Political and geopolitical turbulence overshadowed the by and large favourable fundamentals in the month of August. Our expert, Johan Gallopyn, takes stock of the main trends in equities, bonds, currencies and commodities in the past month. He also explains the position of the central banks.
The scenario of a worldwide synchronous economic upturn remains intact, as confirmed by the publication of strong growth figures in the major regions of the world. Leading indicators point to a continuation of this trend. Although the central banks have embarked on a path towards a less accommodative monetary policy, they will proceed very gradually and very cautiously. The positive fundamentals, which have bolstered the equity markets in recent months, therefore remain in place, but in the month of August were overshadowed by the tensions surrounding North Korea and – it is becoming a tradition – pronouncements by President Trump, this time in response to the disturbances in Charlottesville. The unrest was of only short duration for the financial markets, but was accompanied by a traditional ‘flight to quality’, of which government bonds, the Swiss franc and gold were the beneficiaries. Equities experienced a number of weak days, which, as far as the US market is concerned (-0.58%), broke the trend of the unusual absence of volatility observed in recent months. A number of technical market indicators prompt some caution with respect to the US market, such as the finding that, during the past results season, businesses performing better than expected there did not on average reap the reward of an upwards price response. And even though the US market as a whole is at close to record levels, equity prices of a growing number of companies have hit a low. For European equities, the further appreciation of the euro contributed to a reticent attitude among investors, although it proved possible to limit the damage to -0.45%. Just as in the previous month, the emerging markets achieved the best performance, with a positive close to the month of 1.38%
. The stronger commodities prices and the falling USD were supporting factors for this region.
Government bond yields in the euro area, the United States and Japan all fell once again in August. Geopolitical uncertainties (North Korea) made for greater interest in safe investments. But also the recently published lower-than-forecasted inflation figures and the expectation that the news flow on worldwide economic growth will not continue to surprise to the same extent in the positive sense, were contributing factors. The latter was particularly true of the euro area, where the stronger euro could potentially create headwind for growth. The 10-year bond yields in the US (2.12%) and Japan (0.01%) were on a par with the lowest levels of the year
. The peripheral countries of the euro area did not follow the falling yield trend of the core countries, with wider spreads in consequence. For Italy, the spreads were possibly narrowed too far in previous months by ECB purchases which were larger than provided for in the allocation key of the purchase programme. But the report that Silvio Berlusconi of the Centre Right Forza Italia has dusted off the idea of launching a parallel national currency, has conjured up the Eurosceptic spectre once more. Parliamentary elections are scheduled in Italy no later than spring 2018. The Spanish yield rose after the terrorist attack in Barcelona, in a climate in which investor attitude in general was already risk-averse. That climate also widened corporate bond spreads. The narrowing of the previous month was largely eradicated, certainly in the case of the less high quality issuers. In Germany, parliamentary elections are to be held on 24 September. The expected victory of Chancellor-in-office Angela Merkel will have no impact on the markets.
Central banks and monetary policy
As generally expected, the speeches by Janet Yellen (Federal Reserve) and Mario Draghi (ECB) at the annual symposium of central bankers in Jackson Hole yielded no new information on future monetary policy. They addressed topics of a structural nature. Yellen emphasised the positive consequences of bank regulation following the financial crisis ten years ago, which has made the financial system more stable. This view flies in the face of the standpoint adopted by the Trump administration, which wishes to carry out renewed deregulation of the sector. Draghi spoke about the advantages of international trade and the possible obstacles to it. In spite of rather reticent comments by the Fed members, an announcement is expected from the Federal Reserve in September that it will begin to reduce its balance sheet
by no longer reinvesting maturing bonds. The implicit market expectation in the meantime points to a probability of about 33% of an interest rate hike towards December, which is possibly an underestimate, building on the appraisal by the Fed itself. The ECB is expected to announce in October, when the new growth and inflation forecasts are available, that it will reduce its monthly bond purchases.
After a period of consolidation at around 1.18 EUR/USD in the course of the month, the euro appreciated again at the end of August and exceeded the threshold of 1.20. Because ECB President Draghi, during his speech in Jackson Hole, did not explicitly discuss the appreciation of the currency – and therefore also did not try to talk it down – the euro resumed its rising trend. In contrast to the previous month, the other dollar currencies also yielded ground. The New Zealand dollar fell by as much as 5.3% against the euro
, after the central bank announced that it was concerned about the appreciation of the currency and that market intervention was an option. Following weak economic figures, the pound sterling again fell heavily (-2.8%). The Bank of England downgraded its forecasts for economic growth and the wage trend at the beginning of August. This resulted in the market expectation of a further deferment of an interest rate hike. This expectation has now moved to the second half of 2018, whereas previously the end of 2017 was still on the cards. In addition, the continued lack of clarity of the British Government’s Brexit strategy continues to depress the currency.
Commodities continued their rise in August. Industrial metals in particular hit prices which had not been seen for several years. In addition to the better state of affairs in the emerging economies, as illustrated by the performance of the region’s stock exchanges, the Chinese restriction of output played a role. The Chinese authorities wish to combat pollution by reducing production capacity. The crude oil price remained relatively stable. The impact of the shutdown of drilling rigs in the Gulf of Mexico and of a number of shale oilfields in Texas as a result of Hurricane Harvey had little impact on oil prices because reserves remain high. The gold price continued its upwards trajectory, rising above the 1,300 USD per ounce threshold
. A certain demand for safe haven investments (North Korea) and the lower interest rates contributed to this rise.
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