Wednesday 11/09/2019

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Investment Desk Analyst

Spring is late in coming, in the equity markets too. Our expert Johan Gallopyn looks at the main events of the past month and the first quarter for equity, bond and foreign exchange markets.

Equity markets

After a strong start in January, the equity markets were confronted by strong headwinds. As a result, the first quarter closed with clearly negative figures. In February, this headwind came mainly from the interest rate. After a stronger than expected figure for the rise in wages in the US, the market became aware that it was lagging behind on the expected path for interest rate increases by the Federal Reserve. March was a weak month (MSCI US -3.3% in EUR). A constant concern is monetary policy (the Fed takes a somewhat stricter stance in its outlook), but other factors that also brought uncertainty were import duties on steel and aluminium and trade barriers against China by the American government, the persistent pressure on President Trump in the investigation into Russian interference in the presidential election and the Facebook scandal (use of private data for political purposes) that spilled over to the rest of the technology sector. The so-called GAFA (Google, Amazon, Facebook and Apple) represent slightly less than 10% of the American stock market but were responsible for 25% of the performance over the past year. But in the March correction, the technology sector underperformed the market, not only in the US but also in Europe and Asia. Emerging markets performed in line with developed countries in the past month (MSCI EM -2.7% in EUR) but slightly outperformed the first quarter.

 

 

 

 

 

 

Bond markets

The US 10-year interest rate reached a level of 2.92% in February, the highest level in more than four years. Comments from the central bank and favourable economic figures and expectations (based on the tax reduction) pushed interest rates higher. Since that peak, interest fell somewhat back towards the end of the quarter due to the turbulence on the equity markets and the resulting interest among investors in safe haven investments. The American trade barriers announced so far are admittedly limited in scope, but in the event of an escalation, higher import duties could lead to higher inflation. In the longer term, they can then restrict global growth. European interest rates broadly followed the same trend, although the decline since the recent peak is more pronounced (German 10 year Bund at 0.50%). The leading indicators in Europe suggest that the level of economic activity remains high, but that the peak for this cycle may be behind us. Moreover, the recent inflation figures in the euro zone were still relatively weak. The bond yields of the peripheral countries held up well during the turbulence on the equity market. There was no “contagion” noticeable due to risk avoidance behaviour for that reason, nor due to the elections in Italy. The Italian spread with the German interest rate rose slightly in March, while the Spanish and Portuguese spreads narrowed considerably. Spreads on corporate bonds widened somewhat.

 

 

 

 

 

 


 

Central banks and monetary policy

At the first meeting headed by the new Chairman Powell, the American central bank raised its short-term interest rate by 25 basis points in the past month, as was generally expected. More importantly, the Federal Reserve adjusted expectations for future rate hikes, albeit unchanged at three in total for 2018, but a higher pace for subsequent years (until 2020). The government’s fiscal measures (tax reduction and more government spending) were seen as an additional incentive for an economy that is already well on the right track. The European Central Bank did not change its monetary policy but made a small move towards the normalisation of monetary policy by no longer considering extending its bond purchase programme in scope or duration if the financial environment so required. The Bank of England left the interest rate unchanged in March as expected, but left the door open for an interest rate increase in May. That is also the market forecast, despite the recent moderation in inflation.

 

 

 

 

Currencies

The dollar did not benefit from the increase in interest rates or the somewhat stricter than expected comments by the American central bank (-1.0% against the euro). The prospect of a potentially escalating trade conflict weighed on the American currency. The British pound strengthened against the euro due to progress in the Brexit negotiations. The EU and the United Kingdom reached an agreement for a transitional period until the end of 2020, which means that in practice there is little change until that date. This is especially important for companies, which are seeing the uncertainty temporarily decrease. The prospect of an increase in interest rates in May also supported the currency. The Swiss franc weakened in March (-1.9% against the euro) despite the turbulence in the equity markets. The central bank continues to promise a very flexible monetary policy. The Norwegian krone strengthened against the euro after the central bank promised an earlier-than-expected interest rate increase. Since the beginning of this year, the JPY has strengthened (+3.3% against the euro), thereby making up a (limited) share of last year’s loss. The higher investor interest in safe haven investments can be seen as the main reason for this evolution. It does entail however that it will again be more difficult for the central bank to push inflation to a higher level.

 


 

 

 

Commodities

The Brent oil price saw significant fluctuations in the first quarter with a sharp fall in February and a recovery to just above USD 70 a barrel in March (+6.8% in US dollars). The downward movement was related to reports of shale production in America that exceeded the level of 10 million barrels per day for the first time, with expectations for 11 million by the end of the year. The recovery came after indications that the Trump administration wants to review President Obama’s nuclear deal with Iran, which could lead to new tensions in the region. There is also a possibility that OPEC and Russia could extend their alliance for a longer term. Due to the uncertain equity markets, gold benefited as a “safe haven” and came close to its highest levels at around USD 1,360 per ounce from earlier this year. The gold price also evolved as a mirror image of the evolution of the dollar. Industrial metals experienced a decline (-4.5% in USD), especially at the beginning of March due to the impact of the American trade barriers. Moreover, there were some less strong economic indicators for China.

 

 

 

 

 

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