Global equities last week rose 1.4% in local currency terms and are now at the upper end of the trading range seen since last summer. In sterling terms, the advance has been slightly less due to the recent rally in the pound.
This broad rally has been fuelled by the US finally reaching an agreement to extend the federal debt ceiling, and some unexpectedly strong US employment figures in May. This suggests the economy continues to hold up reasonably well and there is still no definitive indication of an imminent recession or of further tightening of the Fed’s purse strings. Even so, markets are now pricing in an even chance that US rates will see a further rise of 0.25% to 5.25-5.5% in July, while leaving rates unchanged this month.
The wider likelihood of recession across the western economies is still hard to call and opinions are very much divided. Inflation remains key as it will ultimately determine how much further tightening there will need to be. Eurozone inflation declined by more than expected in May with the headline rate dropping to 6.1% and the core rate to 5.3%. Even so, inflation remains too high and most would agree we will see the ECB raising rates by a further 0.25% in both June and July.
In the UK, headline inflation fell back in April to 8.7% from 10.1%, however the core rate unexpectedly rose from 6.2% to a new high of 6.8%. This in turn triggered a sell-off in gilts and renewed worries over higher UK rate rises. Nevertheless the IMF did concede more positivity on the UK economy and like the Bank of England, it is now forecasting a modest 0.4% gain in GDP this year, rather than a decline.
All in all the general market outlook remains quite uncertain.