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

Following the Trump rally experienced by the US equities market in November, it was the turn of the European market in December, which shot up by nearly 7% (MSCI EMU: +6.9%). The European indexes, which had been lagging behind, managed to end the year 2016 in positive territory thanks to the end-of-year rally. The US Dow Jones ended up a couple of points shy of the 20,000-point threshold. The US markets were bolstered still further by expectations of higher corporate profits, which gained extra impetus from the economic policy of future President Trump. However, the caveat should be made that it is unlikely that in 2017 the positive impact will yet be felt by companies, which in the meantime have to contend with an expensive dollar. For European companies, the high dollar rate will be to their advantage and the rise in the currency in the past month, in tandem with the confirmation of the ECB’s monetary policy, the avoidance of a political crisis following the referendum in Italy and sound economic figures, was the engine for the strong performance on the European stock exchanges in December. The emerging markets were quite weak as a result of the expensive dollar (often having debts expressed in that currency) and the prospects of a higher interest rate in the US in 2017.


2. Bond markets

The divergence in monetary policy between the United States and the euro zone is reflected on the bond market. 10-year bond yields in the US and Germany usually follow a very similar trend, but at present the spread between the two has widened to a record level of 240 basis points. During its meeting, the European Central Bank extended the monetary stimulus, while the US central bank jacked up its short-term interest rate (as expected) and for 2017 there are prospects of a slightly tighter policy than previously. The US bond yield climbed somewhat further in December, which brings the total for the past three months to nearly a full percentage point. The European bond yield slumped somewhat in the second half of the month. This was also the case for the peripheral countries of the euro zone, which in the past month nevertheless had to price in the ‘no’ of the Italian referendum and the bail-out of Banca Monte dei Paschi di Siena. However, both elements came as no surprise to market participants. The corporate bond spreads remained very stable in the past month, including for the financial issuers not affected by the problems of the Italian banks.


3. Central banks and monetary policy

The long-expected hike in the short-term interest rate (+ 25 basis points) in the US became reality in December. It was the one and only interest rate hike in 2016. In its outlook, the central bank changed the forecast from two to three interest rate hikes in 2017. As always, the Fed will take account of economic reality, as it did in 2016. The future impact of the economic policy of President-elect Trump remains a factor of uncertainty. At end-2015, the central bank forecasted four interest rate hikes for the past year, but disappointing domestic growth figures, turbulence on the financial markets in China and surprises such as the outcome of the Brexit referendum decided otherwise.  In Europe, monetary stimulus was continued by extending the bond purchasing programme until end-2017, although admittedly the monthly amount was adjusted from 80 to 60 billion euro. This preference for ‘time span’ over ‘scale’ was perceived by the market as a signal that the ECB will be continuing its presence in the market for a long time yet.


4. Currencies

The USD strengthened further in December to 1.03 EUR, the highest level since the beginning of 2013, which brings parity very close. The dollar has risen over the past 3 months by an impressive 6.1%, which has a lot to do with the divergence in monetary policy of the central banks in the two regions. The election of Donald Trump as President and the fiscal stimulus (infrastructure works, taxation cut), which are very likely to be carried out under his policy, has further accentuated this divergence. The Norwegian krone lost ground slightly (-0.7% vs. euro) after the central bank left the interest rate unchanged. The interest rate policy is squeezed between low inflation and weak business confidence, on the one hand, and rapidly rising house prices, on the other.


5. Commodities

After the price rises of the previous months, industrial metals fell slightly in December (GSCI Industrial metals -4.9% in USD). The interest rate hike by the Federal Reserve had only a limited impact, as interest rates returning to a normal level can be considered as confirmation of the stronger economic foundations. The price of gold suffered more from the rising interest rate and interest rate forecasts, even though the inflation forecasts have been adjusted slightly upwards. The consolidation of the USD also represents a headwind for the precious metal. Oil prices ended 2016 at their highest level of the year. The agreement at end-November between OPEC and non-OPEC countries to limit production will in fact take effect from 1 January. The objective is to cut production by 1.8 million barrels per day, with Saudi Arabia accounting for the lion’s share. It will probably still be some time before it can be established whether producers keep the promises they have made.



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