Mercer market review 

Markets can move rapidly and conditions can change based on macro- and micro-economic news and data. At times, it can be difficult to keep up and to determine the important information from the noise.

Our global investments analysts and researchers, and market and asset class specialists, are constantly monitoring markets to identify the most important developments and potential opportunities. 

Our monthly and quarterly insights reports provide a summary of what we believe to be the most significant news points and market movements and attempt to explain them, aiming to keep you on track and informed while still allowing you to keep a focus on the long term.

Global equities and fixed income generally posted positive returns in June. US equities outperformed international equities by a wide margin but slightly underperformed emerging market equities. Growth significantly outperformed value during the month (as measured by the Russell 3000). 

Investor sentiment continued to improve during the month as inflation eased in developed markets. Notably, headline inflation in the US declined to 3.3% year-over-year, better than expected. This followed a few months of higher-than-expected inflation readings earlier in the year that led to investor fears of monetary policy having to stay tight for longer. At the same time, economic growth remains on track. Nonfarm payrolls for May surprised to the upside, although the unemployment rate rose to 4.0% which suggests a slowing labour market. This contributed to optimism that a resilient yet slowing economy will lead to further reduction in inflation without triggering a recession. Yields fell across the curve in the US as a higher chance of looser monetary policy was priced in again, which helped propel US equities and fixed income higher. Solid corporate earnings were another tailwind.

Forward looking purchasing manager indicators continue to be in expansionary territory in developed markets, with the US composite PMI climbing to a 26-month high while indicators for the UK and Europe and Japan were weaker. For China and India, PMIs continued to expand. 

The Fed kept interest rates unchanged, while also releasing their FOMC dot plot which implied just one rate cut in 2024.  US headline inflation eased by more than expected, while inflation in other developed markets continues to trend downward. The Bank of England erred on the side of caution, leaving interest rates unchanged even as inflation fell back to target. Inflation in China remained low in May, as the country is still emerging from a deflationary period. The ECB cut rates for the first time since 2019, while the Swiss national bank cut rates for the second time in a row in a surprise move.

Following a considerable increase in US tariffs on Chinese electric vehicles last month, the EU announced tariffs as well. Also, EU elections resulted in an unexpected set back for establishment parties and a subsequent snap election in France led to a first-round victory of the anti-establishment ‘National Rally’ party. This comes in addition to a general election taking place in the UK in  early July. In the US, Donald Trump and Joe Biden faced each other in the first debate in the run-up of the November election. These events keep uncertainty elevated, which was reflected in negative performance for major European equity indices and hence the MSCI EAFE overall.

The US dollar strengthened against major developed currencies apart from the Australian dollar and Swiss Franc. Global REITs and commodities underperformed broader equities, posting low positive to negative returns in June even as oil prices increased by almost 6%.

Global equity markets performed strongly during the first quarter. Even though the Federal Reserve shifted gears on rate cuts, equity markets focused on the AI narrative and a generally solid economy, which benefited US large growth stocks the most. Returns for small cap, value and non-US were more subdued, yet positive. Equity volatility remained low and declined during the quarter as equities had positive returns across the board.

Treasury yields rose sharply during the quarter as markets positioned for a slower pace in rate cuts than expected at the end of 2023. The 2-year Treasury yield rose by 40 bps from 4.2% to 4.6% during Q1, while the 30-year Treasury yield also rose by 30 bps from 4.0% to 4.3%. Credit spreads declined during this risk-on quarter.

Global equity markets experienced a decline in the quarter, primarily due to an increase in longer-term rates as markets anticipated a prolonged period of higher rates. Volatility remained low for most of the quarter but rose in the final weeks alongside the spike in rates.