Markets Wrap (2H June)

Elections in the West are heating up

The markets reacted positively to the outcome of round 1 of French elections. The current projections of Marine Le Pen's party (or any other party) not having an absolute majority has boosted investor's confidence. However, the difficult to predict French elections are yet to be finished and it may be premature to celebrate. July 7th will hold the second round of voting which will answer the questions, but for now it seems the market likes the scenario of a hung parliament that makes it hard to make any changes.

UK elections are almost a non-event for the markets. Labour is set to take over the power from the incumbent Conservatives on June 4th. With polls predicting 36-41% of voters will vote for Labour, the party is projected to have an absolute majority and for the first time in 14 years push out the wildly unpopular conservatives out of power. So far there is little reason to believe that there will be massive changes under the new leadership and markets are pretty calm.

Race for the White House is underway. The first debate between Trump and Biden was more of a loss to Biden and the democrats, rather than a win to Trump. According to RealClearPoltics tracker, Trump's betting odds have improved a couple of percentage points to 54%, but Biden lost around 16% and now the markets predict Biden's win at 20%. All other possible democrat candidates have gained points, with Gavin Newsom emerging as the most likely candidate to replace Biden as the bid. However, the replacement is likely to only happen if Biden agrees to voluntary concede his candidature and right now he is not looking to concede.

The winners and losers 2024

The biggest winners in the equity front this year are US and Japan stocks, as Nikkei 225 and S&P 500 indices are up respectively 18% and 15% YTD. The AI story is continuing to unfold, with technology stocks outperforming markets - NVIDIA alone added more than a third of S&P 500's YTD return. Small caps have missed out on the rally - Russell 2000 has been flat this year and so far, marks the fourth straight year of underperformance compared to large cap stocks. Lower capacity to offload price increases to end-users and increase in borrowing costs have been among the main reasons for disappointing small cap performance.

As rate cut expectations have receded from sky highs at the start of the year, bonds have been a poor investment. Bloomberg GlobalAgg Index has returned around -3,6% this year. High yield corporate bonds have fared better as credits spreads narrowed further this year. 

Commodity prices spiked again this year after a drop in 2023. Oil has gained around 15%, while gas (TTF) has fluctuated, but ended the half almost at the same place it started. Cocoa prices started rising in 2023 and reached the peak in 2Q. It looks like the rally has fizzled out, but cocoa prices are still up over 80% YTD.

US dollar has remained as the best performer among the main currencies in the first half. DXY dollar index is up almost 5% this year, as the Fed is poised to hold rates higher for longer. On the other side of the spectrum is the Japanese yen, which has fell around 13% against the USD as ultra-low rates are continuing to put pressure on the currency.

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