Tuesday 31/03/2020

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Monthly Market News

Investment Desk Analyst

Your monthly appointment with the financial markets. What were the trends for equities, bonds, currencies and commodities in the past month, and what made the markets move ? You can discover the most striking evolutions in this clear and concise analysis.


1. Equity markets

The equity markets got off to a difficult start in the past month. The direction of monetary policy in the US, the Brexit referendum, the Greek debt issue, etc. – all these factors represented uncertainties which kept investors side-lined. As the month progressed, the markets got a clearer view on these concerns. A new Greek agreement, although not offering a long-term solution, is at least heading in the right direction; opinion polls on Brexit point to a small lead for the 'Remain' camp and the US Central Bank indicated that a higher interest rate is in the offing. In its comments, the Fed referred to the low unemployment, rising (core) inflation and the economy which is stronger than generally assumed. The adjustment of market expectations to these new interest rate prospects was made very calmly, however. In Europe, the leading indicators showed a further gradual improvement in economic activity. The present environment of low interest rates, strong dollar and, all in all, still low oil prices is starting to make itself felt in the real economy. European equities were in any case among the best performing in the past month (MSCI EMU + 2.1%). US equities closed the month (in local currency) somewhat higher, but as a result of the rise of the USD the performance amounts to 4.7% in EUR. The equity markets recorded a negative performance (in EUR) in the emerging market countries. The prospect of an interest rate hike in the US exerts downward pressure on the currencies of these countries. The Latin American markets also suffered from lower commodities prices.


2. Bond markets

European bond yields slipped somewhat in May. This occurred mainly in the first few days of the month, when the equity markets were somewhat more turbulent and investors preferred the safe haven of government bonds. The 10-year rate in the United States followed the same course but on balance remained more or less stable over the month. The shorter maturities did rise in the US (+10 basis points to 0,88% for the 2-year rate) along with the perceived higher probability of an interest rate hike by the Fed in the course of the month. In the meantime, lots of new issues are appearing on the corporate bond primary market. Companies wish to benefit from the low interest rates and the appetite of investors in search of a higher yield than that on government bonds. The corporate bond spreads widened somewhat due to this ample supply. In June, the ECB will embark on the purchase of corporate bonds. Spanish bonds lagged behind a little, but are following more or less the same trend as that of the other peripheral countries. In the opinion polls prior to the elections on 26 June, the alliance of left-wing parties (Podemos and IU (United Left)) is scoring well at the expense of the traditional Left. The Partido Popular of former Prime Minister Rajoy is also gaining support. After the approval of a new savings and reform package, Greece has obtained a next tranche of EUR 10.3 billion under the rescue plan. Debt rescheduling seems to have become more open to discussion, although it is not an option for Germany until the 2017 elections are over.


3. Central Banks and Monetary Policy

In the past month, the US Federal Reserve has prepared the financial markets for an interest rate hike this summer. Several members – including the Chair Janet Yellen – pointed out that the economy is sufficiently strong to continue interest rate normalisation. Whether the interest rate hike occurs on 15 June or during the July meeting may possibly be influenced by the Brexit referendum, but this timing in itself is of little significance. What is more important is that subsequent interest rate hikes will continue to proceed only at a very gradual pace. Taking into account the Presidential elections in November, a status quo after the summer for the rest of the year cannot be precluded. The Central Bank of Australia cut the short-term interest rate by 0.25% to 1.75%, a new record low. In spite of the reasonable growth, the inflation rate is below target. Further interest rate cuts are on the cards.


4. Currencies

The GBP appreciated in May by 1.9%, thereby retracing some of the earlier losses. The opinion polls and bookmaker odds recently indicate a narrow but growing lead for the ‘Remain’ camp for the referendum on 23 June. The results of the opinion polls remain variable, however, and the percentage of electors who are still undecided is fluctuating around 15%. Since the beginning of the year, the GBP is still 4.3% lower against the EUR. The USD consolidated against the EUR after it became clear during the month that an interest rate hike is likely this summer. The market expectations hitherto assumed an interest rate hike at the end of the year at the earliest. The Australian dollar lost ground at the beginning of the month as a result of the interest rate cut and closed the month 2.2% lower.


5. Commodities

At the beginning of the month, the price of gold reached the threshold of USD 1300 per ounce, but fell towards the end of May to a little over USD 1200 per ounce (-5.7% in May, in USD). The prospect of a higher interest rate in the US and the stronger USD make an investment in the precious metal less worthwhile. The oil price continued its upwards trend and Brent even attained the threshold of USD 50 per barrel (+5.3% in May, in USD). The strategy of Saudi Arabia to squeeze less profitable producers out of the market seems to have worked, as a result of which a better balance has been achieved between supply and demand. Industrial commodities experienced a weak month, with stocks remaining high.


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.