Thursday 05/12/2019

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Investment Desk Analyst

After December 2018, the weakest month for equity markets in almost a decade, January closed off as one of the better months in recent years. Our expert, Johan Gallopyn, looks at the driving forces behind the equity, bond, currency and commodity markets in the first month of the year.

Equity markets

Equity markets experienced a strong recovery in January. A number of factors can be cited as a reason for this: a technical upturn following the December correction, signs that progress has been made in the trade dispute between the United States and China, the quarterly results beating downward revised expectations and the more flexible position of the central banks. The S&P500 companies, which have so far published their results for the fourth quarter of last year, recorded an average increase in earnings per share of 11%. Even though the results exceed expectations by a lower margin than was the case in previous quarters, the market nevertheless rewarded the companies with a rise in their share price. In Europe, earnings growth for companies in the Stoxx600 over the fourth quarter is expected to be around 5%, broadly half of what was expected just a few months ago. At regional level, emerging markets continued their outperformance of December, with the weaker dollar, hope for a solution to the trade dispute and a stronger commodity market all playing a part. Japanese equities lagged behind because a more flexible monetary policy in the other economic blocs implies that the Japanese Yen could become more expensive, thereby weighing on the activities of the country’s exporters.

 

Bond markets

In January investors were again willing to invest in risky assets, but this was not at the expense of “safe” government bonds. On the contrary, the German 10-year bond yield again fell 9 basis points to 0.15%. Economic figures in the euro area remain below expectations and the central bank’s monetary policy could be adjusted as a result. Also, European bonds appear not to be impacted by the central bank’s discontinuation of the bond purchase program since the beginning of this year. Spreads for the peripheral countries narrowed. The US 10-year rate remained more or less stable over the past month, whereby the US economy’s resilience to the global growth slowdown was counterbalanced by lower inflation expectations and the outlook for a more flexible than expected monetary policy. Corporate bonds regained some of the ground lost after a weak December. This was particularly the case for US corporates, but less so for European ones, where slower economic growth can affect businesses to a larger extent. 

 

Central banks and monetary policy

The European Central Bank and the Federal Reserve left their key rates unchanged in January. However, the accompanying comments indicate that they are less confident about the future. If the slowdown in economic growth over the past few months is confirmed and there are no signs of recovery, for the ECB this could mean that the prospect of a first hike in interest rates is pushed further into the future and that there may not even be a higher rate set in 2019. After the Federal Reserve adjusted its rate forecasts downwards in December, it was noticeable in January that there was no longer any reference to “further gradual interest rate increases”. The market interpreted this as a growing likelihood that the Fed will adopt a wait-and-see attitude for the rest of the year. There is also the possibility that the Fed will delay the reduction of its balance sheet. To counteract the slowdown in growth, the Chinese central bank injected additional liquidity into the economy at the beginning of January by reducing the reserve ratio that banks are required to maintain when they lend to business. Additional support in the form of reductions in the key interest rate cannot be ruled out during the course of 2019.

 

Currencies

After the withdrawal agreement with the European Union was rejected by an overwhelming majority in the British Parliament, the British pound strengthened (+2.9% against the euro). The debate seemed to be moving towards a softer Brexit (customs union) or a postponement, with a majority of the members of parliament being in favor of a scenario that avoids a no-deal Brexit. At the end of the month, the GBP lost some ground again after a new vote resulted in a mandate for Prime Minister May to renegotiate the Irish backstop solution with the European Union. The Norwegian krone strengthened (+2.6% against the euro) following the recovery in oil prices and after the central bank confirmed that it is likely to raise the short-term interest rate again in March following the first increase in September. The Swedish krona lost the gains it made after the interest rate hike in December. 

 

Commodities

Oil prices, in particular in the first half of January, undid December’s losses and ended up above USD 60 per barrel. The production restriction agreed by OPEC and Russia in December and the weaker dollar at the beginning of the month supported the rise. The US also imposed sanctions on the Venezuelan oil company PDVSA, which is in government hands, in response to the contested re-election of President Maduro. Industrial metals were able to close higher after a volatile month characterized by slower economic growth in China and government measures to boost this growth. The price of gold was able to gain further ground, and for the first time since June it closed above USD 1,300 per ounce. Its attractiveness as a safe haven remains, and the expectation that the US central bank will not raise its interest rate this year, or raise it less quickly, is also supporting the price.

 

 

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