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

During the last few days of January, equity markets lost all the gains (Europe) or some of the gains (US) that they had scraped together during the month. The markets in the United States were nevertheless able to register new records as the Dow Jones Industrial closed above 20,000 points for the first time. Emerging markets fared better, in part due to a weaker dollar (MSCI Emerging Markets +2,9% in EUR). Initially, the markets continued to build on the Trump rally of the preceding months, and also found confirmation in favourable macroeconomic indicators. Few details have been announced with regard to the campaign promises for infrastructure improvements and lower taxes. The Trump rally lost momentum when President Trump’s first real measures proved to be geared toward protectionism (withdrawal from NAFTA) and isolationism (entry ban from certain Muslim countries). In the meantime, fourth quarter results are starting to be announced. In the US the earnings growth to date is 4.2% compared to the same quarter in 2015. This is somewhat above expectations. Companies have little to say about the impact of Trump’s economic policy because they cannot estimate the size, timing and effect of his policy at this time.


2. Bond markets

Bond yields were up, particularly in Europe. The confirmation of a better course of events on an economic level played a role in this regard. Moreover, increased inflation and inflation expectations are pushing interest rates higher. That higher inflation is the result of higher oil prices compared to a year ago. Core inflation (without oil price effects) remains low for the time being. Inflation expectations are looking up for the first time in ages. That has to do with signals of upward pressure on wages in the United States and with the protectionist measures that President Trump could announce. Within Europe we see a divergent development of interest rates on government bonds in different countries. We generally see rising spreads in the peripheral countries. In Italy, that is a consequence of the Constitutional Court’s ruling concerning the new electoral law. Because its achievement was one of the most important aims of the transitional government, President Mattarella can decide to dissolve parliament and call for early elections this year. The 10-year interest rate surpassed 4% in Portugal due to constant concerns about the high debt ratio. Spain is an exception to the rule, with a stable spread compared to German bonds: investors seem to prefer this issuer above the other peripheral countries. Within the core countries too, the spreads show greater divergence: the 10-year interest rate for French bonds exceeded 1% because of electoral uncertainties. Belgium follows that trend. The spreads for company bonds decreased somewhat over the past month, both for financial and non-financial issuers.


3. Central banks and monetary policy

The central banks of the major economic blocs maintained a status quo in January. In the United States the market consensus still assumes that there will only be two interest rate hikes in 2017, while the FOMC anticipates three interest rate hikes. In the Eurozone, the ‘tapering’ discussion has disappeared into the background for the time being, even though there is some pressure on the ECB due to rising general inflation figures. It is to be expected that after the summer, a phasing out of the bond purchasing programme will once again come to the fore. Japan’s central bank increased economic growth prospects; however, inflation expectations for 2017 and 2018 remain unchanged.


4. Currencies

After a rally at the end of the previous year, which nearly brought the USD to parity with the euro, the American dollar lost ground in January. After focusing on China, due to the alleged manipulation of its currency, Trump declared last month that the USD is ‘too expensive’. Moreover, the head of the National Trade Council declared that the euro was highly undervalued. All of this points to the fact that the Trump administration could use currency policy as a lever in trade relations. A weaker USD meant profit for the other dollar currencies, among others supported by stronger commodity prices. Due to lower than expected inflation, the Australian central bank might still decide for a new interest rate cut.


5. Commodities

Following the hectic months that preceded it, in January the price of oil remained fairly stable. Whether the agreed production cuts come about is a question of wait and see; however, the first signals do indeed point in that direction. Industrial commodity prices rose again after the correction that they experienced in December. The gold price was again able to surpass 1,200 USD/ounce thanks to the weaker dollar. The rising interest rates trend currently has little impact because inflation and inflation forecasts are on the upswing.



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.