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

A positive quarter with a jittery tail end. The low volatility that we flagged up last month did indeed prove to be short-lived: on the one hand, as a result of the planned meetings of the central banks in the course of the month and, on the other, due to the problems surrounding Deutsche Bank. Deutsche Bank share prices plummeted to their lowest level in 30 years, after the US Justice Department imposed a USD 14 billion fine on the bank for its share in selling the mortgage products that triggered the financial crisis of 2008. The monster fine led to the market perceiving the bank’s already weak capital structure as a systemic risk. This was reinforced by the German government’s apparent unwillingness to offer help, should it be necessary. Following unconfirmed reports that a settlement could be reached for ‘only’ USD 5.4 billion, the share price recovered slightly. The banking sector was also beset by difficulties after Commerzbank announced a new restructuring plan and cancellation of the dividend. Over the past month, the markets on balance remained more or less unchanged. It is striking that, since Brexit, the euro area (MSCI EMU +6,6% in the third quarter) has outperformed most other markets, although its performance since the beginning of the year is still trailing them.   


2. Bond markets

At the beginning of the month, European bond markets were shaken by the ECB’s decision not to announce any extension of the bond purchasing programme. A minor sell-off on the bond market ensued, with the German 10-year bond yield even rising to +0.07%, although it subsequently toppled back below zero, partly in response to the rate decisions of both the US and the Japanese central banks. Trends diverged in the peripheral countries in the past month. Spain, where the 10-year bond yield hit an all-time low of 0.88%, was a positive outlier, thanks to both the country’s better economic fundamentals and the increased likelihood that a government can at last be formed. The surprising resignation of the Socialist PSOE Party Chairman, who hitherto had been set against entering into a coalition with the Conservative PP, could offer an opening for creating such a new government. The Portuguese bond yield, on the other hand, continued its upwards path to 3.33%. The potential rating downgrade (decision on 21 October) and its impact on the possibility for the ECB to purchase bonds, still plays a role. Italy too lagged behind in view of the constitutional referendum (on 4 December) and opinion polls which – here too – point towards a neck-and-neck race, with a sizeable proportion (1/3) of electors still undecided. Corporate bond spreads widened somewhat. This was the case for non-financial issuers, but more pronouncedly for financial issuers.


3. Central banks and monetary policy

The central banks of the three core regions held meetings in the past month, providing the opportunity for monetary policy adjustments. The ECB and the Federal Reserve maintained the status quo, and only the Bank of Japan in fact proceeded to take action. Contrary to expectations, the ECB did not extend the bond purchasing programme. The central bank first wishes to examine the effectiveness and further possibilities of its purchasing programme. The ECB is still tending towards further monetary easing, although further  interest-rate cuts are unlikely. The Fed sees the economy continuing to develop in the right direction and the majority of the market is now assuming an interest-rate hike in December. On the other hand, the Federal Reserve did revise its expectation downwards concerning what, in its estimation, the longer-term interest rate trend will be. This expectation thereby falls more in line with the trend already anticipated by the market. Although the Japanese central bank kept the short-term interest rate and its securities purchasing programme unchanged, it continued easing further in that now, as an additional target, it plans to keep the 10-year interest rate below zero until the 2% inflation target is exceeded on a sustainable basis.


4. Currencies

After a resurgence of the GBP was recorded last month, the British currency slid back again in September (-1.9% against the EUR). Because the economy has held its own better than expected after the Brexit referendum, the expectation was that the Bank of England would place further interest-rate cuts on hold, after that of the beginning of August. However, the Bank of England is expressly not ruling out the possibility because the risk of a slowdown in growth stems mainly from corporates and not so much from consumers. In addition, the positions seem to have been taken on both sides to head towards a ‘hard Brexit’. The GBP has already depreciated by over 17% since the beginning of this year and is approaching the lowest level since 2013. The JPY went up on the news that the Japanese central bank was leaving the interest rate unchanged, in spite of the expectation held by some analysts of a further cut. The Norwegian krone strengthened on the back of the higher oil price and the signals from the central bank that there is possibly no further interest rate cut in the pipeline this year.


5. Commodities

Oil prices rose again in September (+4.3% in USD). During the month, the International Energy Agency nevertheless announced lower expectations for demand in 2017, as a consequence of slower world growth. However, the announcement by OPEC and non-OPEC producers not only to freeze production, but to cut it (to 32.5 million barrels per day, compared to 33.2 million barrels per day in August), came as a surprise. The cutback still has to be confirmed on 30 November. In the meantime, precise agreements need to be made on the size of the reduction by each member.  There is therefore no certainty for the time being that production will in fact be cut. Industrial commodities also gained ground in the past month, after it appeared from China’s economic figures that the industrial sector has stabilised over the past few months.



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