European stocks end August at surprising highs after a difficult start to the month

‍In our Market Insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.

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European stocks end August at surprising highs after a difficult start to the month

European markets closed higher on Friday, marking the end of August on a positive note as investors analysed global inflation data. 

The pan-European Stoxx 600 reached an intraday peak of 526.66 points, an all-time high according to LSEG data, before slightly trimming its gains. 

Despite this, the index finished above 525 points for the first time, overcoming the sharp declines from early August to end the month up approximately 1.3%.

In the U.S., stocks also saw gains on Friday after a week of volatile trading. The S&P 500 and Dow Jones Industrial Average were both on track to record their fourth consecutive winning month. However, the tech-heavy Nasdaq Composite remained flat, with analysts attributing this to a summer shift in focus toward small-cap stocks.

Global equity markets have been supported by growing optimism for a soft landing of the U.S. economy and the anticipation of interest rate cuts from the Federal Reserve in September, followed by similar actions from the European Central Bank and other institutions.  

This week, key inflation data released in both Europe and the U.S. strengthened these expectations. Eurozone inflation dropped to a three-year low of 2.2% in August, according to preliminary figures from Eurostat released on Friday, aligning with forecasts and down from July’s 2.6%.

In France, the preliminary EU-harmonised consumer price index (CPI) showed an annual increase of 2.2% in August, down from 2.7% in July, as reported by the national statistics office on Friday. Similarly, Italy's preliminary data indicated a harmonised CPI increase of 1.3% year-over-year in August, lower than the previous month.

These reports followed the release of German and Spanish CPI data on Thursday, which also indicated easing inflationary pressures.

In the U.S., data revealed that the Federal Reserve’s preferred inflation metric, the personal consumption expenditures price index, rose by 0.2% in July on a month-over-month basis, matching expectations. 

This data could influence the Fed’s monetary policy, with many investors hoping for a rate cut in the upcoming September meeting.

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Australia's economy fares better than expected, but doubts still loom

Australia's economy outperformed expectations in the June quarter, driven by increased government spending. However, on a per capita basis, economic activity declined for a record sixth consecutive quarter.

According to the Australian Bureau of Statistics (ABS) on Wednesday, gross domestic product (GDP) grew by 1% compared to the June quarter of 2023. This growth rate surpassed the 0.9% predicted by economists but was slightly below the 1.1% reported for the March quarter.

For the entire 2023-24 financial year, the economy expanded by 1.5%, marking the weakest growth since the 1991-92 financial year, except for the 0.3% contraction during the COVID-19-affected 2019-20 year. On a quarterly basis, the economy grew by 0.2%, aligning with economists' forecasts and the ABS’s revised March quarter growth figure.

Australia's growing population has somewhat cushioned the impact of 13 interest rate hikes by the Reserve Bank over the past 28 months. However, per capita GDP contracted by 0.4% in the June quarter, continuing a record decline that began at the start of 2023, according to data dating back to 1973.

The June quarter's growth would have been weaker without increased spending by federal, state, and local governments. This additional demand supported strong employment growth but also made near-term interest rate cuts less likely. 

Public demand rose by 1.4%, contributing 0.3 percentage points to quarterly growth, while household spending decreased by 0.2%, reducing growth by 0.1 percentage points.

Meanwhile, investors were more concerned with significant declines in overseas markets following weak U.S. economic data.

Despite this, the Australian dollar rose modestly after the GDP figures were released, edging back above 67 U.S. cents, while stocks recovered some of their earlier losses of 2% during morning trading.

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India’s economic growth to remain strong despite global economic issues

The Indian economy continues to expand at a robust pace despite global challenges, according to the latest data. 

The India Development Update (IDU) highlights that India remained the fastest-growing major economy, achieving a remarkable growth rate of 8.2% in FY23/24. 

This growth was largely driven by public infrastructure investments and a surge in household investments in real estate. On the supply side, the economy was bolstered by a thriving manufacturing sector, which grew by 9.9%, and resilient services activity, compensating for weaker performance in agriculture.

As a result of these trends, urban unemployment has steadily improved since the pandemic, with a notable decline in female urban unemployment to 8.5% in early FY24/25, though urban youth unemployment remains high at 17%.

India’s external position has also strengthened, with the current account deficit narrowing and strong inflows of foreign portfolio investments pushing foreign exchange reserves to a record $670.1 billion in early August, equivalent to over 11 months of import cover based on FY23/24 figures.

Looking ahead, the World Bank projects a positive medium-term outlook for India, with growth expected to reach 7% in FY 24/25 and remain strong through FY 25/26 and FY 26/27.

With robust revenue growth and ongoing fiscal consolidation, the debt-to-GDP ratio is projected to decrease from 83.9% in FY 23/24 to 82% by FY26/27. The current account deficit is expected to stabilise at around 1-1.6% of GDP during this period.

The IDU also underscores the crucial role of trade in sustaining growth. While global trade has faced rising protectionism in recent years, the post-pandemic reconfiguration of global value chains presents new opportunities for India.

The report points out that India has enhanced its competitiveness through initiatives like the National Logistics Policy and digital programs that reduce trade costs. However, it also cautions that increasing tariff and non-tariff barriers could limit the potential for trade-focused investments.