Monday 22/07/2019

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Investment Desk Analyst

An excellent month of September ensured that the third quarter ended with positive figures for the equity markets. 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.

Equity markets

For the European stock exchanges, the interruption in the rise of the euro offered welcome support. After underperformance during the previous months, European equities took the lead in September (MSCI EMU +4.4%). The equity markets are bolstered worldwide by a favourable economic situation, the outlook for earnings growth for the third quarter, and cautious signs that in the United States progress is being made in the tax reform dossier. The S&P500 managed to close above 2 500 points for the first time. After the outstanding performance in July and August, the emerging markets lagged behind a bit. The somewhat stronger dollar caused investment flows into this region to falter. Equity prices are further bolstered by the expectations concerning the earnings growth for the third quarter which has just ended. According to Factset figures, an increase in earnings for the S&P500 is expected for the third quarter of 4.2% year-on-year. Admittedly that is lower than the earnings growth exceeding 10% in the first and second quarters, but it is nevertheless regarded as positive because more companies than average have indicated a positive outlook in the run-up to the result season.

   

Bond markets

In the United States, the 10-year yield at the beginning of September reached its lowest level so far this year at just above 2%. However, the expectation of a rate hike in December by the Federal Reserve, a tax cut which is possibly on its way and favourable economic figures caused the reference rate to close significantly higher (at 2.33%). The European yield followed the same course, although to a lesser extent, since the fundamentals are not comparable. The election result in Germany and the referendum on independence in Catalonia had no impact on the market. The Portuguese yield bucked the trend and dipped below 2.5% for the first time since the end of 2015. The rating agency Standard & Poor’s upped its rating for Portuguese government bonds and no longer regards them as ‘junk’. It is expected that the other major agencies, Fitch and Moody’s, will follow suit. Fitch already adjusted the outlook to positive in June. This will have consequences above all for private or institutional investors purchasing only investment grade bonds. Portuguese bonds have always continued to form part of the ECB purchasing programme. There was little movement in the corporate bond spreads in September, although non-financial issuers in particular were still able to draw some benefit from the positive mood on the markets.

 

Central banks and monetary policy

The ECB gave the market a glimpse of what may be expected from the important meeting in October. At the policy-setting meeting next month, it is highly likely that it will be determined how the bond purchasing programme is to be wound down. At the same time, President Draghi announced that an interest rate hike will occur only after the purchasing programme has been brought to a close. That means that a higher short-term interest rate cannot be expected in the euro area before 2019. Whereas in the United States the chances of an interest-rate hike by the Federal Reserve in December were estimated a month ago by the markets at barely one third, the market is now assuming a 75% probability. In a speech, FED Chair Yellen intimated that it would be imprudent to leave the interest rate unchanged until inflation has reached the 2% target, because the recent, lower-than-expected figures are attributable to temporary factors. As expected, the FED also announced to start reducing its balance-sheet from October. The Swedish central bank is caught between a (too) strong economy that would justify a higher interest rate and an already appreciated Swedish krona. But the Swedish central bank is very reticent about hiking its interest rate while the ECB’s monetary policy remains very accommodative.

 

Currencies

The pound sterling was the outlier in September on the currency market with a rise of 4.4%. Although the Bank of England left its monetary policy unchanged, it gave a clear signal that, unless the economic figures are disappointing in the coming weeks, it would wind down the monetary stimulus. The recent economic figures in the United Kingdom are tending to be on the weak side, but inflation rose in August to 2.9% and is expected to cross the 3% mark in October. The clear message of the BOE must consequently be seen in that light. The USD was able to stop its fall and close the month just positive, but the depreciation over the third quarter still amounts to 3.4%. The increased chance of an interest rate hike in December and the progress recorded in still implementing a tax plan contributed to this. The stabilising dollar can also be considered as a dwindling interest for the euro after the disappointing election result for Angela Merkel in Germany and the Catalan referendum for independence. The Norwegian krone slid at the end of the month in spite of the higher oil price and the central bank brought forward somewhat the prospects of an interest rate hike.

 

Commodities

The oil price fell just short of the 60 USD/barrel mark last month – the highest level in the past two years – and thereby continued the upwards trend since the low of under 45 USD/barrel of June. No specific reason can be given for this. It is becoming clearer that the market is moving more towards equilibrium between supply and demand. In a recent report, the International Energy Agency raised its expectations for worldwide demand. This is prompted by the better-than-projected economic growth in all regions of the world. On the supply side, the OPEC production restrictions in the meantime seem to have been respected quite well. However the uncertain factor remains shale production in the United States, which has become more efficient in recent years and can now have a viable production at a lower oil price than previously. Industrial metals and gold dipped somewhat, which is partly attributable to the stabilisation of the USD. The gold price also suffered from an expected higher interest rate in the US and a decline in interest in safe haven investments.

 

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