Monthly Market News June 2023 – Trends in the markets

Alexandre Gauthy - Economist

The positive trend in equity markets continued in June. Central banks maintained their focus on tightening monetary policy, but disinflation, expectations of a soft landing for the economy and optimism about AI-related stocks and big technology names were the decisive factors in the positive sense for investors.

Our expert, Alexandre Gauthy, analyzes the trends in June 2023.

Equity markets: Positive month of June closes strong first semester

Stock market indices moved higher again last month. The S&P500 and the Nasdaq reached their highest levels in more than a year. That resulted in the best first half since 2019 for the S&P500 and since 1983 for the Nasdaq. European stock markets could not continue their outperformance of the first months of the year, but European indices are also close to their highest levels of the year. This recent weaker performance can be attributed to weaker economic data in the eurozone (the figures were recently below consensus expectations) and investors' enthusiasm for the topic of artificial intelligence in the US. Share prices in Japan and emerging markets are also joining the upward trend, although this performance is partly offset by currency movements. Despite monetary policy remaining on a path of tightening in the US and Europe, investors are taking heart from the disinflationary trend and economic growth that is slowing but does not seem to be headed for a sharp decline. Monetary easing and the increasing likelihood of fiscal stimulus in China were also supportive factors.

Unlike in May, the rally was less concentrated on US technology stocks or artificial intelligence. They still led the dance but are joined by other companies coming from cyclical or 'value' sectors. Thus, in the month of June, the evolution of the value and growth indices in the US was quite similar, but over the past quarter, the difference in performance is more than 10 percentage points in favor of growth stocks.

Equity markets	June	3 months	Since 31/12	12 months
MSCI EMU NR	3.8%	2.7%	15.3%	24.1%
MSCI EUROPE NR	2.4%	2.3%	11.1%	16.7%
MSCI USA NR	4.2%	8.1%	14.3%	14.0%
MSCI JAPAN NR	1.7%	6.0%	10.5%	13.2%
MSCI EM. MARKETS NR	1.4%	0.5%	2.6%	-2.5%
MSCI AC WORLD NR	3.4%	5.7%	11.5%	11.7%
(Performances in EUR dd. 30/06/2023)				(bron: Bloomberg)

Bond markets: Yields fluctuate within a narrow range

10-year bond yields remained fairly stable in June, a trend that characterised the entire second quarter. The German 10-year bond yield hovered around 2.40%, the US went slightly higher, but it remained within the range in which it has been moving for several months (around 3.75%). Interest rates are doing a balancing act between persistently tight monetary policy and the prospect of a growth slowdown. In the US, shorter maturities did go significantly higher: the 2-year rate rose 50 basis points in June, driven by the market's new assessment of the Federal Reserve's future interest rate path. The 2-year rate almost matched the level around 5% reached before the banking sector turmoil erupted in March.

Corporate bond spreads moved slightly higher, both for investment grade and high-yield bonds, with concerns of a possible recession and the impact on corporate earnings weighing more heavily.

Government Bond Yield 10 yr	Current	June	3 months	Since 31/12
Belgium	3.06	0.09	0.10	-0.17
France	2.93	0.08	0.14	-0.19
Germany	2.39	0.11	0.10	-0.18
Italy	4.07	-0.01	-0.03	-0.64
Greece	3.67	-0.11	-0.55	-0.95
Spain	3.39	0.05	0.08	-0.28
United States	3.84	0.19	0.37	-0.04
Japan	0.40	-0.04	0.05	-0.02
Evolution until 30/06/2023				Source : Bloomberg

Central banks: Fight against inflation continues, China goes against the tide

Persistent (core) inflation prompted numerous central banks to raise their policy rates further last month. These included rate hikes in the UK and Norway (both +50 bp vs 25 bp expected), Switzerland (+25 bp), Sweden (+25 bp), Australia (+25 bp, unexpectedly), Canada (+25 bp, after a pause since January).

As expected, the European central bank raised its deposit rate by 25 basis points to 3.5%, reaching its highest level since 2008. The central bank also confirmed that it will stop reinvestments under its bond purchase programe (APP) as from July. More strikingly, expectations for (core) inflation were significantly raised. President Lagarde referred to the strength of the labour market (thanks to the service sector) as the reason for the upward revision of inflation expectations. In her comments, she stated that it is therefore very likely that interest rates will be raised again in July.

After 10 consecutive rate hikes in 15 months, the Federal Reserve left its policy rate unchanged (within a range of 5.0% and 5.25%), as expected. In doing so, the central bank wants to better assess the impact of previous increases and see the confirmation of the disinflationary trend. Noteworthy was the increase in the Fed members’ median expectation for the evolution of policy rates this year (‘the Dot plots’). That expectation now stands at 5.6% by year-end, implying 50 basis points of additional rate hikes.

China's central bank unexpectedly cut a number of key interest rates, including the important medium-term lending facility. The MLF, a key instrument for providing funding to banks, was cut by 10 basis points to 2.65%. It suggests that monetary authorities are concerned about the weaker-than-expected recovery.

Central Bank Rates	Current	Latest adjustment	Date
Fed funds	5.0-5.25%	+0.25%	May 2023
ECB deposit rate	3.50%	+0.25%	June 2023
Situation on 30/06/2023			Source : Bloomberg

Currencies: Firmer euro in June

The euro strengthened against most currencies in June as the ECB is currently seen as the most hawkish central bank. The dollar weakened against the euro from 1.07 at the beginning of the month to almost 1.10. The overall smooth agreement on the US debt ceiling ended up having little impact on the currency.

The Japanese yen weakened by almost 6% in June, taking its loss since the beginning of the year to over 12% against the euro. The Bank of Japan left monetary policy unchanged (interest rate and yield curve control) this month and Chairman Ueda stated that the extremely accommodative monetary policy will continue for some time to come.

Currencies	Current	June	3 months	Since 31/12
USD	1.091	-2.5%	-0.6%	-1.9%
GBP	0.859	-0.1%	2.2%	2.9%
JPY	157.44	-5.9%	-9.3%	-12.1%
CHF	0.977	-0.4%	1.5%	1.3%
Evolution versus EUR until 30/06/2023				Source : Bloomberg

Commodities: More OPEC+ production cuts, oil price barely reacts

Oil prices rose slightly in June. After OPEC+ already surprised with a production cut in early April - and oil prices temporarily rebounded as a result - the cartel announced a new production cut of 1 million barrels per day in early June. This will be borne entirely by Saudi Arabia. It points to some tensions within the cartel, with African members in particular showing little enthusiasm to voluntarily cut production, while Russia is putting plenty of oil on the market. The recovery in Chinese oil demand after the covid lockdowns was weaker than expected. The gas price (Dutch TTF monthly) rebounded from around 25 euros per megawatt-hour (which was the lowest level in more than two years) to above 40 euros over the past month, despite record high inventories for this time of year. The market remains uncertain about supplies due to confirmation of the permanent closure of gas fields in Groningen and temporary outages in Norway.

Gold prices weakened slightly, due to persistently strict central bank comments. Commodity prices were weaker on additional signals of weakening economic activity in China. In the second quarter, price declines were quite significant.

Commodities	Current	June	3 months	Since 31/12
Industrial Metals (GSCI)	408.04	0.2%	-9.8%	-9.6%
Oil (Brent)	74.90	3.1%	-6.1%	-12.8%
Gold	1919.35	-2.7%	-2.9%	5.7%
Evolution in EUR until 30/06/2023				Source : Bloomberg