A positive second quarter for the equities markets could not erase the loss of the first quarter. The corona pandemic is not over yet and caused increased volatility in June.
Equity market trends: the coronavirus is not over yet
June was again a positive month for the equity markets. The economic figures indicate a fairly favorable development of the economic restart of the countries that have eased their lock-down measures. Early in the month, the S&P 500 briefly reported a positive performance since the beginning of the year, while the Nasdaq index achieved a new historic record of over 10,000 points. The leadership of technology shares remains intact, despite the various regulatory threats that loom over individual leading technological companies. Equity markets experienced a mini correction in the second week of June. In that week, the S&P 500 dropped 7% and the Stoxx 600 6%. A partial recovery followed afterward. The markets refocused on the spread of the coronavirus. Globally, the number of corona infections is still on the rise, not only in Latin America and India but also in the US's southern and western states. Consequently, the European markets and the emerging markets reported the past month's best performances. The Chinese equity market was not affected by the local outbreak of the coronavirus in Beijing.
Bond market trends: extreme stability
Except for a short hick-up at the beginning of the month, the 10-year rates for the German and US benchmark bonds remained extremely flat. The jolt was the result of positive economic news on the restart of the economies, for instance, the surprisingly favorable job creation figure in the US. Due to higher risk appetite among investors, these 'safe' government bonds were disposed of, resulting in rising rates (to 0.91% in the US and -0.28% in Germany). However, central bank intervention is limiting any substantial rate increase. The increase in corona infections globally subsequently caused renewed growing uncertainty resulting in a drop in yields. During the past three months, the rates for these benchmark bonds have remained virtually unchanged.
The spreads of the euro zone's southern countries were able to shrink slightly further in June, but the momentum has weakened considerably against the previous month. The markets are likely waiting for a decision regarding the modalities of the European Commission's recovery fund. As expected, the member states did not reach an agreement at the first meeting of the European Council. Reports are that everyone agrees that the recovery fund will contain both transfers and loans, but the disagreement about the amounts continues. The key to allocating support to the countries continues to be a point of contention as well. The spreads of European corporate bonds narrowed slightly in the past month, but this trend stalled in the second half of the month due to increased uncertainty about corona infections.
Central banks: more measures
As expected, the European Central Bank expanded its pandemic emergency purchase program (PEPP) of 750 billion euros for bonds.The additional amount of 600 billion euro exceeded expectations. Also, the program was extended by six months to mid-2021. The Norwegian central bank came with prospects of a first interest rate rise, which were slightly more hawkish than expected. Norges Bank now anticipates increasing rates towards the end of 2022 compared to during 2023 previously.
The Federal Reserve, in an update of its economic prospects, indicated that it expects that, both in terms of economic growth and employment, the level of 2022 will not have reached pre-corona levels. According to the market, this was rather prudent. Moreover, the Fed announced that it might maintain the policy rate at the current level until the end of 2022. From now on, the Fed will also make direct purchases of corporate bonds on the market (and no longer only ETFs).
Currencies: the euro manages to hang on to gains
The euro was able to extend its gains of the previous months against major currencies such as the dollar, yen, and Swiss franc. As a currency, the dollar continues to be heavily impacted by investor sentiment. A lower risk appetite tends to imply a strong dollar and vice versa. During the meeting between Britain's Prime Minister Johnson and the European leaders in the middle of June, they agreed to intensify the negotiations from July. Johnson reiterated that there would be no extension of the transition period, which ends on 31 December of this year. The pound sterling weakened again and approached the bottom of the margin within which the currency has been fluctuating after the Brexit referendum in 2016. The Norwegian krone did not benefit from the central bank's announcement and weakened somewhat (-0.3% against the euro).
The other dollar currencies were stronger in June, supported by the increase in commodity prices. In the second trimester, the AUD and NZD were able to make up for almost the entire loss since the start of the corona crisis. The emerging market currencies remained reasonably stable in the past month, but, as before, constitute the mirror image of the development of the American dollar.
Commodities: gold approaches a historical record level
After a consolidation period in April and May, gold prices continued to rise and could top 1,750 dollars per ounce. Thus, gold prices matched the highest level of October 2012, approaching the historic record level of 2011 of approximately 1,900 dollars. Due to the rising number of corona infections globally, the interest in 'safe haven' investments are not diminishing. The expectation of the Federal Reserve to maintain interest rates at the current low level until the end of 2022, confirms that the opportunity costs of gold will continue to be low for a long time, which supports the price as well.
Brent oil prices managed to rise above 40 dollars per barrel for the first time since the beginning of March. Encouraging signs from the restarting economies supported the price. Early June, the OPEC, and its allies agreed to extend by a month the production limits of almost 10 million barrels per day. In the original agreement of April, this limit would apply in May and June and subsequently would be phased out in stages. The global increase in corona infections, however, put the brakes on the recovery of oil prices. Commodity prices continued their gradual recovery, and this was most noticeable in the price of copper, which gained 12.1% (in USD) in the past month. The improvement of the Chinese economy, which uses about 50% of the global copper production, is an important driver in this respect.
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