A busy fortnight in global politics, with elections in South Africa, Mexico and India all delivering the expected winners, but still moving markets thanks to the nuances in the results.
The past fortnight has seen markets continue to be moved by shifting expectations on the path of economic growth, inflation and interest rates, though we have still seen the US S&P500 closing at fresh record highs this week. The economic data has highlighted some softness in the US economy, which has fuelled some hopes that the Federal Reserve still has a path to cut rates soon. Meanwhile, the busy year of elections continues, with polls in Mexico, South Africa and India all delivering surprises that resulted in big moves in their equity markets.
Closer to home the UK election continues to dominate the headlines though after a few weeks of campaigning the opinion polls have barely budged. This week’s leader’s ‘debate’ between Prime Minister Rishi Sunak and Labour leader Sir Kier Starmer failed to deliver any knockout blows, with the former pushing the “higher taxes under Labour” narrative while Starmer offered up the prospect of change after 14 years of Conservative government. The most excitement for the political media was the announcement from Nigel Farage that he will assume the leadership of the Reform Party, and stand for election – this will be his eighth attempt to win a seat in Parliament. The news is likely to put further pressure on the Conservative vote, with opinion polls continuing to point to a Labour victory, and potentially a ‘landslide’ win.
Talking of opinion polls, elections elsewhere served to remind that too much emphasis should not be placed on their findings, and trading election outcomes is a dangerous game. Indian equities rallied to all-time highs on Monday on the back of exit polls pointing to incumbent Narendra Modi’s BJP led National Democratic Alliance securing an even bigger majority than in 2019. Equities then slumped 6% on Tuesday as it became clear the polls were very inaccurate. The exit polls had put the BJP led coalition of parties on between 353 and 401 seats of the 543-seat lower house, but in reality the BJP is set to win just 240 seats and assuming their coalition sticks together, the additional 53 seats from the coalition partners will allow Modi to remain Prime Minister for a third term. The opposition India National Alliance of parties performed much better than expected and are set to take 231 seats. The opposition strategy of targeting voters who felt ‘left out’ of India’s growth story amid rising inequality, unemployment and a rising cost of living proved fruitful. The Indian election commission said that 642 million people cast a ballot of the near 1 billion registered voters. Narendra Modi will be able to form a government through his wider coalition of parties, but the lack of an overall majority will make policy implementation tougher and leaves Modi beholden to his smaller coalition partners. While the ambitious reform agenda of the past decade may slow, the consensus remains that India will continue to see very strong economic growth over the coming years. Mexico and South Africa also saw elections, with the former seeing a landslide victory for Claudia Sheinbaum’s Morena party. Mexican equities and the Peso initially slumped as a result, with worries over the Morena party using a ‘supermajority’ from their landslide win to enact changes to the constitution. However, news that the incumbent economic team would stay on in their roles have since helped to calm nerves. The South African election saw the ruling African National Congress party lose its parliamentary majority for the first time in 30 years. The party won 40% of the vote and will now need to seek a coalition partner or try and rule as a minority government.
Elsewhere in politics there is a little more optimism that the Israel – Hamas war may see a ceasefire with the US pressuring Israel to accept a staged deal that involves a ceasefire, prisoner/hostage swap and eventual permanent cessation of conflict. President Biden is seeking an end to hostilities, mindful of the impact of the conflict on his own ratings. White House spokesman John Kirby said the US has “every expectation” that Israel will agree to a plan to end the war in Gaza, but the proposals are causing significant divisions in the Israeli government, with the potential to split the coalition and cause early elections. In the US, Donald Trump was convicted on all 34 counts of falsifying business records to hide hush-money payments made in the run-up to the 2016 election. This is the first ever time a former US president has been convicted of a crime. Sentencing will take place on 11 July but an appeal is inevitable. The conviction does not appear to have dented Trump’s support so far – other, arguably more important cases are yet to come to court, though they may well not do so before the November election takes place. The economic data showed some hints that the US economy has been easing somewhat. First quarter economic growth was revised lower, from an annualised pace of 1.6% down to 1.3%. The spending data within the GDP data suggested that consumer spending had slowed, though some comfort was taken from the PCE calculation of inflation, which was revised lower. The US job openings data was weaker than expected, pointing to fewer open vacancies. Vacancies tend to fall before companies start cutting staff, so this is a data point to watch; the ratio of vacancies to unemployed workers has now fallen to 1.2x, broadly in line with pre-pandemic levels. The US labour report later today will give further signals as to the health of the labour market. Any signs of cracks will likely increase expectations that the Federal Reserve will cut interest rates – we should be mindful of their dual mandate of inflation and employment, though the Fed is likely far more concerned with the former than the latter for now.
Ahead of their meeting next week, the commentary from the Federal Reserve was mixed. Neel Kashkari of the Minneapolis Fed said “I don’t think anybody has totally taken rate increases off the table” and appears in no rush to ease policy, adding “we have time to assess how much downward pressure we are putting on demand”. Dallas Fed President Lorie Logan warned that “policy may not be “as restrictive as we think it is” and that all policy options are on the table. The New York Fed President John Williams was a little more dovish, noting “I expect inflation to resume moderating in the second half of this year”. Market expectations continue to sit between one or two cuts this year but the Fed meeting next week will likely see further shifts in expectations in the aftermath.
The European Central Bank meeting yesterday delivered the pre-announced 25 basis point rate cut which leaves rates at 3.75% but the ECB actually increased their inflation forecast and warned the bank is “not pre-committing to a particular rate path”. The ECB expects inflation of 2.5% this year and 2.2% in 2025 with inflation only falling below target in 2026. ECB President offered little by way of forward guidance but said there was a “strong likelihood” the decision marked the beginning of “dialling back” rates from their all-time high and said that further moves would “depend on the data that we receive”. The somewhat hawkish tone to the meeting serves to remind investors that the path lower in rates for this cycle is unlikely to be smooth or rapid unless we see a sharp deterioration in economic activity that will necessitate a more aggressive path to rate cuts. Be careful what you wish for!
Enjoy the weekend.
Kind regards,
Anthony.
