Monthly Market News
The sharp rise in stock markets in January continued into February. Our expert, Alexandre Gauthy, examines the events that impacted stock, bond, currency and commodity markets last month.
Stock markets continued their momentum from January. Gaining just over 4% over the month, European shares outperformed shares from the other major regions in February. Global stock markets were buoyed by progress in the trade talks between China and the United States, by the more cautious messages being sent by central banks, and by the agreement on funding certain US government departments. Nevertheless, economic figures remained disappointing overall, particularly in the euro zone. In the monetary union, the main news was the significant revision in the European Commission’s growth forecasts for this year (from the previous 1.9% to 1.3%). The Commission’s growth forecast for the Italian economy in 2019 was revised downwards significantly (from 1.2% to 0.2%), along with that for Germany (from 1.8% to 1.1%). Progress was made during the month on the trade front. The US president postponed the March 1 deadline from which custom duties on 200 billion dollars of Chinese imports were due to increase from 10% to 25%. The prospects for a trade agreement are becoming more likely and a meeting is planned between the 2 presidents, Donald Trump and Xi Jinping, with the purpose of finalising negotiations. Chinese stocks rose sharply as a result of this announcement, recording their highest daily increase in over 3 years (a more than 5% gain over the day for the Shanghai Shenzhen CSI 300 index). Sectors highly sensitive to this theme, such as industry and semi-conductors, generally outperformed the indices. US economic growth figures were published at the end of the month. These showed that activity slowed to 2.6% in the fourth quarter, compared with 3.4% for the third quarter. However, this figure was slightly higher than expectations.
On the bond markets, credit spreads tightened after having increased at the end of last year, in an environment in which investors abandoned what are deemed riskier assets. Thanks to this drop in yield spreads, both investment grade corporate bonds and high yield corporate bonds recorded positive performances in February. The main corporate bond indices increased in both Europe and the United States. US and German government bond yields declined during the first part of the month, before climbing again during the second half of the month, closing February at levels generally unchanged compared to the end of January.
Central banks and monetary policy
As a whole, the main central banks have become more cautious since the start of the year. At the end of January, the Fed announced a pause in its monetary tightening. This can be traced to the fact that a lack of inflationary pressure and the economic slowdown in the rest of the world are prompting caution. The European Central Bank also revised upwards the risks weighing on the euro zone economy. In February, the Reserve Bank of India surprised the market by reducing its key interest rates from 6.50% to 6.25%, while the Reserve Bank of Australia (which up to now had expected to increase its rates in the near future) is uncertain about the direction of the next monetary move. This heightened caution on the part of central banks follows the continuing deterioration in economic figures. In the euro zone, the industrial sector is especially being impacted by the slowdown in global trade and the uncertainty over US protectionism. The level of the PMI manufacturing indicator suggests that this sector of the economy is in recession. Nevertheless, growth remains positive in the euro zone thanks to the better performance of the services sector. In the United States, durable goods orders, excluding transport and defence, continued to decline during the month of December, heralding a slowdown in corporate investment for the start of the year.
In the currency markets, the pound sterling gained just under 2% against the euro in February. Theresa May, who until last week had resisted any extension to the period of negotiations with the European Union, announced that she wanted to submit the option of extending this period to the British parliament if her exit agreement was again rejected by parliament. In addition, in the event that the exit agreement is rejected, the British parliament will also vote on the option of leaving the European Union without a deal, which will most likely be refused by parliament. This news supported the pound at the end of February. Over the course of the month, volatility in euro-dollar parity remained low. Emerging market currencies, as a whole, stabilised against the dollar after their gains in January.
The price of gold ended February at levels close to those at the end of January. Oil maintained its bullish bias in February, but suffered at the end of the month when Donald Trump urged OPEC to reduce its efforts to cut production aimed at maintaining oil prices. Here, he stated once again that oil prices were becoming too high. Industrial metals prices moved upwards due to a contraction in stocks and due to Chinese credit growth figures in January, which suggest a resumption in infrastructure investments.
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