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

Encouraging macroeconomic figures, better than expected corporate results and the prospect of more monetary stimulus from the central banks gave the equity markets wings in July. For the eurozone, it was the best month of the year so far (MSCI EMU +5,1%) whereas the US stock market achieved a new historical record. Japan too made progress (even though the JPY remained at a high level), with central bank action and government measures being anticipated by the market. The emerging markets also performed well. A great deal of the panic caused by the Brexit referendum eased away after the faster than expected succession of Prime Minister Cameron by Theresa May and the assurance that the activation of Article 50, presumably leading to more uncertainty, would not be rushed into. On the whole, the US macroeconomic figures, such as the leading PMI indicators (both industry and services), job creation (after a weak month in May) and retail sales, turned out better than expected. The month however did close on a false note when the GDP figure for the second quarter remained stuck at 1.2%, far below the 2.5% forecasted. In addition, the figure for the first quarter was revised downward from 1.1% to 0.8%. In Europe, the impact of the Brexit on the economic outlook was the main concern. On the basis of the German Ifo indicator and the confidence indicators of the European Commission, the impact proves less significant than expected. That is in sheer contrast with the situation in the United Kingdom, where both consumer and business confidence nosedived. Corporate results at an aggregated level exceeded the (downwards adjusted) expectations both in the United States and Europe. Profit growth nevertheless remains negative for the fifth quarter in a row.


2. Bond markets

Interest rates once again dropped in July. Although the German 10-year rate remained flat, the yields on other government bonds of both core and peripheral countries recorded new lows. The Dutch 10-year yield is now negative as well (-0,02%). The European peripheral countries are basically following the same trend, albeit with local variations. In Spain, outgoing Prime Minister Rajoy was appointed to form a government, but so far lacks support of any other party. The impasse continues. If neither Rajoy nor another candidate can win a parliamentary vote of confidence within the next two months, new elections will – once again – be inevitable. The fall in yield on Italian and Portuguese bonds follows a lower pace than that of other issuers due to the results of the stress test for the financial sector, which were announced at the end of the month. 51 banks with a balance sheet total exceeding 30 billion euro were tested in two situations, a base scenario and a negative scenario. Four banks failed to meet the capital requirements in the negative scenario and, as expected, Banca Monte dei Paschi came out worst. A capital injection of 5 billion euro and the sale of toxic loans were immediately arranged for this bank. The stress test made little or no impression on the market as its coverage was too limited (not a single Portuguese bank in the test), the negative scenario was too mild (impact of the negative interest rate on profitability not considered) and the capital requirements were not strict enough. Corporate bonds had an outstanding month: investors continue their search of an extra yield and the ECB’s bond purchasing programme is proceeding apace. The financial issuers underperformed however, pending the results of the stress test.


3. Central banks and monetary policy

The Bank of Japan (BoJ) made only a minor adjustment to its monetary policy whilst its programme for the purchase of government bonds and its policy rate remained unchanged, at -0.1% to be precise. The central bank announced that it would only be increasing the purchase of ETFs on the equity market from JPY 3.3 trillion to 6 trillion each year. Possibly of greater importance is the announcement that the central bank will review its monetary policy in the light of the economic environment by September. Since the bond purchasing programme is already very large-scale, there are little options left, which revives the expectation of ‘helicopter money’ (government spending financed by issuing bonds which are purchased by the central bank). A few days earlier, Prime Minister Abe had announced a fiscal stimulus package of JPY 28 trillion. In the United States, the interest rate was left unchanged, as expected. In a press release, a rather embellished picture was painted of the economic situation and already countered a few days later by the disappointing GDP figure for the second quarter. As a consequence, the market expectation of an interest rate hike before the end of the year has dropped to 30%, compared to over 50% before. In Europe and the United Kingdom, interest rates were left unchanged, which came as a surprise for the UK. With the leading indicators falling, an interest rate cut in the UK at the beginning of August is likely.


4. Currencies

Rather limited currency fluctuations occurred in July. The GBP weakened further (-1,2% versus euro) as a result of the weak economic outlook and the expected fall in interest rates. The JPY continued its rise as a result of the smaller than expected stimulus package of the central bank. The currencies of oil-exporting countries lost ground again: the Norwegian krone -1.6% and the rouble -3.9% against the euro.


5. Commodities

The oil price dropped significantly in July (-12.4% for Brent in USD). US stocks remained high whereas the OPEC increased its production once more. Against the backdrop of weak economic growth worldwide, achieving equilibrium between supply and demand seems further away than it was before. Industrial commodities remained fairly stable in July. Gold continues to attract a great deal of attention with the prospect of an extended period of low interest rates.



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.