bonds over Bunds narrowed somewhat. A rate cut from the Swiss National Bank halted the Swiss franc’s rise against the euro, while the US dollar was strong across the board last week.
GEOPOLITICS
South Korea fired warning shots at North Korean soldiers who crossed the border before retreating, a day after Russian President Vladimir Putin visited Pyongyang and sealed a partnership deal to deepen security and trade ties.
KEY DATA
Headline retail sales in the US rose 0.1% month-on-month (m/m) in May, less than expected, while the figure for April was revised to -0.2% from zero. Industrial production in the US rose a substantial 0.9% m/m in May (0.4% year on year) whereas it was flat in April.
The headline consumer price index (CPI) in the UK rose an annual 2% in May, down from 2.3% in April. The core CPI dropped to 3.5% from 3.9%. Japan’s headline CPI rose to an annual 2.8% in May from 2.5% in April, while core CPI rose to 2.5% from 2.2%.
S&P Global’s composite purchasing manager index (PMI) for the euro area dropped to 50.8 in June from 52.2 in May, according to preliminary readings, with the manufacturing PMI reaching a six-month low. In the US, the index edged higher to 54.6 from 54.5.
MARKET VIEW
US presidential candidates face off in their first debate on Thursday – without a live audience, at President Joe Biden’s request. They meet with the US economy in robust health overall, though the slight weakness in retail sales compared to strength in manufacturing highlights our theme this year of moving focus from consumers to producers. Thursday is also a bumper US data day with core PCE, the Federal Reserve’s preferred inflation measure, and personal consumption figures. We expect two Fed rate cuts this year.
In markets, a heavy week of US Treasury issuance awaits. Equity markets have seen major inflows this year, including a record-breaking flow into tech funds in the week to 12 June, with close to USD9 bn. Add to that declining short interest in vehicles for placing index-level positions on US equities and low cash levels and the market is vulnerable to any disappointing news.
In Europe, France and six other countries face budget discipline measures for running deficits in excess of EU limits. Adding to euro area’s woes are the weak PMI data, indicating slower growth. Fiscal concerns in France, where a new government will have to find 20bn euros in cuts at the next budget, are unlikely to disappear soon, supporting the Swiss franc against the euro.
