Market Commentary Weekly Review | 8th July 2024

A positive week in the capital markets, marked by impressive growth in small-cap stocks. The Russell 2000 rose as much as 6% for the week, while the Nasdaq 100 recorded a 0.3% drop. In Europe, stock prices rose, but only marginally, with Germany’s DAX the best performer recording a gain of 1.48%.

US annual inflation fell to 3%, recording the first monthly negative change since May 2020.

The French debt securities market reacted positively to the results of the country’s early elections — the spread between Germany and France in 10 bond yields fell from approximately 80 to 65 basis points.

Michigan’s consumer sentiment index fell several points and missed economists’ projections. Investors’ expectations for inflation in the coming year remained at 2.9%.

In the United Kingdom, annual GDP growth of 1.4% was recorded, exceeding analysts’ expectations.

US: Lower-than-expected annual inflation and slight drop in consumer sentiment

Last week, most US indexes were higher, with the S&P 500 recording a gain of 0.86%, the Dow Jones up 1.59%, but the Nasdaq 100% was down 0.3%. The week was marked by a rotation of capital from large-cap companies to smaller ones, with the Russell 2000 rising as much as 6% for its best week since November. In addition, value shares showed a better result.

One of the most significant catalysts for market volatility was lower-than-expected US inflation results. Annual inflation was recorded at 3%, the lowest level in recent years. In addition, monthly inflation for the first time since 2020 May was negative and fell by 0.1%. It is important to note that inflation excluding food and energy prices also grew at the slowest pace since 2020 during the month. — this indicator rose by just 0.1%. The market’s reaction to the news was active, with the Russell 2000 index, which includes small-cap companies, performing significantly better than the Nasdaq 100, which has dominated this year. In general, it was observed that many sectors that have survived a difficult period so far rose on that day, but large technology companies fell significantly — this can be explained by capital rotation.

On the other hand, the results of the producer price index, which appeared on Friday, indicated somewhat different trends — the index rose by 2.6% for the year and 0.2% for the month, when analysts had predicted an increase of 0.1%. This producer gauge, excluding food and energy prices, also marked a higher-than-expected rise. Finally, preliminary Michigan consumer sentiment data came out on Friday and missed analysts’ expectations, falling from 68.2 to 66, when analysts had expected a slight increase. Consumer expectations for inflation over the coming year remained unchanged at 2.9%, but expectations for price level growth over 5 years fell from 3% to 2.9%.

Last week, utility services provider Nextera Energy and Home Depot, a seller of home construction and furnishing goods, recorded significant growth. Wells Fargo fell just over 5% after reporting quarterly results.

Europe: French election nudge and UK GDP growth

European stock indexes rose, albeit not as significantly as several US stock indexes: Germany’s DAX rose 1.48%, France’s CAC 40 rose 0.63%, and the United Kingdom’s FTSE 100 added 0.6%.

One of the most anticipated and significant events was the results of the French elections, which marked a better-than-expected left-wing coalition and a worse-than-predicted performance of the radical right alliance led by the National Rally Party. The distribution of mandates among the alliances is fairly even, so none of them has won the majority needed to form a coalition — this aspect may contribute to the fact that the parliament’s ability to adopt significant reforms (including fiscal ones) will be limited. It was the latter factor that possibly had a positive impact on the debt securities market — the spread between the German and French 10-year bond prices rose after the announcement of the results. long-term bonds fell from around 80 points to around 65. Before the election, there were fears of high public spending promised by both the military and the radical right alliances, which would threaten the country’s already difficult fiscal situation. A divided parliament allows us to hope that these reforms will not be implemented or will only be partially implemented. True, the stock market did not have a particularly positive reaction — the CAC 40 index fell in the first days after the election. Analysts speculate that higher taxes on international businesses promised by the leftist alliance may have had a negative impact.

In the United Kingdom, positive data was received on the country’s GDP growth, this indicator grew by 1.4% year-on-year in May data, when analysts expected a rise of 1.2%. The service and construction industries contributed most significantly to the growth. True, last week even several BoE officials emphasized that they are still inclined to leave the current interest rates in view of the relatively high inflation in the service sector.

After news of new EU-approved tariffs on Chinese electric cars, several German car groups posted strong gains, with BMW up more than 5% and Porsche AG up more than 6%.

Top headlines of the week

Tesla is delaying the launch of its robot taxi

Tesla Inc. is reportedly delaying the planned launch of its robot taxi until October. This is to give more time to the teams working on this project to create additional prototypes. According to anonymous sources, the approximately two-month delay was reported internally and not made public. The design team is said to have been told to redo certain elements of the car this week. CEO Elon Musk set the original date of August 8 for the event months ago. Optimism about the event contributed to an 11-day rally in Tesla shares that added more than $257 billion. US dollars to the company’s market capitalization.

The idea of ​​creating an autonomous taxi service has been under consideration in the company since Musk announced in 2016. prepared the company’s second “master plan”. In recent months, the company’s head has prioritized this particular project over an electric car that is cheaper than Tesla’s most affordable car, the Model 3 sedan. For more than a decade, Musk has touted the company’s work on autonomous vehicle technology and convinced customers to pay thousands of dollars for a feature set the company touts as Full Self-Driving (FSD ). Admittedly, this name is misleading, as FSD requires constant maintenance and the cars are not autonomous. However, FSD has been in the news more recently as sales of the company’s vehicles have slowed.

Small-cap stocks rally on interest rate cut expectations

Small-cap stocks, which are included in the Russell 2000 index, jumped higher on Thursday, boosted by hopes of a rate cut after lower-than-expected inflation data. In June, the rate of inflation in the US decreased from 3.3% fixed in May to 3%. This marked the slowest price increase in a year. This unexpected slowdown, driven in part by lower gasoline prices, raised market expectations for a rate cut by the Federal Reserve. According to analysts, the Nasdaq 100 lagged the Russell 2000 by as much as 4.20%. It was the worst day for the Nasdaq versus the Russell since 2021. January. Such a significant difference is relatively rare — since 2008, it has only been recorded about six times in roughly 4,000 trading days. Declining inflation and the prospect of lower interest rates have created a favorable environment for small businesses as their borrowing costs ease. These insights have led to significant growth in the shares of such companies, underscoring investor optimism in this segment.