June marked the end of the second quarter of the year, which was a surprisingly strong one for equity markets

That should come as somewhat of a surprise given that this was a quarter in which Central Banks were taking most, if not all, of the opportunities to raise interest rates. The good news is that speculation has been mounting that the painful interest rate cycle might be nearing its end, in the US at least.

Federal Reserve acts with caution on interest rates as incoming data comes under scrutiny

Given two opportunities during the period to change interest rates, the Federal Reserve skipped one, and hiked by just a quarter of a percentage point in the other. Meanwhile, interest rates are at the same level at which they plateaued for just over a year between 2006 and 2007. Having said that, for now it seems that at least one more US interest rate increase is likely. But like most central banks, the Federal Reserve will now scrutinise incoming data for indications that maybe it has already done too much and that the economy may yet start to falter.

Groundhog Day witnessed in the UK on inflation expectations

Closer to home, inflation in the UK and broader European region have shown frustrating signs of persistence. It felt like Groundhog Day in the UK with inflation above expectations for a fourth month in a row and, like those previous months, by a significant margin. Short-term inflation forecasting has never been as difficult as this and the private sector economists are proving no better at it than the lamented Bank of England. The market is now expecting UK interest rates to peak at 6.5%, which is a concern for many mortgage owners who will be seeing their fixed term mortgages come to an end – particularly those who were part of the flurry of deals being done in June 2021 to take advantage of the stamp duty holiday. That said, the pain of these will not be suffered evenly, with 70% of homes having no mortgage – a record high share.

Government imposed restrictions have impact on stocks in China

In China, the monthly print for the Caixan Services PMI showed a slowdown in service sector activity as the expansion begins to soften. Stocks moved lower as the government-imposed restrictions on bond issuances for Local Government Financing Vehicles (LGFVs) in the Shanghai Free Trade zone.

The restrictions only allow purchases from issuers with genuine operations in the Shanghai area, which is constraining financing for local government infrastructure projects, the main tool of economic stimulus used by the Chinese government.

The Chinese government will also restrict its exports to the West in germanium and gallium, two key components used in semiconductors, communications, and military equipment. It will be interesting to see what transpires from Treasury Secretary Janet Yellen’s trip to Beijing

Apple creates history by hitting $3trillion mark

In stock-specific news, Apple became the first public company to achieve a market capitalisation of $3trillion. The narrow leadership of the market has continued, with seven of the largest US companies (comprising 15% of the global equity market) having risen by an average of 50% in the first half of 2023 – which far outstripped the broader market. These companies are generally seen as benefitting from the use of AI, a technology cited by an unprecedented number of companies in the transcripts of their first quarter financial results.

Written and prepared for Crowe Financial Planning UK Limited by John Moore (Senior Investment Manager at Brewin Dolphin)