Friday 20/09/2019

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Investment Desk Analyst

European share prices trailed those of other regions in December due to a once-again stronger euro, but 2017 will go down in history as an excellent year for the stock market nonetheless. Our expert, Johan Gallopyn, outlines the main trends on the equity, bond and currency markets of the past month.

Equity markets

Part of the stock market gains accumulated in December were lost during the last few days of the year, as investors locked in some profits after an excellent 2017. Due to the stronger euro, euro zone equities even ended slightly in the negative for the month. Over the past year, prices went up with a more than decent 12,6% (MSCI EMU). US share prices were able to set more new records while Emerging Markets - regardless of the region - showed the best performance during the past month (MSCI EM +2,9% in euro) as well as during the past year (MSCI EM +20,6% in euro). In December, the ultimate approval of the tax reform plan in the United States was seen as an important engine behind higher equity prices. The most eye-catching measure - the lowering of the corporate tax rate from 35% to 21% - is not expected to have the same impact for all companies and industries. Together with the temporary increase in long-term interest rates in the US, this led to varied industry performance over the past month. Just like in 2017, profit growth is expected to be an important determinant for stock price evolution in 2018, compensating the probably tighter monetary policy.

 

Bond markets

Yields on US 10-year bonds climbed to a level of 2.5% (which had not been reached since March), due to the approval of the tax plan and the continuing positive economic figures on one hand and an adjustment of the probably too conservative market expectations regarding the Fed’s monetary policy on the other. However, at the end of the month of December, yields ended at the same level, while hardly any changes could be noted compared to the start of 2017. On the European bond market, the elections in Catalonia were met with a moderate response on the part of Spanish interest rates. The elections did end in a (slight) majority for the parties that pursue independence, but the path to such independence is by no means clear and open. A decision was made in Italy to hold parliamentary elections on March 4th. The market was reminded of the related political risk and interest rates for Italian bonds increased to 2%, leading to a wider spread compared to the German reference rate. Corporate bonds benefited from the favourable economic situation and squeezed a few points off the spreads with government bonds.

 

Central banks and monetary policy

As expected, the Federal Reserve increased its prime rate by 0.25% to a fork between 1.25% and 1.50%. This was the third increase of the year and, since the interest rate had already been raised in December 2015 and December 2016, it was the fifth increase in this cycle. In its outlook, the Fed’s attitude towards growth expectations was slightly more positive for the coming years. However, expectations regarding inflation remained unchanged. Those adjusted forecasts do not change the path of further interest rate rises that the Federal Reserve has proposed (based on the average expectations of the Fed members). The counter for interest rate hikes thus remains at three for 2018 and two for 2019, a forecast that already exceeds market expectations. The Norwegian central bank has brought forward its expectation for a first interest rate increase to the end of 2018, marking the second meeting in a row in which the timing was adjusted in this way. In general the central banks in European countries outside the euro zone are adopting a wait-and-see attitude, guarding against creating expectations for monetary action that would deviate from ECB expectations. After all, that would lead to an undesired appreciation of their currency.

 

Currencies

The USD ended the year at just 1.20 against the euro, matching the weakest level of 2017 seen at the beginning of September. The weaker dollar in December came despite a rate increase by the Federal Reserve, the approval of the long-awaited tax reform plan and the publication of good economic figures in the US. The other dollar currencies outperformed the USD and increased against the EUR. AUD (+ 2.1%), CAD (+ 1.8%) and NZD (+ 2.5%) benefited from increasing commodity prices, but still booked significant losses against the EUR over the whole of 2017. GBP recovered slightly after British and European negotiators finally reached an agreement regarding the amount that Great Britain will have to pay to leave the European Union, the rights of British citizens who live in the European Union and vice versa, as well as the border with Ireland. However, this was not enough to compensate the losses earlier in the month. NOK and the SEK were able to recover some of their losses of the previous month after the Norwegian Central Bank adjusted its interest outlook.

 

Commodities

After a break in November, industrial metals continued their rise (GSCI Industrial + 8.2% in USD). For example, copper prices increased by 7.2% and surged 30.8% in 2017. Global economic growth and continuously strong demand from China have pushed prices higher over the past year. After the market suffered from oversupply during the past years it is now regaining its equilibrium, causing the price to reach its highest level since the beginning of 2014. Brent oil prices rose by 5.2% in December and increased to above USD 65 per barrel. Comments from OPEC and Russia point towards the possibility that recently-extended production cuts may continue after 2018. Gold prices again reached the level of USD 1,300 per ounce (+2,6%) as a consequence of the weaker dollar.

 

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