Wednesday 01/04/2020

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Monthly Market News

Investment Desk Analyst

Besides ‘traditional’ topics such as the trade conflict and Brexit, the currency depreciation raging in a number of emerging markets and the Italian budget saga defined the fortunes of equity, fixed-income and currency markets. Our expert, Johan Gallopyn, outlines the main trends of the month of September.

Equity markets

At the beginning of the month, equity markets were dominated by the currency depreciation affecting a number of emerging markets. Logically, emerging market equities suffered most. Following a stabilisation, prices managed to recover partially, with the region remaining in slightly negative territory at the end of the month. On the last day of the month, European equities saw the hard-earned gains dissipate further to the announcement of the Italian budget, closing off the month with a slightly negative performance. Japanese equities proved to be the strongest region in the past month, returning 3.2% in euro terms (+5.7% in yen for the MSCI Japan index). Now that prime minster Abe has started his third term, the Abenomics policy, which put an end to the deflationary economy, can be continued. Even though US equities reached all-time highs in September, their performance over the past month proved to be moderate (MSCI US +0.6%). Over the entire third quarter the US performed very well, returning 7.9% in euro terms. The implementation of the previously announced import tariffs by the United States and China’s retaliation barely affected markets as they were widely anticipated and largely considered as moderate. In a first phase, the US tariffs have been limited to 10%. At the end of a quarter, the reporting season of company results is eagerly awaited. Just like in the first and second quarters, the tax cuts that have been implemented in the US will continue to play a role in the comparison to last year. Here, consensus estimates point to a 19% profit increase for S&P 500 companies. Market participants will be looking at indications of pressure on margins (higher wages) and the possible fall-out of the trade conflict.


Bond markets

In September, bond yields moved towards the upper side of the range they have been trading in for a few months now. As such, US 10-year rates moved to 3.1%, a level that was previously reached in May. German 10-year rates in turn remained at 0.5%. In the US, the strong economy remains an important element driving rates higher. However, increasing or decreasing risk appetite among investors is also a key element driving rates up or down. In Europe, all attention of course went out to the 2019 Italian budget negotiations. Ultimately, the government managed to reach a consensus on a 2.4% budget deficit, as the Five Star Movement and the Liga managed to push through part of their election promises. This has now resulted in a higher than expected budget deficit. Giovanni Tria, the minister of finance, suggested a deficit of maximum 2%, and the new figure is a far cry from the figure the previous government had put forward, namely a 0.8% deficit for 2019. The would seem that lowering the government’s high level of debt is no longer seen as a priority for this coalition. Rates on Italian government bonds rose sharply and have recently matched earlier peak levels of about 3.2%. Furthermore, the Italian government may have to deal with a credit rating downgrade by the rating agencies in the next couple of months. Bonds from other peripheral countries barely moved while corporate bonds generated positive returns throughout the month, with spreads narrowing. The latter benefited from an improved risk sentiment among investors. 


Central banks and monetary policy

The central banks are staying the course. In a widely anticipated move, the US Federal Reserve hiked interest rates for the third time this year. The Federal Open Market Committee members continue to work with the assumption of an additional rate hike this year, three in 2019 and one in 2020, which is still more than the market consensus expects. Mario Draghi, the president of the European Central Bank, caused somewhat of a stir on financial markets by stating that the expects a ‘relatively strong’ recovery of core inflation as a result of the stronger labour market. However, this statement was not confirmed by the most recent inflation figures, which came out below expectations. The Norwegian central bank hiked its short-term rate by 25 basis points for the first time since 2011, following the indication given earlier this year. The central bank remained very cautious in its outlook on future rate increases. The central banks in the emerging markets which had come under fire intervened to stabilise the situation. The Turkish central bank surprised markets with a larger than expected rate hike (by 625 basis points to 24%), despite President Erdogan’s earlier objections to this move. In this manner, the central bank showed that it remains somewhat independent of political interference. Russia raised interest rates for the first time in four years, adding 25 basis points to reach 7.5% in order to support its currency, which is also suffering due to the emerging market currency depreciations and the sanctions imposed by the US.


The US dollar ended the month virtually flat versus the euro, but there was nevertheless some underlying volatility. In August, the greenback managed to appreciate as a result of the tensions affecting certain emerging market currencies. However, after the situation had stabilised, the safe-haven demand for the US dollar faltered in the course of September... until uncertainties relating to the Italian budget in late September arose and resulted in a weaker euro. The Norwegian krone rose 2.8% against the euro following a weak performance in August, after the central bank had raised interest rates and supported by a rise in oil prices. The Swedish krona largely followed suit. The British pound continues to evolve according to media headlines on the state of Brexit talks. The Japanese yen depreciated, erasing the recovery in August which had resulted from the turbulence caused at the time by the emerging market currency depreciations.



After falling below USD 70/barrel in August, crude oil ended September above USD 80/barrel. This marks the highest price in almost four years’ time. The US sanctions against Iran will come into effect in November, and the impact on Iranian exports can already be felt. Moreover, OPEC and its allies do not seem willing to ramp up production this time, unlike in May, when oil prices also reached USD 80/barrel. Industrial metals stabilised following the price slump since the month of June. The metals which fell the most during this correction (namely copper and zinc) even ended the month in positive territory. The currency depreciation affecting some emerging markets has hardly had any economic impact, except in the countries themselves, i.e. Argentina and Turkey. Gold prices remain below USD 1,200/ounce and, just like in previous bouts of market turbulence, failed to benefit from the interest in safe-haven investments during the currency crisis. The Federal Reserve confirmed its expected rate increase trajectory, and lower gold prices may be considered as a signal that the market is confident that this will suffice to contain inflationary pressures.



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