The month of June was proceeding quite merrily until the central bankers – unintentionally – put the cat among the pigeons. That resulted in an excellent first six months with a jittery tail. Our expert, Johan Gallopyn, takes stock of equities, bonds, central banks, currencies and commodities in June and during the first half-year.
Equity market movements in June evolved within a fairly narrow range. The US S&P500 managed to chalk up yet another new historical record, thanks to the technology sector. The positive momentum for the European markets seems to have stalled. Nevertheless, the MSCI EMU progressed by 8.5% during the first half of the year, although this performance was largely achieved in the first quarter. In the second quarter, euro area equities rose only by a further 1.3%. It is not by chance that this coincides with the appreciation of the euro against most other currencies. The pricier euro might depress the activity of exporting companies, according to the reasoning of the market. The stronger euro is also responsible for the performance expressed in euro of the stock exchanges outside the euro area in the past month being negative and for largely wiping out the performance in local currency in the first semester. In June, central bankers’ comments had the most tangible impact on the European equity market. The MSCI EMU conceded 2.5% in June
. At the end of the second quarter, the earnings announcements season is once again just round the corner. For the S&P500, the consensus expectation is an increase of 6.6%. Three months ago, a growth in earnings of 8.7% was still on the cards for the second quarter. The downwards adjustments are a consequence of the slower than expected growth in the US.
In the US, June saw the 10-year bond yield dip to its lowest level in the past six months. In Europe too, yields initially crumbled. That was the consequence of weaker than expected economic figures in the US and disappointing inflation figures on both sides of the Atlantic. The comments of Mario Draghi and other central bankers reminded the markets that the period of ultra-accommodative monetary policy is coming to an end. In the final days of the month, US and German 10-year yields
both shot up by 20 basis points as a result, and both ended the month still higher
. The US 10-year yield is nevertheless still lower than at the beginning of the year, a consequence of the downwards adjustment of growth and inflation expectations. The spreads of the peripheral countries of the euro area narrowed in the course of the month. In Italy, the chance of early elections this year seems to have waned for the time being, after failure to approve the reform of the Electoral Code. In response to that news, the Italian yield toppled to its lowest level since January and the spread with German bonds narrowed. As in the previous months, corporate bond spreads narrowed slightly further. This was the case especially for financial issuers, which are taking advantage of the steeper yield curve.
Central banks and monetary policy
The central banks have had a clear impact on the financial markets in the past month, even though the Federal Reserve was alone in proceeding to take action. As generally expected, the FED raised its short term interest rate by 25 basis points. A third interest rate hike later this year remains likely. The central bank also announced its plans to reduce its balance sheet. This reduction will start extremely cautiously with an amount of USD 10 billion per month in matured bonds which will not be reinvested (from a balance-sheet total of approximately USD 4,500 billion). The amount not reinvested will increase by USD 10 billion every three months to a maximum of USD 50 billion per month. The normalisation can start ‘relatively quickly’, possibly in the final quarter of the year. It was mainly the comments of ECB Chairman Draghi
, who stated that the deflationary forces in the euro area have been replaced by inflationary forces and that this would be accompanied by a monetary policy adjustment, which set the markets in a flurry
. This was seen by the markets as a more rigorous stance than previously, which would therefore have possible consequences (i.e. bring forward) the scaling down of the bond purchase programme. Other ECB members subsequently dampened this interpretation. The Chairmen of the Bank of England (‘reducing the monetary stimulus may well become necessary’) and the Canadian central bank (‘the interest rate cuts of 2015 have proved to be effective’) were to be interpreted along the same lines, however.
Just as in the previous month, the euro strengthened. The speech by ECB Chairman Draghi also had repercussions here, although it has to be said that the fundamentals of the other currencies lend little support. In the United States, even if interest rates are being raised, recent economic figures have been disappointing. The USD weakened in June by 1.6% against the EUR, bringing the depreciation in the first six months to -8.2%. The GBP also fell after the disappointing election result for Prime Minister May, which failed to yield the anticipated larger majority. The GBP hit its lowest level against the EUR since the beginning of this year. The Japanese yen fell 3.1% against the euro
. The Bank of Japan, in contrast to the central banks of the other major regions, is still not apparently showing signs of tightening its monetary policy. The other dollar currencies formed an exception: the Canadian dollar rose (+2.4% against the EUR), after favourable economic figures led to bringing forward the timing for an interest rate hike (hitherto expected in January 2018). The Australian dollar (+1.6% against the euro) also consolidated, but it is expected that the Australian central bank will remain more cautious in its interest rate forecasts.
Commodities fluctuated quite substantially in June. The oil price fell further to start with, even sinking below 45 USD/barrel. After the latest OPEC meeting, there was little additional news (production in Libya again reached 1 million barrels per day, a level not attained since mid-2013) to explain this fall. Short positions possibly depressed the price, which would also explain the sharp reversal in the last days of the month. Nevertheless, Brent crude was down 15.7% in USD over the first six months of the year. Industrial commodities rose in June, following the announcement of better economic indicators for China. The price of gold fell (-2,6% in USD)
following the comments of the central bankers, who held out prospects of a less accommodative monetary policy.
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