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Monthly Market News May 2020 - Market trends
By Johan Gallopyn - Investment Desk Analyst
Poor economic figures did not get in the way of the upward trend in equity markets in May. The fear of missing out on the rally appears to be higher than the anxiety about the growing damage caused by the health crisis. Toward the end of the month, the markets became somewhat nervous about the conflict between the US and China flaring up again.


Our expert, Johan Gallopyn, provides an analysis of the trends in May.

Equity market trends: positive sentiment dominates markets
The equity markets continued their upward trend in May. Economies in Europe and the US are gradually opening up again. However, some market participants fear that the equity prices are running too far ahead of the economy. But poor economic data is known information and the markets have opted to shift their attention to positive news regarding the development of a corona vaccine, signs of improving corporate activity and additional government and central bank measures. The proposed recovery plan of the European Commission was a significant element in the outperformance of European equity in the past month. At the end of the month, investor sentiment became clouded due to a renewed escalation of the conflict between the US and China regarding Hong Kong. China wants to tighten its grip on Hong Kong, which consequently would lose its semi-autonomous status. The Asian equity markets underperformed considerably compared to the other emerging markets. At a sectoral level, the trend of outperformance by high-quality growth companies, such as technology, was reversed, to the benefit of the cyclic sectors, hard hit during the market correction. President Trump's conflict with Twitter could lead to increased regulation of the technology sector. In contrast, industries such as tourism and aviation were able to look forward to restarting their activities.
Bond market trends: extreme stability
US and German benchmark bond rates remained extremely stable in May. US 10 year rates fluctuated around 0.7% while German rates hovered around -0.5%. The effect of the purchasing programs of the central banks is evident. For the first time since 1986, the US government issued a bond with a 20-year maturity, benefiting from the low interest rates to fund its corona crisis support packages. The emission enjoyed great interest. In June, a record amount in American government emissions with various maturities is expected. Government bond spreads of peripheral countries are narrowing significantly, in particular in the second half of the month. The expected extension of the ECB bond purchase program and especially the European recovery fund has contributed to this. The Italian spread against German bonds was able to fall below 200 bps, while the Spanish spread dropped below 100 bps. A similar picture shows in respect of corporate bonds. In the first half of the last month, the market was flooded by new corporate bond emissions, which temporarily halted the downward trend of the spreads.
Central banks: continuing down the chosen path
The central banks remain active in supporting the economy and facilitating the normal functioning of the markets. The European Central Bank announced in May that it is ready to extent its pandemic emergency purchase program (PEPP) (with a final decision on June 4th). At the current rate, the existing 750 billion euro program would be exhausted by October. Last month, the Constitutional Court in Germany ruled that the ECB Public Sector Purchase Program or PSPP does not comply with the German constitution. The dispute dates back to 2015 and deals with the proportionality of ECB purchases and the question of whether these purchases comply with its task of safeguarding price stability. It is unlikely that the ECB shall adhere to the requirement of the German Court to justify its PSPP purchases. The incident shows that the current PEPP and future ECB actions could be challenged afterwards.
Currencies: euro stronger
The euro gained in strength against leading currencies such as the dollar, yen, Swiss franc and pound sterling. The European Commission's proposed recovery fund has contributed to this. It is a significant step forward that it predominantly concerns transfers - and not loans - to countries that have been hardest hit by the corona crisis. So, for the first time, there is apparent solidarity between the eurozone countries. The pound sterling weakened due to a recurring fear of a no-deal Brexit. The negotiations about the future relationship between the EU and the United Kingdom are not progressing, with the UK threatening to leave the talks if there are no prospects of outlines for an agreement by next month. Also, the Bank of England was considering a negative interest rate (currently 0.1%). Other currencies that dropped during the peak of the corona crisis were able to report the start of a recovery. It's the case for, amongst others, the other dollar currencies (CAD, AUD) and the Scandinavian currencies (NOK, SEK). Moreover, the currencies of emerging countries were able to see a slight recovery due to the weaker US dollar. The exception was the Chinese currency, which weakened. Against the dollar, the renminbi moved somewhat further away from the symbolic limit of 7 and approached the levels reached during the trade conflict in September of last year.
Commodities: limited recovery
In May, the price of gold fluctuated between 1700 and 1750 dollars per ounce. At the end of the month, it closed at the lower end of this margin. Improved investor sentiment, owing to the gradual reopening of most of the economies and the confirmation of the Federal Reserve that a negative policy interest is not on the cards, brought prices down. However, many consider the increasing levels of government debt to be a support of the precious metal. Oil prices rose by a spectacular 40% in May. A reaction following the collapse of the prices since the end of February. An OPEC+ meeting will take place on 9 and 10 June, which may discuss a possible continuation of the production limitations agreed in April. Expectations are that Russia will want to phase out production limitations from July, as provided in the agreement. Saudi Arabia and other Gulf states have implemented more production limitations than agreed. Industrial commodities remained relatively stable, which means that the prices continue to approximate their lowest levels in March. Contrary to this, copper reports a more positive trend.
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