Written by Millan Chauhan
Last week was a positive week for global markets, with the MSCI ACWI index returning +2.8% in GBP terms. Both the UK and the US markets were lifted by encouraging inflation reports last week, which helped the FTSE All-Share return +3.3% and the S&P 500 return +3.2% respectively over the week.
UK inflation, as measured by the Consumer Price Index (CPI), was reported at 2.5% year-over-year in December 2024, which came in lower than expectations of 2.6%. However, it was the core CPI rate (which excludes food and energy prices) which was the most encouraging data point, coming down to 3.2% year-over-year, versus expectations of 3.4%. This tends to be a less noisy measure of inflation and can be a better guide for policymakers since food and energy prices tend to be more volatile. Furthermore, UK retail sales also fell short of expectations with the quarter-over-quarter level falling by 0.8% for Q4 2024. The FTSE 250 index returned +4.4% last week and is an index of mid-sized companies that are more exposed to domestic corporate earnings and historically more sensitive to interest rates. The latest economic data increased the probability of a 0.25% interest rate cut at the Bank of England’s next Monetary Policy Committee meeting on the 6th of February 2025.
Within the US, we saw CPI come in at 2.9% year-over-year in December which was in line with expectations. However, the core CPI figure came in below expectations, rising 3.2% year-over-year in December 2024. The Federal Reserve is set to meet next week to decide the trajectory for interest rates with this latest report appearing not to be significant enough to cause the Federal Reserve to cut interest rates at this meeting. Markets are now expecting the Federal Reserve to maintain interest rates between the target range of 4.25-4.50%. Nevertheless, markets reacted positively to December’s inflation report with the S&P 500 index returning +3.2% last week, in GBP terms.
However, it was the large US banks that outpaced wider US stocks, following bumper earnings reports from the likes of JPMorgan Chase, Goldman Sachs and Citigroup. Several of the banks confirmed their earnings were supported by a sharp rise in trading and dealmaking in November 2024, around the time of the US election, with Donald Trump’s victory boosting investor sentiment and appetite for risk. As a result, it was the widest weekly differential between US value and growth equities since September 2024. We also saw US small caps (as measured by the Russell 2000 index) outperform large caps, as the Russell 2000 index returned +4.2% last week in GBP terms. Specific styles of investing exhibit periods of outperformance at points in time that are different to other investment styles and is particularly difficult to time, which is why we continue to believe that diversification across investment styles remains highly appropriate, particularly within US Equities, where index concentration risk issues remain.
Elsewhere within Continental Europe, the European Central Bank released minutes from their December meeting, where they reduced interest rates for a third time in a row. It emerged that policymakers are determined to lower interest rates cautiously and gradually with expectations now leaning towards a further 0.25% interest rate cut next week. In the minutes, it was noted that the case for a 0.50% interest rate cut was considered. The economic backdrop within Europe still remains weak, as confirmed by Germany’s economy contracting by 0.2% in 2024, having fallen by 0.3% in 2023. From an asset allocation perspective, we remain less constructive on European Equities for partly this reason, and we see better opportunities elsewhere.
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