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

Equity markets clearly were bullish across all regions during the month, with the United States (MSCI USA +5,6% in euro) and Emerging Markets posting the best performance. New all-time highs were recorded in the US, thanks to decent earnings growth in the fourth quarter (5% for the S&P 500) and further anticipation of President Trump’s economic policy plans. Emerging Markets were also quite in favour, as China is poised to publish positive economic readings again following two years of negative earnings growth. However, European equities seem to be lagging behind, as investors from abroad have adopted a prudent stance awaiting the upcoming elections in the Netherlands and France. For the time being, equity markets are waiting to see President Trump’s measures with regard to tax cuts, infrastructure and deregulation. During his 28 February speech to Congress, however, there was little more clarity gained. Apparently, a corporate tax cut is in the making, issued by Republicans in the House of Representatives, but this plan entails a number of measures (including the Border Adjustment measure) which are not welcomed by some Republicans.


2. Bond markets

Bond yields somewhat contracted in February, also in the United States. This means that markets have not been taking the possibility of a March rate hike by the Federal Reserve seriously. In Europe, the rate divergence of the previous month continued initially. Political risks in France and the Netherlands, as well as a risk-averse stance towards peripheral countries, pushed rates higher, with spreads to German Bunds increasing. Later in February the trends reversed after polls revealed that Eurosceptic candidates in the elections in the Netherlands and France were leading the polls, but were not pushing ahead. In France, Emmanuel Macron’s chances of beating Marine Le Pen in the second round rose significantly after the independent candidate François Bayrou dropped out of the race, pledging his support to Macron. This resulted in eased selling pressure on French government bonds (10 year rate at 0,89%). Corporate bonds had a quiet month, with spreads barely budging versus government bonds.


3. Central banks and monetary policy

The European Central Bank is, for the first time in years, looking at a situation where not a single eurozone country is facing negative inflation readings. In its statements the ECB is pointing to a temporary rise in inflation, the result of rising oil prices during the previous year. Core inflation, however, clearly remains below target. Hence, the rise in inflation (Eurozone inflation at 2% in February)  is not sustainable. This is, nevertheless, a prerequisite to start thinking about tighter monetary policy. The upcoming ECB meeting on 9 March is not expected to lead to any changes, but it is less clear what the Fed meeting on 15 March will bring. In the course of the month, statements made by Fed members were considered as subdued by the markets, mainly because of the uncertainty relating to President Trump’s economic policies. This has reduced expectations of a rate hike. On the last day of February, Fed member Dudley suggested however that the US central bank should not wait for the Republican plans to materialise to take action.


4. Currencies

The US dollar appreciated versus the euro, especially in the first half of the month (+1,6% in February). This was related to the uncertainty over the elections in the eurozone where polls in the Netherlands and France seemed to confirm the leadership of the Eurosceptic parties. The odds of a rate hike in the US initially seemed to counterbalance this situation. The Australian dollar performed strongly following better than expected economic data and rising commodity prices. The latter element was also helpful for the recovery of emerging market currencies.


5. Commodities

Since December, when a production cut was agreed by OPEC producers and a number of non-OPEC producers, the oil price has remained remarkably stable, trading at around USD 55 per barrel. Higher prices do not seem to be in the interest of producers as this would lead to higher output by shale oil producers in the US. In addition, recent figures have revealed that the OPEC production cut of 890,000 barrels per day was almost entirely compensated by shale oil producers increasing their output. Gold prices continued their rally of the previous month, in spite of a stronger US dollar and the Fed’s interest rate perspectives. Here, geopolitical uncertainties continue to buoy the precious metal. Other commodities rose moderately, supported by stronger global economic momentum, but supply remained high.



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.