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 absence of significant movements in the equity markets in August allowed consolidation of the incipient recovery of the previous month. Emerging markets were the positive outlier, and more specifically the Asian markets (MSCI Asia + 4.0% in EUR), where signs of the Chinese economy gathering pace bolstered the market. Low volatility was another market characteristic. The traditionally calm summer period will undoubtedly have had a hand in this. In addition, investors do not seem to be unhappy about the present situation with low, but sustained growth and negligible inflation, at least so long as the central banks continue their monetary stimulus policy. There was equally no momentous news at macroeconomic level, at which announcements of encouraging figures (for example, for durable goods orders in the United States) alternated with the disappointing (for example, the IFO indicator in Germany). In the United Kingdom, after an initial dip immediately after the Brexit referendum, the indicators seem to have perked up again. Latent political uncertainties remain (also see below), but not to the extent that they determine market sentiment. A characteristic of low volatility is that it usually does not last.


2. Bond markets

European government bond yields remained quite stable, on balance rising slightly during the month for the core countries. The spreads for the peripheral countries narrowed somewhat, but only to a limited extent. The peripheral countries are still not exactly a model of stability, as each country is having to contend with difficult prospects. In Italy, a constitutional referendum is to be held before the end of the year, which ultimately is tantamount to a vote of confidence for Prime Minister Renzi. In Spain, the parties have still not succeeded in forming a government. In two votes, outgoing Prime Minister Rajoy has failed to secure parliamentary confidence. If no new government can be formed by the end of October, the third elections in the space of a year will be held in December. Portugal bucked the trend of lower interest rates: the 10-year interest rate even rose again above the 3% mark, compared to 2.69% in mid-August. The last credit rating agency which still attributed an ‘investment grade’ rating for the country announced a possible review of this rating. An investment grade rating is a condition for participation in the ECB’s bond purchasing programme. Corporate bonds experienced yet another upbeat month with narrowing spreads. The ECB’s purchasing programme is still having an impact. This is somewhat at odds with the cost price of hedging corporate bond issuer default (via credit default swaps), which has not fallen to the same extent.


3. Central banks and monetary policy

As expected, the Bank of England adopted a series of pump-priming measures at the beginning of August. In addition to an interest rate cut of 25 basis points to 0.25%, a bond purchase programme for government and (non-financial) corporate bonds was also announced. The UK’s better-than-expected economic figures at the end of the month – if confirmed – could cause the central bank to provisionally place additional stimulus measures on hold. The central banks in Australia and New Zealand cut their key interest rates during the previous month, by 25 basis points each, to 1.5% and 2.0% respectively. Meetings are planned by the European, US and Japanese central banks during September. For the United States, the market is still pricing in one interest rate hike before the end of the year, possibly this month, but more likely in December. For Japan, market watchers are on tenterhooks as to whether the central bank will adopt helicopter money in one form or another, something which the authorities have so far denied.


4. Currencies

The GBP on balance weakened slightly further against the EUR over the past month, but since mid-August has been able to reverse the downwards trend. A number of economic indicators show a clear improvement after the initial nosedive immediately after the Brexit referendum. One factor of this improvement is precisely the weakening of the GBP which is benefiting exports. Another reason for the sudden rebound of the GBP is the reversal of positions of speculators who were counting on a further fall. The USD fluctuated during the month between 1.11 and 1.135 against the EUR, but ended on balance unchanged.


5. Commodities

After plummeting in the previous month, oil prices shot up again in August (Brent +10.8% in USD). In the course of the month, they even once again hit the 50 USD per barrel mark, whereas at the beginning of the month the price was still 40 USD. Reports on a fresh attempt by OPEC and non-OPEC producers to arrive at a production freeze at the end of September are seen as the driving force behind this recovery. Such a freeze is expected to have little impact on actual production, but its psychological effect may boost the market. Gold lost ground because investors had less need to seek safe havens and because of the growing likelihood of an interest rate hike in the United States before the end of the year.



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