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Macro economist Degroof Petercam Luxembourg

November was a rollercoaster month for the financial markets. Our expert, Alexandre Gauthy, examines the events of the month that had a direct impact on stock, bond, currency and commodity markets.

Stock market

Global stock markets closed the month of November at a level close to what they reached at the end of October. After a positive first week, stock markets digested the publication of lower-than-expected economic growth figures for the third quarter in Europe and Japan, the political situation relating to Brexit, and the lack of any détente in the trade war between China and the United States. Apple’s share price fell 18 % in November following publication of the firm’s results. The company announced that it expects to end publication of unit sales data. Some of its suppliers have also admitted that demand for their products is slowing. In mid-month, stock markets were impacted by the uncertainties over Brexit arising from the resignation of several ministers from Theresa May’s cabinet as well as the open opposition to the exit plan from a large number of UK parliamentarians. Following agreement on the text by European Union leaders, the UK parliament must now decide on the document in the first half of December. A positive vote is likely to buoy global stock markets, while a vote against will lead to a multitude of possible scenarios. At the end of the month, shares performed well, supported by the prudent communication from the Chairman of the American Federal Reserve.

 

Bond markets

The yields on German and US 10-year government bonds fell during November, partially reflecting the publication of relatively disappointing economic figures, such as the PMI leading indicators, which declined last month in the Eurozone and in the United States. The communication from the Chairman of the Fed also had a downward effect on bond yields. According to Jerome Powell, the Fed’s key interest rates would no longer be too far from what the members of the central bank consider as “neutral”, in other words as a level that neither supports nor restrains economic activity. This communication differed from that at the start of October, when the Chairman of the central bank deemed the existing rates to be still far from neutral. This change in tone caused a slight readjustment in market expectations with regard to future movements in short-term interest rates, which helped the price of what are considered risk-free bonds. The yield on Italian government bonds remained volatile in November. After having resubmitted a draft budget to the European Union that contained few changes compared to the initial version, the Commission is almost guaranteed to launch an excessive deficit procedure against Italy. Yields on Italian government bonds eventually fell at the end of the month following comments by the country’s leaders showing themselves willing to revise the expected budget deficit for the coming year downwards. The yield differential between high-quality and lower-quality corporate bonds and risk-free returns widened last month in both the United States and Europe. This increase in credit spreads can be attributed to a slowdown in economic growth as well as an anticipation of the ending of the ECB’s asset purchase program at the end of the year. Nevertheless, default rates remain low and company profitability high, which is likely to slow down any significant increase in yield spreads.


Central banks and monetary policy

The members of the European Central Bank did not meet last month. However, the account of the previous month’s meeting has been published. According to the ECB, the slowdown in economic growth in the third quarter will only be temporary and inflation will gradually return to the target of 2 %. Nevertheless, in light of recent economic publications, the ECB is likely to revise its growth and inflation forecasts downwards during its December meeting. The American Federal Reserve decided at the start of November to leave its rates unchanged, which was largely anticipated by investors. The minutes of the last meeting of the Fed tell us that the central bank still intends to increase its rates in December. By incorporating only one interest rate hike for next year, the markets seem to be questioning future increases in key interest rates being considered by the Fed.

 

Currencies

The euro hit a low point of 1.1213 against the dollar on November 12 before bouncing back slightly to stabilize at 1.1360 for one dollar at month-end. Euro-dollar parity was punctuated by central bank messaging and economic publications throughout the month. The Norwegian krone lost 2 % of its value against the euro in November due to a drop in oil prices. The krone remains strongly correlated to the price of oil given the Norwegian economy’s dependence on the commodity. Certain Asian currencies, such as the Indian rupee and Indonesian rupiah, gained more than 5 % over the month against the euro. The gain in the Indonesian rupiah can be attributed to the unexpected hike in key interest rates by the Indonesian central bank on November 15.

 

Commodities

Oil recorded a negative performance of more than 20 % in dollars over the course of the month, bringing the cumulative performance since the peak in early October to around -35 %. On November 5, the United States exempted eight countries, including India and China, from the ban on importing Iranian oil. All in all, Iran will reduce production by less than originally planned, meaning that the supply of oil on the global market will initially be greater. However, since oil prices are extremely sensitive to any variation in supply and demand, this excess of supply from Iran drove down the price of a barrel of oil. The next decisive event for the oil market is the upcoming meeting of OPEC scheduled for December 6. On the whole, the price of gold remained generally unchanged at the end of the month compared to early November. The price moved in the opposite direction to US 10-year government bonds over the period.

 

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