In Europe, the political landscape has been reshuffled. The Labour Party achieved a landslide victory in the United Kingdom, while the Conservatives collapsed after 14 years of turbulent governance. Keir Starmer is the new Prime Minister of the UK. The landslide win was facilitated by discord within the Conservative (Tory) camp. Despite the euphoria over the electoral victory, the new government faces significant economic challenges in fulfilling its promise of renewed prosperity. In France, the feared shift to the right in the National Assembly elections was less pronounced than expected. In the United States, the Democratic Party, through backstage maneuvering, secured Joe Biden's withdrawal as a presidential candidate, with Kamala Harris expected to run in his stead. U.S. core inflation cooled to its lowest level since 2021 in June 2024, with the core consumer price index rising by just 0.1% from the previous month. Despite declining inflation, household and business demand remains robust. Employment rates and wage growth have slowed, increasing the likelihood that the Federal Reserve will lower interest rates in the coming months. As an early indicator of a cooling labor market, initial jobless claims in the U.S. reached their highest level in a year in July. In the Eurozone, inflation slowed to 2.5% in June. Private sector growth is sluggish, particularly in Germany, where an unexpected decline was recorded. The ECB has kept interest rates unchanged but is considering additional rate cuts if inflation continues to decrease. Similarly, the Chinese lowered interest rates in July due to below-average growth. China's economy continues to struggle with weak consumer spending. In contrast, the Bank of Japan's rate hike appears unusual amid global rate cuts. The BOJ raised its key interest rate and announced plans to reduce bond purchases to emphasize its commitment to normalizing monetary policy. The key interest rate was raised to about 0.25%, while monthly bond purchases are set to be reduced to approximately 3 trillion yen (19.6 billion USD) in the first quarter of 2026, about half of the previous amount. BOJ Governor Kazuo Ueda is gradually steering away from ultra-loose monetary policy towards normalization. These measures could fuel speculation of another rate hike later this year.
The stock markets experienced a healthy rotation in July. US technology stocks saw significant declines, driven by a shift from large-cap tech stocks to cyclical sectors. This movement gained momentum following signs of cooling inflation and hopes for interest rate cuts by the Federal Reserve in September. Notably, the Russell 2000 outperformed the tech-heavy Nasdaq 100 by a record high of 12 percentage points at times. This rotation from megacaps to small caps is seen as an indication of a broadening market rally. Alphabet's recent financial results presented a mixed picture. While the company continues to perform well in terms of revenue, high expenditures on forward-looking technologies such as AI are impacting profits. Investors are concerned about the scale of these expenses and the uncertainty surrounding when these investments will pay off. Similar concerns, coupled with weaker revenue growth from the Azure cloud division, were reflected in Microsoft's financial results, causing its shares to drop by up to 7% in after-hours trading due to rising expenses. The Magnificent 7 stocks experienced their steepest decline since 2022. Earnings season, meanwhile, is slightly positive. In the US, earnings and revenue surprises in the still early reporting season have marginally exceeded expectations. However, revisions on both sides of the Atlantic have painted a negative picture for weeks, and the impact of weak Chinese consumer spending is sporadically affecting luxury goods producers.
With the weaker global growth outlook, falling inflation, and impending interest rate cuts by the ECB and FED, yields on key government bonds have fallen. The Swiss franc has been sought after in a geopolitically uncertain environment. Gold prices have risen by nearly 4%, while silver has lost 2%. Sensitive metals like aluminum, steel, and copper have fallen due to economic uncertainty. Oil prices have dropped by 7%.
Whether the stock market correction that began in July is over, remains to be seen. With increasing signs of a slowdown in growth, financial markets will cautiously navigate from data point to data point after a strong first half of the year. The hype around artificial intelligence also needs to prove itself as a profitable investment. So far, the business mainly benefits the manufacturers of necessary hardware components and infrastructure suppliers. On the other hand, central banks are starting to lower interest rates to avoid excessively burdening the labor market and consumption. This scenario works as long as inflation continues to decline, and so far, the trend is somewhat favorable. Only the components of service inflation remain stubbornly high, forcing the US Federal Reserve to wait further. However, the bond markets already sense the need for an imminent rate cut due to weaker labor market data. This hope has so far led to a healthy rotation, which could prove sustainable if the global economy does not slide into a deep recession. A well-diversified portfolio benefits from the recently renewed enthusiasm for cheaper "laggards" in the stock market. Swiss pharmaceutical stocks, particularly Roche, Lonza, and Novartis, are once again gaining favor among investors due to solid earnings and attractive dividends. The recalibration of the market to growth uncertainties is likely to lead to further volatility in the coming months. We are prepared for stronger setbacks in the stock markets with a high degree of diversification and hedging. We see pronounced pullbacks as a tactical opportunity to selectively increase our equity exposure.