June 2024 market commentary

Major equity markets experienced mixed fortunes in June. With a snap election called in France and parties campaigning in earnest ahead of the UK general election, the Euro STOXX 50 and FTSE 100 ended the month down 1.72% and 1.06% respectively, though both remained in positive territory at the close of Q2. Continuing growth among the giant US tech stocks along with strong earnings reports across the wider US tech sector saw the S&P 500 gain 3.59% over the month. Government intervention to support the struggling real estate sector in China combined with strong Artificial Intelligence (AI) performance helped emerging market equities outperform their developed market counterparts over Q2. 

(All returns are sourced from FactSet and are reported as total return in local currency for the period 03/06/2024 — 28/06/2024)

June market summary

After fluctuating inflation reports during the first months of 2024, the Federal Reserve stated in June that recent data suggested the US was back on a disinflationary path. Fed chair Jerome Powell nevertheless maintained that slowing price rises would have to stick before interest rate cuts could be considered. Strong economic data in the early part of the quarter gave way to reduced consumer sentiment and spending, and a gradual slowing of the labour market. Despite the Fed’s cautious stance, the changes in economic activity kept investors hopeful that rate cuts would occur before the end of the year.

UK inflation hit the Bank of England’s benchmark rate of 2%, driven largely by a fall in food and soft drink prices and slowing price increases for recreational activities, furniture and household goods – cheaper deals on television sets ahead of Euro 2024 were also cited as a contributing factor. Inflation nevertheless remained high in the services sector and petrol and diesel prices increased slightly. Consequently, the Bank held the base rate of interest at 5.25% for the seventh consecutive time and markets scaled back expectations of a first rate cut in August. Continuing wage growth and fears of a temporary inflation spike also contributed to the Bank’s continuing caution.

Revised analysis by the Office of National Statistics showed an increased rise in domestic GDP over the first quarter of 2024. Higher-than-expected growth in the services and production sectors contributed to the increase, even though poor weather throughout the period resulted in a fall in construction output.

With inflation in the eurozone moving steadily towards the European Central Bank’s 2% target, the Bank elected to cut its base interest rate from 4% to 3.75%. Noting a marked improvement in the trajectory of regional inflation, the Bank nevertheless warned that inflation was likely to remain above their target until 2025, reiterating the line that future rate cuts would depend primarily on the continued close monitoring of economic data – analysis at the end of the quarter suggested that Europe’s economic outlook was improving as the region’s cost-of-living crisis eased. 

The calling of a snap election in France in the aftermath of the European Parliament election had a negative impact on the French equity market and hampered broader European equity returns.

Passing of EU Nature Restoration Law “a momentous day for nature” 

Environmental organisations and conservationists celebrated the passing of the EU’s Nature Restoration Law, the first piece of comprehensive, continent-wide legislation aimed at restoring Europe’s degraded ecosystems and boosting regional biodiversity. The Law combines long-term nature recovery objectives with binding restoration targets for terrestrial and marine habitats and species. At least 20% of Europe’s land and sea areas are targeted for recovery by 2030 with an extended plan to restore all degraded habitats and ecosystems by 2050.

Chief among the Law’s objectives is to work in tandem with the EU’s climate mitigation and climate adaptation goals. Recovery plans will therefore focus on natural systems with the greatest potential to capture and store atmospheric carbon, clean water and air, prevent or mitigate natural disasters, and improve the conditions necessary for increased food security. The Law also targets no net loss of green urban space by 2030 and the reconnection of river systems to create at least 25,000km of free-flowing waterways.

At least 20% of Europe’s land and sea areas are targeted for recovery by 2030 with an extended plan to restore all degraded habitats and ecosystems by 2050.

The Law’s passage followed a 2022 estimate by the European Environment Agency that 81% of the region’s habitats were in decline. Initial proposals for legislative action faced opposition from European conservatives and farmers concerned by potential impacts on food production and implementation costs, and eight member states elected to either reject the Law or abstain. Austria’s last-minute decision to end its opposition enabled the Law to meet its passage threshold. With support from the European Environment Agency, member states now have two years to submit National Restoration Plans demonstrating alignment with the Law’s targets and timelines.

Bonn Climate Talks leave countries split on climate financing commitments 

With countries expected to agree new climate finance targets at COP29 in November, financing commitments and timelines were principal discussion topics at the Bonn Climate Talks in June. Under the Paris Agreement, developed countries were obliged to support climate mitigation efforts in developing countries, largely through their foreign aid budgets. Having missed the 2020 deadline for a collective $100 billion annual climate fund, developed countries subsequently scaled back foreign aid spending to relieve domestic fiscal pressures. At the same time, developing countries struggled with increasing debt, further limiting global investment in climate action.

COP29 targets a “new collective quantified goal” (NCQG) to replace the original annual climate financing target after 2025. The principal aim of the Bonn talks was to engage in an ad hoc work programme to agree a text ahead of NCQG negotiations in November. The result was a highly divergent range of views on priorities and responsibilities and widescale disagreements over funding amounts, providers, and recipients.

Among the main points of contention, developing countries asserted that financial support should benefit them all equally rather than focus primarily on the most vulnerable. They also argued that the global financial system created barriers to the free flow of climate capital. Developed countries argued that countries with high emissions and larger-scale economies who nevertheless classified themselves as ‘developing’ under the Paris Agreement should contribute to any new global funding target.

While delegates in Bonn were reminded that finance was the “great enabler of climate action”, it remains to be seen if countries can reach consensus on its sources and priorities ahead of November’s conference in Baku.

Among the main points of contention, developing countries asserted that financial support should benefit them all equally rather than focus primarily on the most vulnerable.

International Energy Agency (IEA) warns of a “staggering” excess of oil by 2030 

Having predicted in 2023 that a seismic shift in global energy provision signalled “the beginning of the end” for fossil fuels, the IEA forecasted in June that the energy transition coupled with increased US oil production and tight output controls by the OPEC+ alliance will culminate in “staggering” levels of excess oil capacity, far outstripping global demand.

In its medium-term Oil 2024 report, the IEA said that slowing oil demand would reach its peak before the end of the decade and plateau thereafter. At the same time, supply is expected to reach 114 million barrels per day, creating a daily excess of around 8 million barrels against projected demand. The exponential rise in spare capacity could result in a lower oil price environment, posing major challenges for US and OPEC+ producers.

While demand continues to decline in advanced economies, the appetite for oil remains strong in Asian markets. The IEA nevertheless predicts that the growing prevalence of electric vehicles and advances in energy efficiency will accelerate the global decline in oil demand after 2030.