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Investment Desk Analyst

Prospects of better trade relations between the United States and China led to rising equity prices in November. Our expert, Johan Gallopyn, analyses the most important trends in the equity, bond, currency and commodities markets for you.

Equity markets: share prices continue to rise

November was again a positive month for global equities. The S&P 500 hits once more historical records and European stock exchanges are close to their highest levels in recent years. The prospect of better trade relations between the US and China is an important driver for financial markets. The first phase of the trade agreement seems to go a little further than originally foreseen. Some of the tariffs previously introduced will probably be reversed in a number of steps. Meanwhile, developments in Hong Kong are complicating the discussions. Concerning emerging market equities, they ended the month unchanged. Both the turmoil in Hong Kong and protests in a number of Latin American countries as well as the somewhat disappointing economic figures in China can explain this weaker performance. Now that the publication of the company results for the third quarter is complete, conclusions can be drawn. Companies in the S&P 500 recorded a profit fall of -2.2% on turnover growth of 3.1%. It is the third quarter in a row with negative profit growth but results were generally seen as better than expected. Companies in the S&P 500 that realise an important part of their turnover outside of the US had clearly a more negative result than companies that mainly operate locally. Expectations for the fourth quarter have meanwhile been adjusted to a profit growth of -1.4% compared to +2.9% at the end of September, the start of the Q3 results season. In Europe, the profits for companies in the Stoxx 600 fell by 4.7% in the third quarter compared to the previous year, with a turnover growth of 1.4%. These results are also better than initial expectations (-8.6% in terms of profits).

Bond markets: Belgian 10-year annuity is slightly positive again

Due to more positive messages in the US-China trade dispute and signs of stabilisation in industrial activity worldwide, the 10-year reference interest rates in the United States and Germany rose, particularly in the first half of the past month. They reached a level of 1.94% and -0.25%, respectively. The Belgian 10-year interest rate even rose slightly above 0% once again. In the second half of the month, bond yields fell slightly. After the Spanish elections on 10 November, the political situation remains unstable. Pedro Sanchez’s Socialist party will form a government with the radical left-wing Podemos party. But it will be a minority government, making significant public finance measures unlikely. Corporate bond spreads showed a mixed picture: quality bonds (Investment Grade) were somewhat higher while High Yield bonds were lower. The latter, admittedly, had a more difficult period during the previous months.

Central banks and monetary policy: New Zealand central bank surprises

There was relatively little news coming from central banks in November. In her first speech as ECB President, Christine Lagarde stressed the desire to supplement the flexible monetary policy with an expansionist fiscal policy. Fed Chairman Jerome Powell confirmed his view that the current level of interest rates is appropriate for the current economic context. The market is no longer taking into account a new interest rate cut in December. The New Zealand central bank surprised many by keeping its interest rate stable at 1%. The market expected a reduction of 25 basis points. The central bank wants to assess the impact on the economy of earlier rate cuts, but leaves the door open for further cuts if circumstances would require it. The Chinese central bank lowered its 1-year refinancing rate for commercial banks for the first time in this cycle. It is likely to be the prelude to further interest rate cuts in the course of next year.

Currencies: fairly stable

The euro remained relatively stable in November against other major currencies, although the dollar was able to regain ground after the fall in October. The British pound strengthened further. Polls showed that the Conservatives are holding onto their comfortable lead on the Labour Party in the run-up to the election on 12 December. The New Zealand dollar strengthened after the central bank didn’t implement a rate cut which was expected by the market. Emerging market currencies were generally somewhat weaker considering a strong dollar and a number of specific risks, mainly in Latin America. The Brazilian real has depreciated: the currency fell -4% against the euro during the month and hit a historic low against the US dollar. Chinese currency strengthened over the month (+1.2% against the euro), but this was accompanied by some volatility.

Commodities: gold on the defensive

Oil prices rose in November. However, there were reports that OPEC+ would not announce any additional production restrictions because Russia would not be in favour of them. However, the current restrictions on production (due to expire in March 2020) would be extended and there would be more emphasis on actual volume compliance. Industrial metal prices lost ground during the month (-2.3% in USD) due to weaker activity indicators from China. The nickel price, which jumped sharply during the summer months, has now fallen after Indonesia’s export ban was partially and temporarily lifted. Gold prices also fell due to declining interest in safe haven investments and a stronger dollar.

 

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