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Capital Markets Update: June 2023

NOVA Wealth1 July 2023

Market updates from June

In a Nutshell

The last month saw continued volatility in UK markets. Inflation and rising interest rates have continued to squeeze households and small businesses; and gilts performed poorly. However, European, US and East Asian markets generally fared better. Eurozone economies in particular saw strong market performance and a fairly sharp drop in inflation rates (although still well above central bank target rates).

Across June, the UK saw continued inflation and rapid wage growth. British CPI growth in the last year has been largely driven by rising food and energy prices, and in recent months has far outstripped European and North American inflation rates. According to ONS statistics, UK CPI hit 10.1% in March, and averaged 8.7% across April and May. Moreover, in the three months to April 2023, UK wages grew 7.2%, in contrast to 5% and 4.6% in the USA and Eurozone respectively.

Prompted by worsening inflation, the Bank of England implemented an unprecedented increase to interest rates towards the end of the month. The Monetary Policy Committee voted to increase the base rate to 5% - the highest level since the 2008 financial crisis. This comes as unwelcome news to many homeowners, who are facing ever-higher mortgage repayment rates. The BOE Credit Conditions Survey published in April this year reported that, while lender credit supply has been fairly stable, defaults rates among households and SMEs had increased dramatically in Q1, and were expected to continue to increase across the coming months.

While there was something of a rally across European, North American and Japanese markets, the UK’s recent market downturn continued across June, albeit with some fluctuation. The FTSE100 showed negative 1.6% growth across the month, and the FTSE250 was down around 4%. Short-dated government bonds performed particularly poorly, with the price of the two-year gilt falling to a 15-year low. The two-year yield is now up to 4.8%.

Eurozone and US inflation rate drops, markets show fairly strong performance

In more positive news, European and US markets performed fairly well over the month. The NASDAQ Composite index was up by 5.2%; and the Dow Jones Industrial Average by roughly 4.1%. France also saw decent growth, with the CAC40 up around 3.6%. The German market had a slightly more volatile month, with very strong initial performance offset by a sharp dip in the latter half of the month. However, across June the DAX still showed nearly 2% growth.

According to Eurostat data, Eurozone consumer price inflation also dropped to 5.5% over June, from 6.1% in May. This was largely driven by a 5.6% drop in energy prices over the month - which comes as a relief after a year of dramatic oil price rises. However, the inflation rate remains very high among food, alcohol and tobacco goods at nearly 12%.

US inflation also fell over the month, similarly driven by a drop in oil prices and offset by persistent food price inflation. The YTD rate in April was 4.9%, but had dropped to 4% by the start of June - far from the 9.1% peak seen in June last year. However, this is still well over the Federal Reserve's target rate of 2%. While the FOMC paused their streak of rate hikes in June, the Fed will likely continue with their strategy of monetary tightening to further reduce inflation.

Chinese market growth stalls

Chinese market growth slowed down over June, following extremely strong performance across Q1 this year. Market indices showed mixed performance. The SSE Composite Index was down 0.70% across the month; while the CSI 300 was up around 0.90%

The Hong Kong stock market has been particularly volatile over the last few weeks. The Hang Seng index showed positive performance of nearly 9% over the first half, but this was immediately followed up by a 5.6% dip toward the end of the month. Overall growth was positive at 3.8%, but it remains extremely volatile.

Inflation in Hong Kong and mainland China has remained low, especially when compared to the rest of the world. Between January and March this year, mainland Chinese inflation averaged around 1.3%, while Hong Kong’s rate was around 1.9%. [1]

Looking ahead

While ongoing market volatility and high inflation rates may raise concerns among some investors, it only highlights the importance of a long-term perspective. Ensuring a diversified portfolio, a sufficient cash reserve, and a robust financial plan will be vital to navigating potential fluctuations in the market as we move into the second half of 2023.

Important information

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.

[1] South China Morning Post. (2023). Why is Hong Kong’s inflation so low compared with other global cities? Available online

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