Welcome to the Muslim Money Experts’ monthly market review, an analysis of global market performance. In this series of monthly blogs, we explore the implications of current economic data and changing market conditions that help you better understand the markets and support your investment decisions.
Markets continued their year-to-date rally in June, as more investors continued to move away from their defensive positioning to start the year. The MSCI World Islamic Index rose by 6.4% in June, while the Dow Jones Sukuk Index fell by 0.5%, as interest rates were rising once again.
The persistent themes during the month were the stickiness of inflation, the expected path of interest rates, and the emergence of artificial intelligence as a driving force for optimism in the global economic and market outlooks.
The S&P 500 formally entered a bull market during the month and finished the month up 6.5% led by the mega tech companies as a result of surging long-term expectations of an AI boom that has been likened to the internet revolution in the ’90s. Despite geopolitical tensions between the US and China and uneven chip demand creating obstacles for the current profitability of an AI-driven economy, the tech rally has been ferocious with the NASDAQ composite index up 32% in the first months of the year.
In the broader economy, the year-over-year CPI increase fell to 4.0% from 4.9% in the previous month, suggesting that inflation was starting to come under control. However, as central banks in Europe and Canada headed in a different direction with surprise rate hikes as a result of inflation picking up in those regions, the US Federal Reserve echoed the hawkish stance of the other banks while keeping rates on hold, indicating that at least two more rate hikes would be needed this year.
As the month progressed, it became more noticeable that market interest rates at the short end of the curve (e.g. 2 years) were significantly higher than rates at the long end of the curve (e.g. 10 years), a phenomenon known as an “inverted yield curve.” This has historically been a reliable indicator of a looming recession as it reflects expectations of interest rates being lowered in future years in an effort to stimulate economic activity.
However, this time around, market participants took the view that the inverted yield curve reflected expectations of interest rates being lowered in response to inflation coming back down to target levels. This view reflected a belief that the recession may be avoided in the US by winning the fight against inflation before high-interest rates do any significant damage.
Elsewhere in the world, the economic picture was not as strong, as activity in Europe started to slow down with weak manufacturing data and higher interest rates. With inflation starting to pick up as well, concerns about stagflation started to resurface and European markets underperformed in June. The mutiny in Russia could have upended the energy markets and created significant volatility more broadly, but the markets took it in stride.
In China, economic data continued to disappoint after high expectations of a strong recovery due to the long-awaited post-Covid reopening. With the recovery losing momentum, the Chinese government stepped in by asking banks to lower interest rates to encourage spending, providing stimulus, and taking steps to protect the value of the yuan.
Heading into the second half of the year, the big question mark remains whether the recent bout of inflation is ending or will remain prolonged, and how central banks will respond. As markets gradually push rate cut forecasts further into the future, there is a risk that the recent rally will start to fizzle out. However, given that a lot of the optimism is about the tech sector and its innovations being independent of the economic cycle, many market participants also believe that barring any major shocks, it is likely the worst is behind us.