Monday 21/10/2019

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Investment Desk Analyst

Despite the volatility of recent months, most financial markets closed quarter 3 2019 positively. In September too, the equity, bond, currency and commodity markets experienced fluctuations. Our expert, Johan Gallopyn, analyses it for you.

Equity markets: market rotation

In the first half of September, the equity markets made up for the dip in August. The forward/backward approach in the trade conflict between the U.S. and China worked positively in the past month. High-level discussions between both countries are anticipated for mid-October. Central banks also contributed to the positive mood, as did the somewhat reduced political risks (Italy, Brexit) in Europe. It is not a surprise that European equities performed better than the other regions in the past month. Nevertheless, there were events that disturbed the market, albeit for a short time, and stopped the momentum in the markets in the second half of the month. The attacks on Saudi Arabian oil installations had a limited influence on the equity markets. The impeachment procedure against President Trump and the observation that the Federal Reserve is increasingly divided regarding monetary policy created somewhat more uncertainty. US equities performed less well than other regions. The sector rotation out of growth equities also had more impact on the US market.

Bond markets: breather

The development on the bond markets was virtually a mirror image of the equity markets. In the first half of September the bond markets fell (higher interest rates) after which it recovered somewhat. Overly aggressive expectations about central bank monetary policy probably gained too much traction in the market. Furthermore, minds in Europe appear to be ripening about supplementing monetary policy with fiscal stimulus measures. This is intended to support the economy and keep inflation at the desired level. The French Government announced a tax cut for 2020. Germany, with the most fiscal room, however continues to apply the brakes on the implementation of a less rigorous budgetary policy. The German 10-year interest rate evolved from -0.70% at the beginning of the month to just above -0.50%, finally closing on -0.57%. Corporate bond spreads remained, on balance, fairly stable over the month, for both the investment grade and for the high yield segments. The market absorbed the large number of new issues smoothly.

Central banks and monetary policy: no surprises

The European Central Bank announced a number of monetary easing measures, including a cut in the deposit rate from -0.40% to -0.50% and a relaunch of its asset purchasing programme for 20 billion euros per month. This is the first rate cut since 2016. Norges Bank continued to swim against the tide and raised its policy interest rate by 25 basis points to 1.5%, the fourth increase in the past year. However, Norway's central bank was more cautious about future policy and it is likely that interest rates will remain unchanged for the rest of the year, and possibly next year. As generally expected, the Federal Reserve also cut its policy rate by 0.25% at its September meeting. It was the second interest rate cut in quarter 3 2019. Most striking was a growing discord among the Fed members about current and future policies: 7 members voted in favour of the cut, 3 against. The median expectation of the members of the Fed is not for a further cut, but the market expects an additional cut in the rate this year. And one to two more, next year.

Currencies: British pound remains plaything of Brexit developments

The British pound evolves following the Brexit reports. After a low point in August and the appointment of Boris Johnson as Prime Minister, the hard positions he took regarding the deadline and the Irish backstop solution, the currency recovered some ground in September. The British Parliament voted to preclude a no-deal Brexit and an alternative to the backstop is open for discussion with the European Union. A European Council meeting will be held on 17 and 18 October and by then, it should be clear whether an adapted withdrawal agreement is feasible. The Norwegian krone remained fairly stable, despite the fluctuations in the oil price and the rather prudent stance of Norges Bank. The US dollar is continuing its slow-but-steady rise. Even though that is likely to be a thorn in the side of the American Government in terms of its trade policy. The macro-economic figures for the US remain better than in other regions and the dollar is a leading currency. The interest rate is positive for both the short and the long term.

Commodities: short-lived spike in oil price

September’s eye-catcher was of course oil. Prices shot up to more than $70 per barrel after the attacks at the crude oil processing plant in Abqaiq and at the Khurais oil field (both in Saudi Arabia), 14 September 2019. But it soon turned out that the damage could be repaired within a few weeks, and not a few months as initially feared. Oil prices dropped quickly to pre-attack levels, just above $60 a barrel for Brent oil. Furthermore, the expectation that the International Energy Agency will lower the outlook for oil demand in 2020 because of the weak global economic growth does not offer support for the price of crude oil. Industrial commodities (+0.7%) remain fairly stable after the downturn of recent months. Gold prices consolidated at around $1,500 per ounce, close to recent highs.

MSCI indices: source MSCI. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

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