Equity markets have performed very well this year despite the challenging macroeconomic and geopolitical environment. With the exception of a brief correction in April, equities have shown a strong upward trend. This strong positive performance has been particularly pronounced in the US, where the major indices are breaking records on an almost daily basis. The S&P 500 has surpassed the 5,500 mark and is up 15.6% so far in 2024. The Nasdaq Composite is close to the 18,000 mark and is already up 21%, while the Dow Jones Industrial Average has crossed the important 40,000 mark but is only up 3.8% in 2024. Last year's trend also continued with the stellar performance of the Magnificent 7, which have been key contributors to the positive performance of the broader market and other technology stocks, as demand for AI shows no sign of slowing. Figure 1 compares the performance of the Magnificent 7 with the major US indices. Since June 2023, the Magnificent 7 have gained almost 60% compared to 35% for the Nasdaq, 30% for the S&P 500 and 20% for the DJIA.
The macroeconomic situation in the US and Europe is evolving differently. The US has reacted more quickly to inflation, which has led to a faster decline in inflation than in Europe. Inflation in the US already reached 4% in May 2023, when it was still 8% in the EU and over 10% in the UK. Since then, US inflation has remained stable and has not fallen further. Inflation in the EU fell below 4% in October 2023. In contrast to the US, inflation in the EU continues to fall, slowly approaching 2% as of April 2024. In the UK, the development is even faster, with inflation falling well below 4% in February 2024 and the lowest of the three in April 2024.
These developments have led to very different outlooks for the expected rate cuts. At the beginning of the year, the Fed was expected to be the first to cut, with around 5-6 rate cuts estimated. With sticky inflation, markets are now pricing in 0-1 rate cuts for the remainder of 2024. The European Central Bank followed Switzerland's lead and cut rates by 25bps to 4.25% at its June meeting. How this process will continue remains relatively unknown. While further cuts are certainly expected in 2024, the number of cuts remains largely uncertain. The ECB is expected to review the June cut at its next meeting in order to provide more insight into where it is headed. The UK is also making positive headlines with inflation moving towards 2%, which has been rare in recent years with Brexit issues and the recent re-election. The Bank of England is widely expected to start cutting interest rates at its upcoming meeting. Figure 1 provides more details on the development of inflation and interest rates in recent years.
Cryptocurrencies started very promising in 2024, with the approval of the first spot Bitcoin ETFs on 10th January. In anticipation of a possible approval, Bitcoin started to surge in December 2023, which also led to price increases for other cryptocurrencies. Shortly after the approval, the much-anticipated Bitcoin Halving further boosted the ecosystem with a particularly strong performance in March 2024. The Bitcoin Halving took place in mid-April, leading to a slight dip in the market. Historically, this is a common occurrence, with most of the gains occurring ahead of the event, followed by a period of “selling the news” or profit taking, leading to slight declines. In addition, several ETF providers also applied for approval of spot Ether ETFs following the approval of Bitcoin ETFs. Until mid-May 2024, the chances of approval were almost unanimously seen as close to zero. However, when the SEC set a deadline for the decision, the view on a potential approval quickly changed. A few days later, the SEC released a statement confirming the approval of spot Ether ETFs on 23rd May 2024. Figure 1 shows the price of Ethereum from 2023 to the present and its performance since then. Most of Ethereum's gains this year have come from the very strong February and March, with another significant spike when the SEC released the statement on the ETF approval deadline. At the time of writing, ETH is trading at $3.8k with a market capitalisation of $463bn.
Inflation remains a key contributor to global risks, particularly in the US. Since June 2023, inflation has fallen below 4%. While this initially looked promising, inflation has never fallen below 3% and remains sticky. As a result, most market participants expected the Fed to cut rates several times during 2024. Recent developments have changed these expectations dramatically. At its most recent meeting, there was a significant chance that the Fed would even raise rates again. At its meeting in early May 2024, the Fed is holding its rate between 5.25% and 5.5%. While rate hikes are less likely in the near term than before the May meeting, some economists do not see a cut before 2025. Whether interest rates are lowered is increasingly dependent on the US labour market. With its current strength, the economy can tolerate higher interest rates. If the labour market shows signs of trouble, cuts are likely to come sooner than expected. While inflation will remain a key criterion for such a decision, the focus seems to have shifted to the labour market. Figure 1 shows the development of inflation and interest rates in the US, the EU, the UK, and Switzerland.
In the EU, inflation has been on a healthier decline. Inflation in the EU has fallen to 2.6% in March 2024, the lowest level since the start of the inflation spike. Interest rate cuts now seem much more likely in Europe than in the US. Even in the UK, inflation is coming down to manageable levels and the BoE has hinted at earlier cuts than previously thought. Switzerland, which has been unique during soaring inflation, was even able to already to lower its interest rate from 1.75% to 1.5% in March 2024. |
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