SUMMARY
UK voters overwhelmingly voted in the centrist-left Labour party in a snap Parliamentary election on Thursday, the first time the Conservatives have not held power since 2010. Newly-chosen prime minister Keir Starmer will lead his party, which has a clear mandate to govern since it holds a majority of seats in Parliament.
France will hold its second round of elections on Sunday, with the National Front expected to gain the most seats in the National Assembly, although it appears that President Macron and a consortium of far left parties have bonded together to ensure that Marine Le Pin’s National Front does not gain a clear majority.
In the US, President Joe Biden appears unwilling to give up his candidacy in spite of a poor performance at the recent debate, with former President Trump’s re-election campaign gaining momentum and powering in front of President Biden according to recent polls.
Last week was holiday-shortened in the US, with Thursday July 4 being Independence Day; markets were closed. Most focus State-side was on the June jobs report, released Friday, which (with revisions) suggested that the US jobs market is weakening, a good outcome in terms of containing inflation.
Stock and bond markets were generally better on the week.
MARKETS LAST WEEK
Last week marked the end of the second quarter and the first half of 2024.
Global stock indices tracked by EMC were positive across the board last week, with the exception of China which continues to lag. Japanese stocks got off to a flying start following a 2Q24 loss, solidifying its lead as the best performing equity market YtD (+22.3%). European and US indices were also in the black to kick-off the third quarter.
US stock indices were higher, led by the NASDAQ as the tech rally continues to power forward. Tech stocks got another boost on Friday following the US jobs report, which is expected to favour the Fed lowering the Fed Funds rate in September. Small cap stocks, as expressed via the Russell 2000, continued to struggle, down 1% WoW. It is clear that investors remained focused on momentum stocks, with small caps being at the other end of the spectrum.
After edging higher earlier in the week, UST yields plummeted on Friday following a weaker-than-expected US jobs report for June. Yields were lower across the curve, but were most pronounced at the policy-sensitive short-end of the curve.
Corporate credit spreads were little changed in the US, although EUR-denominated high yield spreads were sharply tighter on the week, reversing recent losses related to uncertainty associated with the UK and French elections.
For similar reasons, the US Dollar lost ground to Sterling and the Euro (and was lower WoW vis-à-vis the DX-Y index). Gold was stronger on the week, while Bitcoin dropped to its lowest level since late February.
WHAT DROVE MARKETS LAST WEEK
Last week was again dominated by geopolitics, mainly the election in the UK (occurred Thursday) and France (this Sunday, pending), as well as ongoing questions around the candidacy of US incumbent President Joe Biden.
UK election
The UK election was held on Thursday, and as expected, Labour won by a landslide, claiming 416 seats (of 650) in Parliament. However, the domination as far as the significant gain in seats by Labour was less convincing in the popular vote, as you can see in the table below from the #BBC, showing the popular vote on the left and the seats won on the right.
Any way you slice it, Labour has a majority of seats and now has a clear mandate to govern the country after 14 years of Conservative leadership, bucking trends in the EU (including France) and the US that have drifted towards more right / conservative leadership. My opinion as far as key takeaways from the UK election were:
Labour’s ascension to government leadership was more about failures of the Conservative Party than enthusiasm about the Labour Party. Recall that there have been five different Conservative Prime Ministers since 2019, and the electorate was simply worn down by the constant upheaval in the party effecting the country’s ability to move forward. Interestingly, Labour’s percentage of the popular vote (34%) was only 2% more than the last election, while the Conservative’s popular vote plummeted by 20% (to 24%).
Other winners were the Liberal Democrats and Reform UK. The Lib Dems went from eight seats in Parliament in 2019 to 71 in this election. Interestingly, they were the only party to express dissatisfaction with BREXIT and an interest in engaging much more closely with the EU. Reform UK, headed by controversial and right-leaning leader Nigel Farage, won only five seats in Parliament but had 14% of the popular vote, showing broad support for Mr Farage’s anti-immigration and inward looking policies, aligned with similar themes that are gripping the EU and US.
Rishi Sunak and Jeremy Hunt (former Chancellor of the Exchequer) held onto their seats, but former PM Liz Truss lost hers, as she is still paying the price for her failed attempt to cut taxes without corresponding decreases in expenditures in 2022.
Investors, especially bond investors, will impose guiderails for the Labour Party, largely reducing their ability to make significant changes to the UK budget.
What will be interesting to watch is whether Labour might try to repair some of the economic damage done to the UK because of BREXIT, a term rarely uttered by candidates in any party in the runup to the election except for the Lib Dems. Fortunately for Labour, they are stepping into the leadership of the UK which has clearly seen its darkest days economically, with growth rebounding, inflation nearly back in check, a solid jobs market, and the Bank of England poised to begin reducing interest rates as soon as August.
US jobs report for June
The US jobs report for June was released on Friday morning before the market opened (BLS report here). It was a solid report, with jobs (206,000) added slightly better than expected but unemployment ticking up to 4.1%. It was the 34thconsecutive month of jobs growth in the US, although as you can see in the graph below from the New York Times, US jobs growth is slowing.
What seemed to affect investor sentiment more was the downward revisions to jobs added in April and May, which totalled 111,000. The bond market rallied on this news, as it increased confidence that the Federal Reserve might lower its key benchmark overnight bank rate sooner than otherwise to support a slowing economy. The CME FedWatch Tool is now predicting that the Fed will reduce the Fed Funds rate by 25bps in September and again in December. Oddly, the stock market also rallied on news that the US economy might be weakening, with expectations regarding lower interest rates trumping concerns about earnings declines. And that’s the sort of market we are living in today, folks!
WHAT’S AHEAD
French second round election on Sunday, with the National Front expected to win the largest number of seats in the National Assembly but not a majority
President Biden – will he run, or will he step aside?
Central bank policy meetings: ECB July 18; FOMC and Bank of Japan, both July 30-31; Bank of England Aug 1
CPI, PPI, consumer confidence Thurs/Friday in US; CPI in China on Weds; retail sales Eurozone Friday
MY TRADES LAST WEEK
I am guilty of holding onto my sh*t stocks too long. Last week, I sold Diageo (FTSE 100 company), which I originally bought two or three years ago as a “hedge” against the economic downturn that has yet to arrive. In the meantime, I lost 25% on my investment, an illustration of the simple fact that you win some and you lose some, but hopefully, the winners far outpace the losers.
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