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July 1st, 2024 - A hot month ahead.

July is traditionally a friendly month for risky assets. But with French and UK elections entering the center-stage, not to mention the sudden crisis in the US Democratic party, things could turn out "hotter" than usual. A market friendly outcome in French elections could spark a rally in beaten down stocks and the opposite could push them even lower. The UK appears to be electing the first Labour government since Gordon Brown in 2010, but the new Prime Minister appears to be more positioned to the center, compared to the candidacy of Mr. Corbin in the recent past. The July central bank meetings could also complicate things or on the contrary provide fuel for a "melt-up". With equity markets close to their recent highs and volatility at multi-year lows, a steep summer correction or a "bubble-type" rally would not surprise us at all.

The first round in French elections did not produce any surprises, which is positive for short-term sentiment in markets. The RN coalition is set to win the majority of the 577 seats , with estimates bringing their total between 250 and 280, just shy of an absolute majority (289). In the second round all candidates who received at least 12.5% of the local votes will advance and there are many cases where three candidates will run for election, from three different parties. This makes it more complicated to forecast what could finally happen. But It is safe to assume that the scenario of a leftist government seems to be out of the way, which should help French stocks rebound for now.

The US Presidential debate was all about appearances, and nothing about substance. Of course, when Mr. Trump is on the other side of any debate, it might be too much to ask for insightful discussions and thoughtful arguments on real issues. It soon became obvious that President Biden does have age issues, losing his line of thought several times and being escorted off stage. It is not a simple issue to replace him with another nomineee, but discussions seem to have already started just four months before the elections.

Inflation in the US as measured by the PCE deflator was announced at 2.6% as expected. Looking into the details, we received confirmation that the recent trends still hold: namely that consumer goods' prices keep deflating and services' prices continue to rise creating uncertainty on inflation's path. In particular, prices for goods decreased 0.1% and prices for services increased 3.9%. In other components, food prices increased 1.2% and energy prices increased 4.8%. Excluding food and energy, the PCE price index also increased 2.6% from one year ago.

Eurozone inflation data are also coming up. As a positive precursor, the individual country data released on Friday showed a better-than-expected picture. In France, June CPI slowed to 2.5% from 2.6% in May and in Portugal inflation dropped to 3.1% from 3.8%. In Italy, inflation is still below 1%, at 0.9% while Spain's inflation remained at 3.5%. The German data are due today and the Eurozone Composite CPI tomorrow. Overall, it seems that we could have a positive surprise on Eurozone's inflation numbers, with the forecasts being for a small drop to 2.5% from 2.6%.

Ahead of the July ECB meeting in two weeks, the inflation data could be critical for the message that the central bank would wish to convey. At the moment the markets price that the ECB will cut rates by 25bp at its September meeting with no change for July. The ECB President Christine Lagarde has already said that the June cut should not be taken as the beginning of a pre-planned sequence, and a number of current and former officials have made the same point. So if the ECB now thinks that a September rate cut is not likely , then the July 18 policy meeting would probably be used to tone down market expectations for more rate cuts. Of course we could also start hearing from the ECB this week, as the Sintra conference in Portugal could be used as a forum for some form of guidance.

The final estimate of the US Q1 GDP confirmed that consumer spending is weakening. Although real GDP growth was revised 0.1% higher to 1.4%, looking into the details we saw a fairly large downward revision to consumer spending. It expanded just 1.5% in Q1 versus the prior estimate of 2% with downward revisions to both goods (-0.4%) and services (-0.6%). It also became clear that government spending and investments are the main positive contributor to growth so far this year. But with fiscal tightening ahead in order to bring the budget deficit under control, growth could really stall in the second half of the year if consumer spending does not pick up. We remind that the first half retail sales have been disappointing, which is compliant with what the GDP analysis revealed.

Global equities were "all over the place" last week. The volatility in French stocks and profit taking in some US mega caps, amid rotation to other sectors created a very mixed picture. The S&P500 lost 0.1% and Nasdaq finished flat, as the small caps index (Russell 2000) rallied by 2%. Small caps in the US are just 1% higher this year. In Europe, the French index lost 2% but Germany rose by 0.5%. Japan rallied by 2.5%, boosted by the lower Yen, but Chinese indices lost 1-2% on average.

Bonds were rather stable, ahead of the inflation data and the central bank meetings of the month. The recent wea macro data in the US and the possibility of a bad outcome in France has led investors to the safe havens of long-term bonds of Germany and the US, boosting their prices and bringing yields down. It is for this reason that we have been advocating in the recent months to use the rise in yields back then to accumulate positions in longer-term, high quality bonds. In time of turmoil, they can provide significant protection to an invested portfolio. The 10-year US is now at 4.25% and the German equivalent at 2.40%.

Chart of the Week : French stocks are at "make or break " levels.

Since the day that President Macron declared the snap elections, the French CAC40 index is down almost 7% and has corrected 10% from the peak in May. And it is now slightly negative for the year (-0.9%), where most European indices still sport a 8-10% return YTD. Interestingly, the index is back on the support trend-line (green dotted), which is in place since the low of the pandemic period. A 10% correction from the peak is also usually a good entry point in a bull market. From a pure technical view the current levels could offer a superb opportunity, but of course when politics are involved the final outcome is very uncertain. We would stick to keep buying high quality French names of an international character, that can weather any local political turmoil.


• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : FactSet , photo:


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