iShares June Road Report: top advisor questions of the month

June turned up the heat. U.S. stocks kept their upward climb, fueled by positive inflation reports and meaningful signs of an economy trending towards normalization.

We give our views on the questions we’ve been asked by advisors, centered around the shifting monetary and political landscapes we’ve seen this month, and what it could mean for the summer months ahead.

Off the back of a cooling inflation report released earlier in the day, the Fed announced it would stay steady and keep target interest rates between 5.25 - 5.5%, to no one’s surprise.

All eyes were on the committee’s Summary of Economic Projections (SEP), featuring everyone’s favorite “dot plot,” which displays what individual members of the committee expect monetary policy to look like in the months to come. June’s median ‘dot’ called for only one rate cut before the end of the year. However, after Chair Powell cited “modest” progress towards their inflation objective, investors were quick to pull forward rate cut expectations. Following the meeting, market pricing for a rate cut in September rose to 60%.¹

After a few months of poor inflation data, markets have been relieved to see a couple positive prints. We retain our view that the Fed will issue two cuts before the end of the year, with the first in September. We think the upcoming summer months could present opportunities for fixed income investors to lock in yields before they slide further. Due to the anticipatory nature of the market, waiting until the Fed actually cuts could cause investors to miss out on bond price appreciation.

Signs of taming inflation around the world have allowed other central banks to begin their rate-cutting cycle ahead of the Fed. In emerging markets, rates have been steadily coming down from their highs, notably Brazil which began its rate descent almost a year ago.

After months of cuts from emerging market banks, lower rates finally came to developed markets for the first time this month: in the same week, the European Central Bank and the Bank of Canada reduced their rates by 25 bps each. In a world where central banks change rates at different times, here’s what we believe policy divergence could mean for investors:

• Bond yields across the globe are expected to decline further as the path of rates becomes clearer. Fixed income investors could take advantage of price appreciation, as well as take opportunities in extending duration.
• Global equity market dispersion has led investors to consider positioning into funds that capture single-country performance. We think a good balance of single-country exposures and broad allocations can help capture growth in regions investors have positive outlooks on.
• In any market, central bank policy divergence could introduce near term volatility as expectations and positioning change. We caution investors to look past the uneasiness and focus on the longer-term trends of disinflation and rate policy.

It’s also important to note that not all central banks have acted the same. This month the Bank of Japan stayed firm – holding rates at 0 - 0.1% as the country completes their second full month in non-negative territory. 

June was a groundbreaking month full of key elections. To put it into perspective, 1 out of every 4 individuals lives in a region that held an election this month – that’s over 2 billion impacted people. Let’s look at a few highlights:

Mexico

South of the border, Mexico elected their first female president, Claudia Sheinbaum. Although the ruling Morena party failed to obtain the super-majority needed in the Senate to change the constitution, the coalition is still expected to negotiate with the few remaining senators to pass reforms. Mexico’s uncertain political future caused some market turmoil: equity indices lowered, and the peso fell 4% following the results.²

As congress hashes out potential reforms, we see volatility in Mexican equities in the short to medium term. In the long run however, we believe Mexico is still poised to benefit from ongoing structural nearshoring trends, making the country an attractive strategic opportunity for EM investors.

Europe

Across the pond, the European Parliament elections saw a surge of far-right support, introducing the possibility of economic policy shakeups and forcing French President Macron to call a snap legislative election. Indices fell and the euro tumbled, falling 1.5% on the month.³ French stocks were especially hit hard – the French CAC40 fell 6.3% by the end of the week.⁴ Yields spiked across the continent and spreads between country’s bond markets widened to their largest margins this year.

The Europe could continue to be impacted by market volatility in near future amid political uncertainty. As such, we continue to highlight selective exposures in international markets through the use of active and single-country funds. 

India

In the subcontinent, Prime Minister Modi retained his seat, but his party lost its outright majority, marking a return of coalitions politics to the country. The prospect of political instability proved poorly digested by markets: the rupee weakened, and indices sharply slid. 

The election introduces more volatility to Indian equities, and we are sitting tight and paying attention to several key milestones that will provide clarity on the policy path ahead. Our long-term positive outlook on India remains unchanged. We think the election volatility could bear opportunities to invest in India at cheaper valuations.