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
It was an excellent first quarter. March was particularly positive for European markets (MSCI EMU +5,4%)
. With the constant stream of good news on the economic front and the welcome message from ECB president Draghi, investors set political uncertainty to one side and turned their attention to fundamentals. Market consensus has it that the fundamentals are most favorable for the European market in terms of expected earnings growth and valuations. So far interest in European equities has come mainly from European investors, with international investors remaining on the sidelines, judging from capital flows. US equities lagged in March, as the Republicans’ failure to agree on a replacement for ‘Obamacare’ led investors to start doubting whether the Trump administration will be able to carry out the economic measures it has announced. The best Q1 performance was posted by emerging markets, like Europe benefitting from favorable fundamentals.
2. Bond markets
Bond yields rose, especially in the first half of the month as the market factored in expectations of an upcoming rate hike in the US. In the US yields retreated later on, as the disparity between the very positive advance indicators and the less inspiring hard economic figures caught the markets’ attention. On balance European interest rates were higher at month-end. Spreads between other countries’ government bonds and Germany’s narrowed somewhat, but remained significantly wider than they were six months ago. In the Dutch elections Geert Wilders’ anti-EU party failed to make a breakthrough. From polls ahead of the French presidential elections, it seems that Marine Le Pen has so far failed to establish a lead. Spreads remain high
since recent polls in Italy
show that Beppe Grillo’s Five Star Party is in the lead (10 year bond yield at 2,32%). The equally anti-EU Lega Nord (Northern League) is apparently the third biggest party. Against this backdrop the euro will remain on the agenda for the financial markets. Spreads on corporate bonds narrowed, especially for financial issuers.
3. Central banks and monetary policy
The ECB and the Fed both did what was expected. The ECB left interest rates unchanged. ECB president Draghi said that the risk of deflation has faded, but that the recent increase in inflation was not durable. Now the markets are focused on whether the bond purchase program will continue after 2017 and whether there might be a rate hike before the end of the purchase program. The US Federal Reserve increased its short-term interest rate by 25 bps
, as had been widely expected. Fed Chair Yellen said the pace of further hikes would be very gradual - a relief for the markets, which had come to expect a faster normalization.
The euro strengthened against most currencies thanks to the positive message from the ECB and the cooling of fevered brows following the Dutch elections. The dollar weakened appreciably in March, although recovering somewhat toward the end of the month. The Fed’s measured outlook and Trump’s difficulties in pushing through his agenda made for a lower dollar. The GBP hardly suffered at all from the long-awaited triggering of Article 50 to leave the EU or from demands for a new referendum on Scottish independence. The Norwegian krone nosedived
(-3,2% vs. EUR) as a result of the weaker oil price and the Norwegian central bank's message that its monetary policy would be kept accommodative for longer than expected.
Gold started the month at US$1,250 an ounce, then fell to US$1,200 before ending March back where it had started. The fall was the direct result of expectations of a rate hike by the Fed in March. And the subsequent recovery was due to the Fed’s measured comments. Since the beginning of this year the price of gold has been considerably higher. March brought an end to the narrow band in which oil prices had moved since December
(Brent oil -5,0% in USD). Data on increasing reserves were one factor in this: another was the speed at which US shale oil producers have returned following the increase in prices. The current agreement on output curbs among OPEC and some non-OPEC producers comes to an end in June. Whether or not it is extended will depend above all on Russia and Iran.
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