Favourable financial developments alongside political tension
Looking back at the second quarter, these are the main developments:
- Stock prices rose worldwide, driven by strong corporate results in the first quarter. Big tech companies benefited from the AI hype.
- Financial markets are now expecting fewer interest rate cuts for this year than they expected at the beginning of the quarter.
- While inflation figures are more favourable than expected, they are still higher than the central bank's target. This particularly applies to the services sector.
- Geopolitical tension in the Middle East is growing, causing oil prices to go up. The effect will taper off if escalation between Israel and Iran is avoided.
- At the European parliamentary elections in France, Marine Le Pen's radical right-wing party Rassemblement National (RN) came out as the largest. President Macron called new elections in France, which led to unrest on the financial markets in June.
Outlook
Late July / early August saw (brief) unrest on the financial markets impacting the funding ratio of our pension fund. The 30-year rate which we use for our calculations declined steadily from 2.5% to 2.22%, after which it recovered slightly to 2.29%. This rate decline reflected fear for a recession in the USA and a potential further interest rate increase in Japan.
Economic developments in the USA were disappointing. This applied to, for instance, job growth and the results published for the second quarter by American tech companies investing in AI. Unemployment was on the rise as well. In Japan the central bank increased its key interest rate from 0.10% to 0.25% and indicated that 0.50% would not necessarily be the ceiling. These developments in Japan and potential interest rate cuts in the USA have made the Japanese Yen stronger, as a result of which borrowing in the Japanese currency has become more expensive, and “carry trading” as well. “Carry trading” means money is borrowed at relatively low interest rates, in this case the Japanese Yen, in order to be invested elsewhere. The goal is to make a higher return, for instance by investing in shares or countries whose currencies have relatively higher interest rates. In early August, many market parties reversed (large portions of ) their “carry trades” as they feared the possibility of further interest rate hikes in Japan. This led to a sell-off of shares and lower interest rates (as a result of investments in relatively safer bonds).
After this, a Japanese central banker said, “A possible rate increase will not be implemented if the financial markets are not stable”. This helped financial markets cool down after several days and our funding ratio was able to recover. We will continue to monitor these developments closely. Stay up-to-date through our newsletters, website and next quarterly report.”
This Pension Overview has been carefully prepared. The final figures for 2024 will be published in the anual report. You cannot derive any any rights from this report.