July was an eventful month for the financial markets, especially for currencies and commodities. Our expert, Johan Gallopyn, takes stock of the main trends in equities, bonds, central banks, currencies and commodities in the past month.
No month goes by without a new record. At any rate, with the exception of April, that seems to be the case for US equities (expressed in USD) in 2017. At the end of last year and the beginning of this year, US equities were buoyed by the expectation of tax reform and infrastructure investments by the Trump administration. This expectation has in the meantime been scaled back considerably and has made way for substantial growth in profits and a weaker dollar to support equity prices. At the end of the month, over half the firms in the US had announced their results for the second quarter and profits were up 7% for these firms. The weaker dollar will be an important reason for analysts to adjust profit forecasts upwards for the second half of the year. The reverse applies for firms in Europe, where the expensive euro may depress the profits of exports-oriented companies. European equities consequently lag behind (in local currency) those in other regions. The boom after the first round of the French presidential elections has largely crumbled. The emerging markets as a whole are continuing to thrive and are the best performing region this year in terms of both local currency and euro. The recovery in commodities prices and the better-than-expected Chinese economy are the reasons for this. In July too, the emerging markets posted the best performance, with a rise of 2.5% in euro
After rising in June, bond yields remained relatively stable in the past month. The measured comments of ECB Chairman Draghi reminded the markets that the central bank will remain present as a major player in the bond market for some time to come. Spreads of the peripheral countries crumbled further. On balance, however, they are only back to their level of the beginning of this year before the uncertainty about the elections in many European countries and the concern about the Italian banks widened the spreads. The French yield spread to Germany’s 10 year bond dropped to 25 basis points
, compared to 80 basis points at the height of the Eurozone election fever early this year. Greece was able to have recourse to the bond market for the first time in three years, after the IMF supported the rescue plan of the European creditors. The issue in question has a five-year maturity and has met with healthy interest. The return to the market is confirmation of the progress Greece has made in its reforms, but will impose greater discipline on the country regarding the budget and the continued implementation of further reform. Otherwise the bond yield will shoot up rapidly again. Corporate bond spreads narrowed quite considerably in the course of the month and matched the lowest levels of 3 years ago. This was true of both financial and non-financial issuers. It is an illustration of the better state of affairs in the European economy and of investors’ increased appetite for risk.
Central banks and monetary policy
Following the speech during the Forum on Central Banking in Portugal at the end of June, the market eagerly awaited the comments that Chairman Draghi would give after the European Central Bank meeting last month. The ECB confirmed its view that, if need be, it would extend the scale or duration of the present purchase programme of EUR 60 billion per month. Draghi pointed out that inflation, in spite of the stronger growth figures, remained below target and that there was unlikely to be any change in the next few months. Although the reduction of the purchase programme was not yet officially discussed within the central bank, it is generally expected that the ECB will clarify the situation regarding the timing in the autumn. Fed Chairman Yellen gave a speech before Congress in which she reiterated previous standpoints. The only nuance was that inflation will remain low for longer than expected. It does not appear from this that there is any great urgency to tighten up monetary policy more rapidly. The Federal Reserve is expected in the coming months to embark on the gradual reduction of its balance sheet. However, that scenario could still be thwarted by the discussion on raising the debt ceiling, for which Congress must give its approval before mid-October. But Republican opinion is divided on this issue too. The Conservative faction wishes to link increasing this limit to more cuts in government spending. This matter is unlikely to be dealt with before the summer recess, as a result of which it is necessary to wait until September to see whether the United States will again be heading for a Government shutdown, just as in 2011 and 2013. The Canadian central bank raised its interest rate by 25 basis points
to 0.75% - the first hike in seven years. This action was accompanied by positive comments on the economy and inflation, which holds out prospects of a further interest rate rise later this year.
The trend of a stronger euro continues. The favourable economic data, the tendency towards a less accommodative ECB and the reduced political uncertainty within the euro area continue to play a role. But also factors specific to other countries have an impact. The Swiss franc lost 4.3% against the euro
, reaching its lowest level since 2011. It was not so much fundamental reasons which were the cause of this, but rather the waning interest for the safe haven of the CHF. The Chairman of the Swiss central bank repeated once more that monetary policy would remain accommodative, which means that the negative interest rate will last for some time yet. The US dollar continued its slide and lost a further 3.5% against the euro. Since the beginning of this year, the currency has already depreciated by 12%. Alongside the positive elements which strengthen the euro are the negative elements which undermine the dollar, such as the scaled-back expectations concerning tax reforms and stimulus plans of President Trump. The same happened in the past month with the repeatedly unsuccessful attempts to abolish Obamacare (which reveals the lack of agreement on pretty well everything in the Republican camp) and the chaotic staff changes at the White House. Also the less certain path towards normalisation of monetary policy by the Federal Reserve plays a role. The currencies that are sensitive to the trend in commodities prices put up a better show. The other dollar currencies (AUD +0.4% and CAD +0.5%) even rose against the euro. In Australia too, inflation remains below target, but it is evolving in line with the expectations of the central bank. The Norwegian krone rose by 2.5%.
Commodities, and notably oil, precious metals and industrial metals, rose significantly in July. Industrial metals continued to reap the benefits from the better-than-expected economic figures in China, with in consequence the hope of rising demand from that region. The copper price rose to its highest level in 2 years. The oil price
reversed its trend of the previous month and rose again above USD 50 per barrel
. Reserves in the United States were lower than expected, which compensated in the short term for the fear of a persisting imbalance between supply and demand. The fall in the dollar also lent its support. That argument was also a contributing factor in the rise of the gold price, which again exceeded 1250 dollar per ounce, a level around which it has already been fluctuating since the end of February.
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