Friday 07/12/2018

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Investment Desk Analyst

After a turbulent start to the month - the trade dispute - the markets ended up in calmer waters. The equity markets were able to close July with clear profit in all regions. Our expert, Johan Gallopyn, looks at the trends for the equity, bond and currency markets over the past month.

Equity markets

The month of July did not get off to a favourable start after the introduction of the previously announced US import tariffs on Chinese goods and the Chinese retaliatory measures on US imports. New threats followed (subjecting all Chinese imports to tariffs). In the course of the month, attention shifted to the announcement of the operating results for the second quarter. The trade tensions also continued to ease after the meeting between President Trump and President of the European Commission Juncker ended with a cease-fire, at least temporarily. The shares in all regions increased, with the Eurozone (MSCI EMU + 3.5%) and the United States at the head of the pack. They returned to a positive ground since the beginning of this year, except the emerging markets. In particular, the Asian region (MSCI Asia +0.7%) lagged behind due to the weak performance of the Chinese shares. In the course of the month, the American technology index Nasdaq recorded a new all-time high just below 8,000 points. However, a number of closely followed technology companies recorded results below expectations (Facebook, Netflix, Twitter), which reduced the index. Other technology companies did meet or exceed expectations (Apple, Amazon, Microsoft). The season of results was approximately halfway through at the end of the month and exceeds expectations on both turnover and profit levels. In their comments, a number of industrial companies report a limited impact from the trade tariffs, but most companies do not yet see any significant impact. Expectations for the next few quarters are therefore not affected. 

 

 

 

Bond markets

10-year bond yields rose, especially in the second half of last month. US interest rates reached just below 3% and German interest rates remained just below 0.5%. Interest rates were pushed higher by a number of factors. In the US, the economic figures remain favorable, which means that the Federal Reserve will carry on down its expected path of interest rate increases. Moreover, the government announced that it would issue more bonds in the second half of the year than previously expected. This is a consequence of the increased public deficit resulting from tax cuts and increased expenditure. European bonds followed the same trend, partly because there was some relaxation in the trade dispute with the US following the meeting of Juncker with Trump. In addition, both bond markets were impacted by the market expectations regarding a monetary policy adjustment in Japan. Corporate bond spreads declined over the past month, after several months of increasing interest rate differentials. This was particularly noticeable in the higher risk segment.  

 

 

 

Central banks and monetary policy

In the run-up to the Bank of Japan meeting, the market created expectations that monetary policy adjustments - read less flexible, following the example of the US and European central banks - could be announced. In the end, these adjustments were confined to matters of a more technical nature and the BOJ will continue to pursue its extremely flexible policy “for quite some time”. Moreover, the central bank lowered its inflation outlook. The objective of the BOJ remains to keep the 10-year interest rate at around 0%, but will henceforth apply an (informal) fluctuation margin of 0.2% upwards and downwards compared to 0.1% previously. The aim is to make the market function better if scarcity on the market would arise as a result of the purchasing program. The Chinese Central Bank is adopting a more flexible position through liquidity injections and measures to facilitate lending. More measures are expected.

 

 

 

 
Currencies

There were no major fluctuations in the foreign exchange market. The British pound remained fairly stable during the storm that arose in the May government after a soft Brexit was presented in the Prime Minister’s White Paper. The GBP was not supported by the economic figures, where retail sales fell more than expected in June, albeit following two strong months. The recent inflation figures were also lower than expected. However, an increase in interest rates at the beginning of August remained at the market forecast, but with a more cautious outlook for the future. The yen experienced some volatility due to the expectation among some market players that a Japanese central bank would take a less flexible stance, which ultimately failed to materialize. The yen closed the month lower. The Chinese currency continued its decline last month (-3.2% against the EUR). Compared with the US dollar, the loss has already reached 8% since the beginning of the second quarter. The Chinese Central Bank is expected to adopt a more flexible monetary policy. This is the result of indications of a slower economy, and trade tensions with the US. The interpretation of the market is that the Chinese government is not actively steering the currency’s decline, but tolerates it.

 

 

 

Commodities

Commodity prices were forced into further decline after a weak month of June. Industrial metals (GSCI Industrials) had to cope with an additional drop of 4.6% in July. The causes are further signs of slowdown in China, fuelled by uncertainty about the impact of the US-China trade tensions on global growth. Oil prices fell for the same reasons. In addition, there were reports that don’t foresee a prospective shortage of supply. They point in particular to the possibility that certain countries would be exempted from the ban on importing Iranian oil, a quicker than expected restoration of Libyan supply and President Trump’s threat to call on strategic reserves. Gold prices fell again and reached the lowest level in one year. The trend towards higher interest rates continues to have a negative impact on precious metals.

 

 

 

MSCI indices: source MSCI. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

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