How have the financial markets performed?
For the financial markets, interest rate cuts were the main focus in the past quarter. This was no longer a surprise, but not everyone had expected the US Fed to kick off with a 50 basis-point cut.
Equities
Lower interest rates were a mixed blessing for stock exchanges. While lower interest rates are in principle good for stocks, if the declines are due to a deteriorating economic outlook, this will not necessarily be the case. US equities delivered a positive return of almost 2% and European equities of over 2%. Towards the end of the quarter, the Chinese government announced a large-scale package of stimulus measures, causing Chinese stock prices to rise by about 25% in a few days. This also had an effect on emerging markets as a whole, where share prices rose by more than 4%. Asian equity markets benefited indirectly, as prices rose by more than 4% in the past quarter. Returns on Asian equities were still somewhat dampened by Japanese stocks, which underperformed on the back of the Bank of Japan’s rate hike which was contrary to the international trend. This decision was made in response to a recovery in the Japanese economy, rising wages and higher inflation. The rate hike boosted the value of the yen, which is not good for export-oriented companies on the Japanese stock exchange.
Bonds
Government bond yields fell further in the past quarter, due to the interest rate cuts and the expectation of more cuts to come in the coming months. Government bond prices accordingly rose, and European government bonds delivered positive returns of 4% or more, depending on the bond’s maturity. Lower base rates also helped European corporate bonds, but returns on these bonds were less than on government bonds at 3.3%. This underperformance suggests that sentiment regarding the European economy is not entirely positive, as corporate bonds are seen as a riskier category.