• Eurozone economy exits recession, US stable
• Uncertainty surrounding outlook for earnings
• Investment policy unchanged

Both the stock and bond markets responded negatively to the resurgence of geopolitical worries, persistent inflationary pressures in the US and concerns regarding the sustainability of economic growth. Additionally, investors grappled with increased geopolitical tensions following the exchanges of attacks between Israel and Iran. After making record highs in March, the rallies in Japanese and US equities tapered off, and they led the way lower for global equity markets in April. Enhanced investor confidence and a strong beginning to the first quarter of the US earnings season towards the end of the month contributed to the recovery of stock market stability. Overall, global equities shed 3.3% in April, taking the gain for 2024 to 4.6%. Conversely, emerging market equities managed to secure positive returns of 0.5% for the month, supported by increased exposure to commodities and growing investor interest in undervalued Chinese equities.

In April, commodities saw gains, with the comprehensive Bloomberg Commodity Index Total Return rising by 2.2%. The surge was primarily fueled by increases in base metals (copper: +13.9%) amid signs of a rebound in global manufacturing activity. Gold advanced (+3.5%), as the deteriorating equity sentiment caused demand for safe-haven assets to rise. The recent uptick in commodity prices is posing challenges for central banks, such as the Fed, regarding monetary policy decisions. It also serves as a reminder to investors of the potential value commodities may offer within a diversified portfolio.

Yet, strong job data, along with CPI and core PCE data above expectations, dampened the hopes for a cut anytime soon, which triggered selloffs in US Treasury bonds. In April, the Bloomberg US Treasury Index experienced a 2.3% decline, resulting in a negative total return of 3.3% for the year thus far in 2024. European and US investment-grade credit similarly declined by 0.8% and 2.5%, respectively. Surprisingly high inflation reports added to mounting indications that the Fed might delay rate cuts beyond earlier expectations, causing 2-year Treasury yields to rise towards 5% throughout the month. Additionally, tightening lending criteria led to an expansion of corporate bond spreads. A milder increase in European bond yields led to the region’s outperformance. With a less inflationary setting and the anticipation of steady yet sluggish growth in the eurozone, markets are exhibiting greater confidence in potential rate cuts from the European Central Bank (ECB) compared to those from the Federal Reserve. Although the first cut from the ECB is still anticipated to occur over the summer, expectations have been reduced to only two cuts fully priced in by year-end.

Sentiment of stock investors turned notably negative after the release of weaker than expected US GDP figures (+1.6%) for the first quarter of 2024, to the point where discussions about stagflation began circulating. April’s disappointing ISM Services PMI (49.5) reinforced concerns. On the other hand, we believe it is crucial to avoid becoming overly focused on the minutiae and losing sight of the bigger picture. If anything, the broader information consistently indicated that domestic demand continued to perform well, supported by sound labor conditions. The same applies to the inflation figures. The recent unexpected increases in the Consumer Price Index (CPI) may largely stem from one-off factors affecting specific items (e.g., auto insurance), as well as unanticipated stability in housing rents. Notably, many components of underlying inflation are converging to the target. Goods inflation is negative, and a smaller rise in hourly earnings and fewer job openings continue to point to a cooling labor market. Markets performed positively over the past week despite the presence of higher-than-anticipated PCE inflation and discussions about stagflation.

While the latest non-farm payrolls report and the Conference Board’s gauge of consumer confidence added to a string of generally soft US economic data, several leading indicators show that the eurozone economy is improving. The Service’s PMI reached a 11-month-high. And this recovery seems to have legs, as we are finally seeing promising activity data in the two largest eurozone economies, Germany and France. Moreover, the economy could receive a further lift from anticipated interest rate cuts by the European Central Bank (ECB) in June.

Overall, present economic conditions suggest a gradual economic slowdown in the US and lower inflation, notwithstanding occasional setbacks, such as those experienced last month. We maintain a preference for high-grade bonds, given our expectations for Fed rate cuts. We anticipate that the Swiss National Bank, the European Central Bank, and the Bank of England will also lower interest rates this year. Investors should take advantage of currently attractive yields to increase their exposure to high-grade bonds, especially if they are strategically underallocated. Excess cash on the sidelines, share buybacks and improved earnings growth can provide further support to stocks. However, as the stock market looks already priced for a rather benign outcome on growth and inflation, we feel comfortable with a neutral allocation.

Please find attached our last Asset Allocation Update for May.