Q2 Inflation, monetary policy and currency update
The second quarter of 2024 saw significant movements in global stock markets, driven by a series of economic events and policy decisions. Central bank policies remained an important factor, with any indications of rate changes having a profound influence on market sentiment.
UK
In Q2 2024, the UK’s Consumer Price Index (CPI) inflation rate reached an annual figure of 2% (as of June 2024), down from 4% at the beginning of the year due to a slowdown in price rises, namely from food and soft drinks. As such, the UK’s core CPI, which excludes volatile items like food and energy, remained relatively stable at 3.5% (as of June 2024), indicating persistent underlying inflationary pressures. The Bank of England (BoE) maintained the interest rate at 5.25% as their ‘higher for longer’ mantra continues to headline.
ECB
The European Central Bank (ECB) faced continued inflationary pressures in Q2, with the Eurozone’s inflation rate holding steady at an annual rate of 2.50% (12 months to June 2024). However, core inflation has fallen to 2.90% (June 2024) indicating a wider spread of monetary policy measures to stabilise prices. In response, the ECB has lowered their 3 key interest rates: refinancing operations rate, marginal lending facility rate and deposit facility rate to 4.25%, 4.50% and 3.75% respectively.
US
In the US, the inflation rate for Q2 2024 showed a modest decline, coming in at an annual rate of 3% (as of June 2024). This decrease was attributed to lower energy prices and a stabilisation in housing costs. Core inflation in the US fell to 3.3% (June 2024), reflecting a small disparity between inflation and core inflation as well as steady but high prices amongst energy, goods and services.
The Federal Reserve (Fed) decided to keep the federal funds rate unchanged at 5.25% having raised it several times in the past year. This pause allows the Fed to assess the impact of previous rate hikes on the economy and inflation. However, the general consensus is projecting one more cut of 0.25% by the end of 2024.
Currency
Interest rates can influence currency movements as higher rates attract foreign investment and increase demand for that currency. Recent movements have been significantly influenced by central bank rate policies and geopolitical tensions. The GBP/USD pair saw the dollar strengthening in the run-up to 2024, which has been attributed to a ‘flight to safety’ phenomenon amid global uncertainties.
The above reflects the “higher for longer” interest rate environment in the UK and US, where sticky inflation has caused the FED and BoE to maintain interest rates in contrast to the ECB. As such, both Sterling and Dollar appreciate against the Euro in anticipation of more aggressive rate cuts from the ECB. However, we have also seen Dollar strengthen against Sterling which is indicative of a slowdown in the economy and retreating interest rates in the UK compared to the US.
| Currency | January 1st 2024 | July 1st 2024 | Price change |
| GBP (£) / EUR (€) | 1 GBP = 1.1533 EUR | 1 GBP = 1.1777 EUR | 2.12% |
| EUR (€) / USD ($) | 1 EUR = 1.1038 USD | 1 EUR = 1.0739 USD | -2.71% |
| USD ($) / GBP (£) | 1 USD = 0.7855 GBP | 1 USD = 0.7907 GBP | 0.66% |
UK election
The recent UK election, which saw the Labour Party emerge victorious, led to significant market reactions. The polls opened at 6am which saw the FTSE and Sterling appreciating as the market instinctively priced in a labour victory. Sterling saw a slight increase against the USD, continuing its recent upward trend, whilst gilt yields experienced a modest decline, with both short-term and long-term rates easing.
The FTSE 100 index rose 0.56%, with notable gains in construction-related stocks, reflecting optimism about Labour’s housing policies. The FTSE 250 Midcap index also rose 1.80% causing the second-highest rise for the first day of a new UK prime minister since the mid-cap index was created in 1994.
Additionally, the broader FTSE All-Share index mirrored these trends, moving up noticeably. This market response underpins the significance of the election results, highlighting investor expectations regarding future economic growth, regulatory changes, and fiscal policies under the new administration. Overall, the election results are set to shape the economic and political landscape in the coming months, with financial markets closely watching the new government’s legislative priorities and potential impacts on various sectors.
Consistent growth outperforming
Following on from Q1 2024, we have seen growth in some equity markets during Q2 as hopes for a soft landing have been somewhat revived. Artificial intelligence was at the forefront of this growth, as we saw NVIDIA become (albeit for a brief period) the largest company in the world by market capitalisation, overtaking the likes of Apple and Microsoft. The strong earnings reports within the US tech market helped growth stocks outperform other asset classes once again.
Emerging Market equities also outperformed developed markets over the quarter. A key contributor for this growth was the Artificial Intelligence race, as infrastructure and hardware needed for AI’s boom is mainly produced from ‘Taiwan Semiconductor Manufacturing Company’, which is up 50% year to date. Additionally, Chinese and Indian markets have rallied from lows in February earlier this year which has contributed to the outperformance of Emerging Markets.
Other areas affecting markets
In June 2024, OPEC+ (members of the Organization of the Petroleum Exporting Companies, plus other oil-producing companies) announced a cut in oil production to stabilise falling oil prices due to prolonged higher interest rates and slowing demand from oil importers. The cuts have now been extended until 2025 which has led to outperforming energy stocks but raised concerns about persistent inflation and market sentiment.
The Chinese appetite for gold, and continued inflationary pressures, has caused Gold bullion to rise towards the start of the quarter. However, China sidelined their appetite due to the increased valuations, causing a plateau in price throughout the remainder of the quarter. Conversely, silver took gold’s momentum further, outperforming in Q2 as markets now realise its importance within industrial uses given GPU chips are a core component for AI and in solar panels.
Following on from our previous quarterly commentary and a sharp increase in the price for Cocoa, prices continued to rise but ultimately stifled towards the end of the quarter due to diminishing demand from consumers at such high prices. Although future Cocoa expectations are declining, unfortunately, even after this decrease, the price for cocoa still remains very high and is likely to trickle down into the price of chocolate in the foreseeable future.
Strategic Solutions’ Centralised Investment Proposition (CIP)
The table below has taken the average fund performances in each risk range:
| Risk Profile | Average
performance |
Highest performing | Lowest performing |
| Defensive | 0.61% | 1.16% | -0.14% |
| Cautious | 1.20% | 2.14% | 0.26% |
| Balanced | 1.55% | 2.36% | 0.45% |
| Moderately Adventurous | 1.88% | 3.11% | 0.79% |
| Adventurous | 2.14% | 3.61% | 0.91% |
| FTSE 100 (UK) | 3.78% | ||
| S&P 500 (US) | 3.99% | ||
Strategic Solutions’ outlook:
Overall, 2024 has already proved to be a challenging year as investors have only been consistently rewarded with exposure to the magnificent 7, the trend that does not seem to be slowing. Additionally, we have experienced a significant change in the UK’s political environment as the Conservatives’ reign of 14 years in power has come to an end. US elections are looming ahead with the Republican/Democratic contest heating up. Lastly, inflation in developed economies is proving to be stickier than initially thought.
Despite all the noise, our strategies have still generated positive returns as most portfolios have appreciated over the quarter, as the market oscillates between the potential of one to two rate cuts for the remainder of this year. Whilst this could be a sign of the soft-landing arising, geopolitical tensions are ever-present with the uncertainty of how the changing political standpoints could influence the economy ahead.
As usual, we ensure that each of our strategies remain well diversified to dampen the potential volatility ahead. We are confident that all our strategies are well-positioned for the markets ahead.
If you have any immediate concerns surrounding anything written in this commentary or would like to further understand anything discussed in our investment reports, please contact your adviser. Otherwise, we look forward to seeing you at our next meeting.
Past performance is not a reliable indicator of future returns. The value of investments and the income from them can go down as well as up, so your clients may not get back what they invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in small and emerging markets can also be more volatile than other more developed markets
