In the second quarter of 2024, equity markets in developed countries showed more muted returns than in the first quarter, although many indices reached new all-time highs. The slowdown observed in April was not unexpected, considering the robust performance of the previous six months, during which the MSCI World Equity index rose more than 20%.
The subsequent rebound suggests that there is still underlying support for equities, although we note a concentration of the rally on artificial intelligence-related stocks. Without these, the overall performance would have been less positive. Markets have been influenced by better economic data supporting corporate earnings and higher inflation data suggesting tighter monetary policy.
Importantly, for the first time in years, there is a divergence in the policies of the world’s major central banks. At its June meeting, the European Central Bank (ECB) cut key interest rates by 25 basis points, joining the Swiss National Bank and the Swedish Riksbank in loosening monetary policy. This shift is due to the ECB’s growing confidence that inflation will decline.
In contrast, in the United States, expectations in the markets about the Federal Reserve have become more optimistic. Rates are expected to remain high for longer than expected. At the beginning of the year, interest rate futures markets forecast seven cuts by the Federal Reserve in 2024, the first of which was in March. Now, these forecasts have been reduced to a maximum of two cuts, with the first expected in September.
In commodities, gold has benefited from its status as a safe haven asset following the escalation of tensions in the Middle East. The rise in the price of gold occurred despite rising U.S. real interest rates, thanks in part to purchases by central banks, particularly China.
The fixed income environment remains complex, with bond markets facing rate expectations, political concerns, and a marginal slowdown in economic data. Spreads remain tight, despite a slight widening in emerging markets. Although it is difficult to find positive factors in this asset class, it is important to note that central banks have moderated their aggressive stance, which could lead to a possible reversal.
The summer months are typically characterized by quieter trading activity. However, we remain alert to possible market swings, especially in light of uncertainties related to the upcoming elections. We expect volatility to increase toward the end of the third quarter as the election campaign for the White House in the United States intensifies. Recent elections in other regions have already generated volatility spikes in the short term. Whoever wins elections in the United Kingdom, France, or the United States will face large fiscal deficits, a theme that will continue to influence bond and currency markets.