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

There is a world pre-Brexit and a world post-Brexit. It is obvious that these two worlds will be poles apart. Risks arise from the lack of clear direction after the political chaos in London concerning the leadership of both the governing Conservative party and the Labour opposition, the possible independence of Scotland and reunification of the Irish Republic and Northern Ireland, a likely recession in the UK, the long and difficult negotiations on the trade agreements with the EU, and the fear of contagion in other EU Member States giving rise to referendums on exit also being held there. Which of these risks will become reality is still unclear, but investors post referendum have been seeking ‘safe havens’ – investments in government bonds, gold and refuge currencies. In a first reaction, equity markets worldwide were hit, with the higher risk segments falling the most: at sectoral level, it was the financial stocks and, in geographical terms, the European peripheral countries, such as Italy, Spain and Greece, which were hardest hit (all down a good 10% on Brexit day). It is partly the contagion risk which plays a role here and partly the continuing weakness of the balance sheets of the banking sector in those countries. For the UK itself, the damage all in all was not as bad as expected (FTSE100: -3.15% in GBP): as a result of the fall in the GBP, exporting companies will become more competitive. But the mostly internationally oriented listed companies do not provide an accurate reflection of the British business world as a whole. After the initial panic reaction, the markets recovered somewhat towards the end of the month, but it remains an extremely negative month especially for the European markets (MSCI EMU -6.0%).


2. Bond markets

In the first half of the month of June, bond yields in several countries (euro area, UK, Japan, Switzerland, etc.) already hit new record lows. This was attributable to the disappointing employment figure in the US, the start of the ECB’s corporate bond purchasing programme and the Brexit referendum. Following the result of the referendum, this trend was accentuated further by the flight to safe havens. On balance, bond yields were down in all regions in the world. In the UK, the 10-year yield fell by no less than 56 basis points, while the German bund fell below zero and closed the month at -0.13%. The higher risk segments in the bond market followed suit: financial sector corporate bonds were forced to concede the most ground, while other corporates displayed more resilience. Government bonds of the peripheral countries, and especially Portugal and Italy, also had to tolerate somewhat wider spreads. Spain held its own well after it appeared from the elections of 26 June that the traditional parties (the Centre Right Partido Popular of Prime Minister in office Rajoy and the Socialist PSOE) gained support and the recently formed parties Podemos and Ciudadanos lost ground. The electorate therefore, 3 days after the Brexit referendum, did not opt for the unknown. Forming a government will also not be an easy matter even now, but a third round of elections in six months would not be accepted by the population.  


3. Central banks and monetary policy

As a result of the disappointing US job creation figures at the beginning of the month, the chance of an interest rate hike by the Fed during the summer had already receded, but Brexit is now also decreasing the likelihood of an interest rate hike later this year too. According to the market (based on futures), there is still an outside chance of an interest rate hike in December (less than 25%). In Europe, additional incentive measures are again on the cards as a result of Brexit. In the United Kingdom, an interest rate cut is already expected in the course of this month of July; the ECB will monitor the situation and if necessary deploy 'all available instruments'. An interest rate cut further into negative terrain is not the most self-evident in view of the impact on the profitability of the banks, but equally it cannot be precluded. A broadening or prolongation of the bond purchase programme is a further possibility. Japan is also expected to take fresh measures, especially as Brexit has brought about strong consolidation of the Japanese yen, which further stymies exports. The central banks will proceed in full coordination and if necessary intervene in the currency market (cfr. Swiss central bank) and provide the banks with the necessary liquidity.


4. Currencies

The days before the EU referendum, the GBP rose: the market anticipated a ‘Remain’. The correction was consequently strong as the results became known, against both the USD and the EUR. Against the USD, the GBP plummeted to its lowest level since 1985. Moreover, in the days after the referendum, the currency, in contrast to other markets, was unable to recover. This has to do with the unfavourable economic fundamentals of the UK already pre-Brexit (budgetary deficit and balance of trade deficit), on the one hand, and the expectation of a further interest rate cut in the UK, on the other. On balance, the GBP fell 8.6% against the EUR in June. The EUR weakened against the USD after the referendum, but, for the month as a whole, the damage on balance remained very limited. Against another refuge currency, the JPY, the EUR lost 7.0%


5. Commodities

As a safe haven in times of uncertainty, gold was one of the winners in the past month. The gold price rose to just below the level of 1350 USD per ounce on the day that the result of the referendum was announced and on balance it closed the month 8.5% higher (in USD). The expectation that global interest rates will remain low for longer as a result of Brexit is a supporting factor. The oil price remained more or less unchanged in June, making a full recovery from the dip after the Brexit result. Although production of the OPEC countries remains high, the market nevertheless expects that a further move will be made towards equilibrium between supply and demand. Industrial commodities rallied after their previous month’s weakness.



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.