Market Review
Global equities continued to rise as bond yields retreated
In June, global equities maintained positive momentum from the prior month and were once again led by domestic, mega-cap technology stocks. Developed international markets were down for the month due to the negative impact of surprising election results in Europe. Collectively, emerging markets (EM) provided solid returns, despite weakness in China and Latin America. The MSCI Mexico Index weighed on EM performance, down nearly 13%, largely in response to the unexpected general election outcome. However, EM performance got a boost from India, thanks to a positive reaction to election results, as well as technology stocks in South Korea and Taiwan.
Bond prices increased in June as yields fell across the curve for a second consecutive month, due to reports of moderating economic growth and improved inflation data. Both served to reinforce expectations for the Federal Reserve (Fed) to soon begin cutting interest rates. Meanwhile, the European Central Bank (ECB) and Bank of Canada (BOC) were the first major central banks to cut their policy rates, marking the first time in history the ECB cut rates before the Fed.
Theme of the Month
Global election crosswinds
While many investors may have their sights set on the November U.S. elections, June was a particularly important month for elections around the globe. Major elections took place during the month in India, Mexico and the European Union (EU), the results of which largely came as a surprise relative to consensus expectations. As the regions collectively represent about 25% of global GDP, these outcomes led the U.S. dollar to appreciate against other major currencies. One key takeaway from the election results is that there seems to be a trend toward deglobalization in some regions, which may have important market and economic consequences around the world.
In Mexico, the incumbent party won more support than anticipated, leading to concerns of concentrated power, which typically does not sit well with investors. As such, in addition to the stock market pullback in Mexico, the peso fell 4% relative to the U.S. dollar, its worst one-day decline since June 2020. Considering the substantial size of the U.S./Mexico trading relationship, we will be monitoring the development of any market-based policy reforms.
In contrast, election outcomes in India weakened the concentration of power among current Prime Minister Narendra Modi’s party. Consequently, the MSCI India Index fell 6.4% on June 4, when the results were announced, its worst day since April 2020. Investors are concerned that the increased need for political compromise may stymie the strong economic momentum the country has experienced of late. That said, we believe the outlook for India remains strong. Consensus expects India’s GDP growth rate to be among the highest of all G-20 countries in both 2024 and 2025, at 7.8% and 7.0%, respectively.
The June election with the most significant economic and market impact, in our view, was that of the European Parliament — the governing body for the entire EU. Overall, results were in line with expectations. Support shifted from green party to populist candidates, reflecting the EU’s challenges of energy insecurity and elevated core inflation.
In France, voter turnout for the populist National Rally party far exceeded expectations, prompting President Macron to call for “snap” (an election called earlier than scheduled) parliamentary elections. The outcome remains uncertain as of this writing as the second round of elections is scheduled to take place July 7. The CAC 40, France’s primary stock market benchmark, fell more than 6% in June, its third-worst monthly return since March 2020 (Figure 1). Furthermore, the spread between the German bund — typically viewed as the benchmark for European sovereign bonds — and French government bonds, widened to levels last seen during the European debt crisis in 2011. The election may be interpreted as a referendum on the political direction of Europe more broadly as agenda items such as renewable energy, immigration and social program spending are expected to pressure EU GDP below 2% through the end of 2026.
Figure 1. Monthly CAC 40 Returns
Markets brace for election uncertainty in France
Source: As of 6/28/2024. Source: Bloomberg L.P.
View accessible version of this chart.
With elections in the United Kingdom scheduled for July 4, there is no rest for weary investors. Consensus is expecting a change in political control, with polls indicating the Labour Party may resume power for the first time since the 2005 general election. Should the polls prove accurate, we do not foresee as dramatic a market reaction to the U.K. outcome as has occurred elsewhere around the globe.
In addition to global election buzz, June also marked global changes in monetary policy, as both the ECB and BOC cut policy rates. Although the Fed has yet to cut rates, we believe the central bank’s consistent forward guidance has helped temper potential dislocations in currency or sovereign bond markets (Figure 2).
Figure 2. U.S. Dollar Index
Central bank forward guidance helps maintain stable currency markets
Source: As of 6/28/2024. Source: Bloomberg L.P.
View accessible version of this chart.
In addition, we believe the Fed’s guidance for future policy easing continues to be a tailwind for equity markets. In our view, the ECB and BOC’s moves to cut rates ahead of the Fed highlights the unique nature of the global business cycle, the lingering effects of pandemic-era fiscal stimulus and geopolitical uncertainty in Europe. Historically, when the Fed begins to cut rates, it is due to a material weakening in the economy. As such, investors should not anticipate sustained positive market reactions after central banks announce interest rate cuts, in our view.
For more information, please contact your PNC advisor.
Figure 1: Monthly CAC 40 Returns
Markets brace for election uncertainty in France (view image)
Date |
CAC 40 Monthly Return |
7/2019 |
-0.0036 |
6/2020 |
0.0512 |
5/2021 |
0.0283 |
4/2022 |
-0.0189 |
5/2023 |
-0.0524 |
6/2024 |
-0.0642 |
Source: As of 6/28/2024. Source: Bloomberg L.P.
Figure 2: U.S. Dollar Index
Central bank forward guidance helps maintain stable currency markets (view image)
Date |
DXY Index |
7/2019 |
97.286 |
6/2020 |
96.937 |
5/2021 |
90.233 |
4/2022 |
98.632 |
5/2023 |
101.214 |
6/2024 |
105.88 |
Source: As of 6/28/2024. Source: Bloomberg L.P.
