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Quarterly Economic & Market Review – Q2 2024

Economic and Market Overview

During Q2, the markets had to contend with political uncertainties, including ongoing challenges in Middle East, the death of Iranian President, Indian elections, US politics, French elections and the ramping up of election campaign as we approached UK elections on 4th July. The markets were relatively more volatile than the previous quarter amid changing macroeconomic factors and the expectations for the future path of interest rates as inflation softened in some parts of the world while remained sticky in others. The European Central Bank took the lead in cutting interest rates in June, a shift from nine months of stable rates. The Bank of England is expected to follow suite, however, the consensus for interest rate reduction in the US is expect to be in second half of the year, as policymakers do not expect it will be appropriate to reduce rates until they gain greater confidence that inflation is moving sustainably toward 2%.

As interest rates remained elevated in the quarter, mixed economic data was released where inflation generally fell in most of the developed economies but rose in Canada and Russia, however, unemployment rate increased in some of the countries including the US, UK, and Germany. In terms of economic growth, almost all major economies witnessed growth in Q2 vs Q1, although US GDP growth was lower than what it was in Q1. Meanwhile, Q1 GDP growth in China was the highest in last four quarters as economy gains from stimulus initiatives taken the government.

During the second quarter, equity markets broadly followed the positive momentum set in the first quarter of 2024 amid softening inflationary pressures and signals from central banks that interest rates will possibly start falling in second half of 2024. However, the performance of equity markets varied across the globe. Both the US and UK equity markets (S&P 500 and FTSE 100) rose by 4.49% and 3.75%, respectively, mainly driven by improving macros, good corporate earnings, and resilient economies. DJ Islamic markets index, the benchmark for Shariah compliant equity investments, surged over 4% in the second quarter. Meanwhile, Europe’s Euronext 100, China’s Shanghai Index, and Japan’s Nikkei 225 declined by 2.76%, 2.58%, and 0.553%, respectively, amid geopolitical situation and weakening macro factors. DJ sukuk index ended the quarter with just over 0.6% increase as yields largely remained volatile. Commodities’ markets also rewarded investors with good returns where gold surged by 5.26%, DJ Commodity Index increased by 3.09%, however, oil declined by 3.34%, in Q2 of 2024 amid heightened uncertainty and delay in interest rate cutting cycle. On the currency front, UK pound closed the quarter almost flat against US dollar.

Performance of global assets Q2 2024

In Q2, amid pushing expectations of rate cut back to later part of the second half of 2024, yields started rising again, and after touching to 4.7% level, they ended Q2 at around 4.3% level, which is still much higher than 3.90% at the start of the year. The volatility in yield curve is a reflection of high level of uncertainty around macroeconomic environment posted by mixed macroeconomic data over the last two quarters.

10-Year Treasury Yields

On the geopolitical front, there were a number of notable developments including the death of Iran’s President Raisi and other officials after a helicopter crash due to poor weather. Moreover, the US blamed Chinese leadership for supporting Russia’s war in Ukraine and cautioned China could face further sanctions in response from the US and NATO countries. Additionally, Russia and North Korea signed mutual defence pact while Vladimir Putin and Kim Jong-un’s agreement raised western alarm about possible Russian help for nuclear programme as Putin said Russia may send weapons to North Korea.

Key News & Events in Q2 2024

UK

• The annual inflation rate in the UK slowed to 2% in May 2024, in line with forecasts, the lowest since July 2021, from 2.3% in April and 3.2% in March.

• The Bank of England decided to maintain the Bank Rate at 5.25% during its June meeting, as expected, with two members advocating for a decrease to 5%. The rates did not move in any direction in the second quarter, and they are at this level since September 2023.

• The British economy expanded 0.7% on quarter in Q1 2024. It is the strongest expansion in over two years, ending the recession it entered last year as the economy saw contractions of 0.1% and 0.3% in Q3 and Q4 of 2023, respectively.

• The Bank of England announced Financial Stability Report. Risks to the UK financial system are broadly unchanged since Q1. But some asset prices have continued to rise, and the risk of a sharp correction persists. However, the UK banking system is strong enough to provide the support households and businesses need as the economy recovers.

• The UK unemployment rate rose to 4.4% from February to April 2024, compared to the previous three-month period’s 4.3%. It was the highest reading since the three months to September 2021.

US

• The annual inflation rate in the US unexpectedly slowed to 3.3% in May 2024, the lowest in three months, compared to 3.4% in April and forecasts of 3.4%. At the end of first quarter of 2024, the inflation rate was at its peak of 2024 at 3.5%.

• The Federal Reserve left the fed funds target range steady at 5.25%-5.50% for a 7th consecutive meeting in June 2024. The Fed has kept rates at these levels since August 2023 in line with their thinking that the policy is sufficiently restrictive to counter heightened price levels after covid-19 outbreak.

• The US economy expanded an annualised 1.4% in Q1 2024, but continuing to point to the lowest growth since the contractions in the first half of 2022. Although the US economy is growing, however, the growth is sufficiently less than what we have seen both in Q4 and Q3 of 2023, which indicates higher rates is having the intended impact.

• The unemployment rate rose to 4% in May 2024, the highest since January 2022, up from 3.9% in the previous month The jobless rate was 3.8% at the end of first quarter of 2024. Meanwhile, the labour force participation rate dropped to 62.5% from 62.7%, and the employment-population ratio decreased to 60.1% from 60.2%.

Europe

• The National Rally (RN) won 33% of the popular vote in the first round of France’s snap two-round general election, according to final results, with the leftwing New Popular Front (NFP) alliance on 28% and President Emmanuel Macron’s centrist Together bloc on 21%.

• The 2024 European Parliament election was held in the European Union (EU) between 6 and 9 June 2024. It was the tenth parliamentary election since the first direct elections in 1979, and the first European Parliament election after Brexit. A total of 720 Members of the European Parliament (MEPs) were elected to represent more than 450 million people from 27 member states.

• Annual inflation rate in the Euro Area eased to 2.5% in June 2024 after briefly accelerating to 2.6% in May. Still, inflation rate is slightly higher than 2.4% at the end of Q1 2024 and 2.4% in April.

• The ECB lowered the three key interest rates by 25 basis points in June, in line with expectations. The main refinancing operations rate was lowered to 4.25%, the deposit facility rate to 3.75%, and the marginal lending rate to 4.5%. It is the first rate cut since September 2023 as rates remained at 4.5% level throughout that period.

• The Eurozone economy expanded 0.3% on quarter in the first three months of 2024, recovering from a 0.1% contraction in each of the previous two quarters. It also marks the strongest GDP growth since the third quarter of 2022, with net trade making the largest upward contribution.

• The unemployment rate in the Euro Area remained unchanged at 6.40% in May and it remained at this level throughout Q2, which is slightly lower than 6.50% in Q1 of 2024.

China

• China’s annual inflation rate was at 0.3% in May 2024, holding steady for the second straight month. It remained at this level in Q2, which is higher than 0.1% at the end of Q1 2024. It was the fourth straight month of consumer inflation, signalling an ongoing recovery in domestic demand.

• The People’s Bank of China left key lending rates unchanged at the June fixing, aligning with market expectations. The 1-year loan prime rate (LPR), the benchmark for most corporate and household loans, was maintained at 3.45%. This rate remained at this level since August 2023 to provide stimulus to the economy, which is struggling with low growth and property market turmoil. Meanwhile, the 5-year rate, a reference for property mortgages, was retained at 3.95% following a record cut of 25bps in February.

• The Chinese economy grew by a seasonally adjusted 1.6% in Q1 of 2024. Low rates and stimulus packages are helping the second largest economy grow, however, the growth rate is still low compared to the same period last year.

• House prices in China fell by 0.7% month-on-month in May 2024, following a 0.6% decrease in the prior month, which is much higher than the price drop of 0.3% in March 2024. The house prices are continuously on the downward trend since July 2023.

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