An Indian Rollercoaster

Here are some of the biggest stories from last week:

• The European Central Bank cut interest rates for the first time in nearly five years.
• Indian stocks went on a rollercoaster ride during the nation’s surprise elections.
• Meme-stock GameStop skyrocketed at the start of the week.
• OPEC+ extended its oil supply curbs but also outlined a plan to bring some production back online later this year.
• China is emitting less CO2 for the first time since the pandemic ended.

Dig deeper into these stories in this week’s review.

Macro

In a widely telegraphed move, the European Central Bank delivered its first interest rate cut in nearly five years on Thursday, moving faster than its US and UK counterparts in lowering borrowing costs after the biggest inflation surge in a generation. The move took the bloc’s benchmark deposit rate to 3.75%, down from a record high of 4%. But the ECB stopped short of indicating more rate cuts may follow, which is perhaps understandable in the wake of recent data showing stronger-than-expected economic growth, inflation, and wage increases. Data released last week, for example, showed eurozone inflation accelerating for the first time this year to 2.6% in May, driven by a surge in the labor-intensive services sector.

In its updated quarterly outlook, the ECB lifted its inflation forecasts for this year and next by 0.2 percentage points each. That means it’s now expecting inflation to average 2.5% in 2024 and 2.2% in 2025 before dipping below its 2% target in 2026. The bank also boosted the bloc’s economic growth forecast for this year from 0.6% to 0.9%. It expects 1.4% growth next year and 1.6% in 2026.

Stocks

Indian stocks had an extremely volatile start to the week after the surprising election results in the world's most populous country were revealed. The Nifty 50 Index – India’s main stock benchmark – rallied 3.3% on Monday to a record high after exit polls forecast a landslide election win for Prime Minister Narendra Modi. You can understand traders’ euphoria: the incumbent’s third term promised investors a continuation of infrastructure-led economic growth and market-friendly reforms. But the rally proved to be very short-lived, with the Nifty 50 Index tumbling 5.9% on Tuesday – its worst day in more than four years – after poll tallies showed Modi’s party losing its parliamentary majority.

The narrower-than-expected victory for Modi’s alliance will raise questions about the new government’s ability to push through politically difficult reforms in property and labor laws, which are seen as crucial by some investors to sustain India’s strong economic growth. While Modi’s alliance is still set to win a third term, he will now have to depend on coalition partners for support – including two regional party leaders who have frequently switched allegiances in the past.

Elsewhere, meme-stock mania is back in full force in the US. Last Sunday, American trader Keith Gill – a.k.a. “The Roaring Kitty” – posted a screenshot on Reddit that seemed to show he’d spent $106 million buying shares in struggling video game retailer GameStop, along with $68 million in options that would let him snap up more. The big reveal by the godfather of the 2021 meme stock frenzy initially caused GameStop’s shares to surge 74% when markets opened on Monday – adding $6 billion to the company’s total value at the time – before settling to a 21% gain by the close. It also triggered a rally in other meme stocks, including AMC Entertainment, SunPower, Beyond Meat, BlackBerry, and Reddit.

The Reddit post was the account’s first in more than three years, mirroring a return for Gill’s account on social media site X just last month, which sent GameStop’s shares surging (though the rally quickly fizzled out as the mania failed to retain investor interest). The flashy episodes, which come as US stocks continue to hit new highs, are arguably the latest signs of frothiness in the market, according to some commentators. In other words, beware of chasing the meme-stock frenzy…

Commodities

In an effort to reverse falling oil prices, OPEC+ has announced several production cuts and extensions to these curbs since 2022. And at its latest biannual meeting on Sunday, the cartel agreed to further extend those cuts (in some cases to the end of 2025) but also outlined a plan to bring some oil production back online later this year.

The first set, a group-wide cut of 2 million barrels a day set to expire at the end of the year, was extended for 12 months. However, the group exempted the UAE, which will be permitted to gradually increase its 2025 baseline output by 300,000 barrels a day. A set of voluntary production cuts by nine members – including Saudi Arabia, Russia, and the UAE – totalling 1.66 million barrels a day and due to expire in December, was also extended until the end of 2025. A third set of voluntary cuts introduced in January and set to end this month, representing 2.2 million barrels a day, will be prolonged until September and then gradually unwound over the following 12 months.

Traders had largely expected the decision. After all, OPEC+ is still contending with an uncertain demand outlook (especially from China) and surging oil production from the US and Canada. Brent oil traded at around $78 a barrel after the group’s decision – down from more than $90 in April after tensions spiked in the Middle East. What’s more, oil prices are way below the roughly $100 a barrel needed by Saudi Arabia – the cartel’s de facto leader shouldering most of the production curbs – to fund its ambitious economic transformation program.

Elsewhere, new research last week showed China is spewing less carbon into the atmosphere for the first time since the pandemic ended. See, China’s CO2 emissions spiked after the nation dropped its economy-choking “zero-Covid” policies in December 2022. But that trend is starting to reverse, with emissions from the world’s biggest polluter falling 3% in March from a year ago – the first drop in over a year, according to Carbon Brief.

There were several drivers behind the decline. First, record wind and solar installations met nearly all of China’s increased demand for electricity. Second, the ongoing slowdown in the property sector curtailed emissions from the highly pollutive steel and cement industries. Third, oil demand growth stalled thanks to more EVs on the road. Carbon Brief expects emissions to continue to decline in April, which reinforces the research firm’s view that China’s emissions could have peaked in 2023 – well before the nation’s 2030 deadline.

China’s CO2 emissions account for nearly a third of the world’s total. So the decline in March is great news, especially with the planet having recently hit its 11th straight month of record temperatures. And, fortunately, there’s been good news elsewhere too: a recent study from Bloomberg New Energy Finance said that, on a global basis, emissions may have peaked last year and could fall by as much as 2.5% this year, helped by China's reduction in coal-fired electricity generation.

But China’s green enthusiasm may not be strictly about the planet: if not for clean energy, its economy would be a lot more lethargic. Case in point: the nation’s clean energy sector accounted for a staggering 40% of economic growth last year. Without that, the country’s economy would’ve grown by a measly 3% last year – well shy of the government’s 5% target and the 5.2% it actually delivered.

Next week

• Monday: China loan growth (May), eurozone economic sentiment (June).
• Tuesday: UK labor market report (May). Earnings: Oracle.
• Wednesday: Fed interest rate announcement, China inflation (May), UK GDP (April), US inflation (May). Earnings: Broadcom.
• Thursday: Eurozone industrial production (April), US producer prices (May). Earnings: Adobe..
• Friday: Bank of Japan interest rate announcement, eurozone trade balance (April), US consumer sentiment (June).