‘The quiet before the storm in a teacup’ sums up the evolution of the markets in the month of May. Below, our expert, Johan Gallopyn, has selected for you the memorable highlights concerning the trends in the past month in equities, bonds, central banks, currencies and commodities.
The victory of Emmanuel Macron in the second round of the French presidential elections was largely anticipated by the equity markets. After 8 May, the equity markets took a breather while looking for a new direction. The easing of political uncertainty concerning the euro area, the resumption of growth in corporate profits and the central banks cautiously returning monetary policy to normal are factors providing support for equity prices. But these are known factors. The peace was abruptly shattered mid-month by the allegations against President Trump on possible obstruction of justice and the passing on of confidential information to Russia. The impeachment of the President was even mooted, which caused a minor storm on the equity markets (worst daily performance for the S&P500 since September). The storm quickly passed because the impeachment of the President is highly unlikely with a Congress dominated by Republicans. It is hard to estimate the cost for the President in terms of political capital, but in any case this episode will not have made the implementation of his programme any easier. Accusations of corruption on the part of President Temer sent the Brazilian equity market nosediving, with an intraday loss hitting 10% and only a very partial recovery since then. On balance, most markets were positive in local currency, but expressed in euro, only Europe (MSCI EMU +1.6%) and the emerging markets (MSCI Asia +4.5%) ended in positive territory
The April trend continued on the bond markets during the past month. In the euro area, we therefore saw a further narrowing of the spreads of the peripheral countries and France, as a result of the waning of the political risks. Nevertheless, the risks for the euro area have not all evaporated yet: parliamentary elections must be held in Italy no later than May 2018 and there is a possibility that they may be brought forward. That will depend on the approval in the coming weeks by both houses of Parliament of a new electoral law for proportional composition of Parliament. The possibility of early elections in September causes the spread between Italian and German bonds to remain quite wide
and to have narrowed little compared to other peripheral countries (the 10 year Italian bond yield rose 12 basis points over the past three months). The US bond yield also fell somewhat, in spite of the prospect of a hike in the short-term interest rate. This is attributable to the rather disappointing economic figures. The US 10-year yield is approaching its lowest level since the beginning of this year at around 2.20%. In the case of corporate bonds too, the spreads narrowed again, which occurred mainly in the first part of the month and especially for the issuers not benefiting from the highest quality rating.
Central banks and monetary policy
The US central bank remains on schedule for an interest rate hike this month. In spite of the weaker economic growth and somewhat lower inflation figures again, the Federal Reserve will wish to avail itself of the fundamentally favourable internal situation and calm market environment to continue the normalisation of monetary policy. But attention is being focused less on the probable interest rate hike than on the comments on scaling down quantitative easing. The European Central Bank will announce its new inflation forecasts this month. But judging by the recent comments by Chairman Draghi, they will contain no argument in favour of speeding up the timing for a return to a less accommodative monetary policy. Notably the timing for tapering the bond purchase programme is being watched closely by the markets
. In Europe too, (core) inflation remains below the central bank target.
The euro continued to rise against almost all other currencies. The reduced political risk for the euro area and the better economic figures led to growing interest in the currency, even though the ECB seems to be showing no sign of tightening its monetary policy in a hurry. The euro rose 3.1% against the dollar
, partly as a result of the underwhelming economic figures in the US and the position of President Trump. The GBP backtracked on its progress of last month and lost 3.6%. The polls show that the lead of the Conservative Party of Prime Minister May has narrowed significantly after the Party’s political agenda seemed to include limitation of social security. There is a fear that a less convincing victory in the elections on 8 June would give the advocates of a hard position in the Brexit negotiations greater clout in the party. The Swedish krona fell again (-1.2%), after the central bank last month confirmed the prospect of a low and negative interest rate for a protracted period, which prompted investors to sell the currency and to invest in currencies with a higher interest rate. Furthermore, the growth figure for the first quarter turned out lower than expected. The Brazilian real lost a considerable amount of ground (-5.2%) after the corruption accusations made against President Temer.
In the run-up to the meeting of OPEC and non-OPEC members on the extension of the production restrictions, the price of Brent crude again rose above the 50 USD/barrel mark. But the actual announcement that the production restriction of 1.8 million barrels per day was extended until March 2018 nevertheless disappointed the market, with a sharp fall in consequence
, as the market had hoped for more. It is feared that this measure alone will be insufficient to run down the stocks, especially due to the upwards adjustment of expectations for shale oil production in the US. The other commodities also fell as a result of signs of slower growth momentum in China. The price of gold dipped in the first half of the month, but recovered subsequently due to the hype surrounding the Trump impeachment and the weaker dollar.
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