The Week in Markets – 28 June – 2 July

I’ve been moaning about the lack of market drama to write about over recent weeks. This one hasn’t helped, although it has made me more sympathetic towards TV commentators struggling through the inevitable Wimbledon rain breaks. But, actually, the 2% rise in global equities this week is the best part of 20 years’ interest at the current UK base rate (0.1%), which is a fairly dramatic statistic. So maybe I’m not looking hard enough.

That 2% rise is a good example of the illusion I mentioned last week: Was it actually equities rising? Or was it the thing we’re measuring them with falling? Well, we’re measuring them in sterling here, and the pound has had a duff week relative to most major currencies, so most of that ‘rise’ was actually the value of the pound dropping: it was off by more than 1% last week against the dollar. It’s hard to isolate any one reason for this weakness, so I’d put it down to a general sense that the prospect of a British interest rate rise has, if anything, moved further away.

Another indicator that it was currencies moving, not markets, is that UK equities, which didn’t get the same overseas currency boost, were off the pace: only a 0.3% rise at the time of writing.

Currency, however, isn’t the only reason UK equities lagged last week. And, for that matter, why they’ve lagged for the last decade. The make-up of the British market is radically different to that of the world’s biggest market – the US (which itself constitutes over half of the total global stock market). The UK market has heavy exposure to large oil companies, mining companies and banks, while the US market is dominated by tech giants like Microsoft, Apple and Google.

So the fact that UK equities have begun to wilt again, while US equities are regaining their mojo, tells us something about the outlook for global economic growth. Oil companies, mining companies and banks all need strong, broad-based economic growth in order to flourish. So they rallied hard after November’s vaccine announcements, as this heralded the likely easing of lockdown, and with it our thirst for buying stuff and going places, all of which need oil and natural resources.

However, in recent weeks that rally has faded, and investors have been returning to the tech giants, and with them US equities. This doesn’t mean they’re suddenly expecting a recession, but does imply they believe we’re heading back to the winner-takes-all conditions that have dominated for the last decade. That means the strongest company in any industry survives and thrives, but weaker competitors struggle just to defend their slice of the pie, let alone grow it.

Note that this is all “at the time of writing”, which is Friday morning. Later today sees the release of key US employment data. If these are wildly different to what’s expected, we could see this trend either accelerate or reverse. Finally some drama then? I should be careful what I wish for…

Have a great weekend,

Simon Evan-Cook
(On Behalf of Raymond James Barbican)