Explore the monthly market wrap-up, a summary of the key trends, emerging players and market movements.

Key market movements that caught our attention in June:

European Central Bank cuts rates before the Fed

The European Central Bank (ECB) has implemented its first rate cut in five years, which was widely anticipated. On June 6th, President Christine Lagarde announced a 25 basis point reduction to all three of the ECB's key interest rates. The main refinancing operations rate, which is the rate banks pay when they borrow money from the ECB for one week, and the deposit facility rate, which banks use for overnight deposits with the Eurosystem, were reduced to 4.25% and 3.75%, respectively.

Inflation in the eurozone has moderated from an average of 5.4% in 2023 to 2.5% in May. This is an impressive reduction in the headline rate, although core inflation and services inflation remain stubbornly high at 2.9% and 4.1%, respectively. The persistent services inflation will likely deter the ECB from making further rate cuts in the coming months. Policymakers are concerned that persistent inflation in the services sector could entrench an above-target inflation rate. Wage pressures also remain, with first-quarter data showing wages grew at a rate of 5%, a 0.1% increase from the final quarter of 2023. Wage growth is expected to remain elevated for the rest of the year, with the majority of the decline anticipated in 2025.

Source: Tradingeconomics.com

Currently, Europe is experiencing significant activity, with French elections taking centre stage and the Euros in Germany. Without a significant moderation in services inflation, the market's expectation of two 25 basis point cuts by year-end seems ambitious. One more cut for the year appears more appropriate.

France’s snap election drives bond yields; National Rally Party deficits

President Macron declared a snap election after his centrist party suffered a heavy loss to the Nation Rally (RN) party in the EU elections. The blow to Macron was significant as Marine Le Pen dominated the polls with twice as many votes as Macron's party. The voting system in France is different from that of Australia. It is a two-round system. In the first round, if no candidate receives more than 50% of the vote, a second round is held. In the second round, the top two candidates from the first round face-off, and the candidate with the most votes wins.

The snap election caused bond yields to spike, losses across a broad range of stocks, and a fall in the euro. The spread on French yields compared to German bund yields, a key measure of market sentiment, rose to 84 basis points. Investors were spooked by the prospect of either a far-right or far-left government, both of which are associated with large spending. The RN has pledged to end the long-running high deficits and adhere to the European Union's fiscal rules. However, analysts remain cautious of the RN's measures to reduce deficits, as they may not yield significant savings, leaving questions about how they would fund their proposals. France's budget deficit was well above target at 5.5% of economic output in 2023, posing significant challenges in reducing it. Sunday's second round of elections will determine whether the RN party achieves a majority and their ability to pass legislation with ease.

Source: Tradingeconomics.com

China’s copper stockpiles pulling prices down

Comex copper has fallen approximately 15% from its highs in mid-May, primarily due to developments in China. The large levels of copper stockpiles in China are causing prices to ease and trade flows to adjust. Stockpiles have surged this year, with China importing about 60% of globally traded copper. Inventories registered with the Shanghai Futures Exchange (ShFE) reached a 51-month high of 339,964 metric tons in the week leading up to June 7. This unusual buildup of copper may be due to struggling sectors such as housing construction and manufacturing.

Additionally, in the first five months of the year, imports reached 2.327 million tons, an 8.8% increase from the same period a year earlier. This rise in imports could be attributed to discounted Russian copper, as Russia can no longer sell to its previous major buyers in Europe due to sanctions. These record-high stockpiles have recently decreased, indicating that buyers are returning. The demand outlook for copper remains strong, driven by the energy transition and data revolution, which will continue to require significant amounts of this critical metal. However, short-term fluctuations due to US short squeezing and Chinese stockpiles do not provide a reliable long-term outlook for investors.

Source: China Customs

Will's May market comments:

"In the world of central banks, there has been a noticeable divergence: Europe has begun a rate-cut cycle, the US has made progress on inflation and employment, while Australia continues to grapple with persistent inflation, delaying any potential rate cuts. The crucial Q2 data, set to be released before the August RBA meeting, will likely be the deciding factor for either maintaining or increasing rates. Some argue that the current cash rate of 4.35% has not been restrictive enough to combat inflation, especially when compared to other nations with rates exceeding 5%. The RBA faces a challenging decision in August. They may be compelled to take strong measures against inflation, even at the expense of economic growth."

- William Smith, Dealers Assistant, BPC Wealth Management