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
Equity markets adopted a ‘wait-and-see’ attitude in October, although globally performances were nevertheless positive (MSCI EMU +1.3%)
. Equity markets had a considerable amount of news to process: rising bond market yields, quarterly results, bustling acquisitions activity and, last but not least, the election campaign in the United States with its mind-boggling twists and turns. The US market trailed behind the majority of its counterparts, with a negative performance, expressed in USD, of 1.9% over the month. Within the equity markets, a clear sectoral rotation was to be seen: especially in the first part of the month, defensive sectors and interest-sensitive stocks put up a mediocre performance, while cyclicals and financials fared better. Towards the end of the month, the rising opinion poll ratings of Republican candidate Trump caused jitters on the market. A Trump victory entails a number of uncertainties for the markets in the fields of monetary policy, protectionism, budgetary discipline and geopolitical positioning. Democrat candidate Clinton, on the other hand, stands more for continuity of the present environment, which would seem to meet with the financial markets’ preference. Japanese equities put up a strong performance, thanks to a somewhat weaker JPY.
2. Bond markets
The most notable movement on the financial markets in the past month was possibly the rise in bond yields. In the euro area and the US, the 10-year yield gained 25 to 30 basis points and in the United Kingdom as much as 50 basis points. This is attributable to a combination of factors. The macroeconomic figures are still anything but spectacular, but do confirm the picture of activity gradually picking up. In addition, the market started to assume that the ECB would scale back its bond purchasing programme after March 2017. In general, central banks are placing increasing emphasis on the need for fiscal stimulus alongside monetary stimulus to relaunch the economy and bring inflation sustainably closer to the 2% target. In the United States (it is an item on the programme of both presidential candidates) and Japan, this is a realistic option. Europe is still sticking to budgetary discipline. Another factor contributing to the rise in the UK yield is the continuing fall of the GBP, as a result of which investors are scaling down their investments in this currency. In Spain, a government was finally formed, but the market was already anticipating this and the actual news therefore had no impact on the market. The performance of Italian bonds was weaker in the run-up to the referendum at the beginning of next month, with wider spreads in consequence
. Portuguese government bonds were finally able to retain their investment grade rating. Their yield bucked the trend and remained unchanged during the month, which implies a narrower spread. Corporate bond spreads again narrowed somewhat, thereby largely compensating for the loss of the previous month.
3. Central banks and monetary policy
The central banks of the euro area, the United States and the United Kingdom left their interest rates unchanged in October. The Bank of England did state that it no longer expects the next movement necessarily to be a cut, given the more encouraging leading indicators and better-than-expected GDP for the third quarter. Moreover, the BOE has jacked up its inflation forecast for 2017 significantly (from 0.8% to 1.4%) as a consequence of the sharp fall of the GBP. At the press conference following the ECB meeting, President Draghi kept his cards close to his chest. Concerning the expectation which recently surfaced in the market that the bond purchase programme would be tapered
, Draghi stated that an abrupt end to the programme in March 2017 was unlikely. Most analysts expect the announcement of an extension of the programme during the ECB meeting in December, possibly for a smaller amount that the present EUR 80 billion per month. In its September meeting minutes, the Federal Reserve confirmed the policy it has been pursuing for some time now concerning an interest-rate hike in December, but did not go so far as to issue explicit guidance. The market puts the probability of a December interest-rate hike at 70%.
The USD strengthened against the EUR especially in the first half of the month. The prospects of an interest-rate hike in December bolstered the currency. The dollar is also fluctuating along with the ups and downs of the presidential election: as the uncertainty of the result built up again towards the end of the month, the currency lost ground. The Mexican peso is still more a barometer for the US election. As presidential candidate Trump succeeded in largely narrowing the gap in the opinion polls towards the end of the month, the peso fell. The Mexican central bank has an emergency plan ready in the event of a Trump victory. The GBP fell further, with movements still prompted by the better-than-expected economic figures and the expectation of arduous Brexit negotiations.
Commodities experienced mixed fortunes in October. Industrial commodities tended to be favourably orientated, thereby continuing the upwards trend of the previous month. More signs of better growth prospects in recent weeks in several regions in the world, and especially in China, lend support to demand. Oil prices dipped again in the second half of the month: the production limits announced by OPEC and non-OPEC producers are not yet a done deal after a number of countries (such as Iraq) demanded an exemption for themselves. The gold price lost considerable ground at the beginning of last month
as a result of the rising bond yield and the increasing chance of an interest-rate hike in the near future in the US. The gold price toppled below 1250 USD/ounce to recover slightly at the end of the month as a result of the uncertainty surrounding the presidential election in the US.
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