Tuesday 31/03/2020

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Monthly Market News

Investment Desk Analyst

Your monthly appointment with the financial markets. What were the trends for equities, bonds, currencies and commodities in the past month, and what made the markets move ? You can discover the most striking evolutions in this clear and concise analysis.


1. Equity Markets

After three successive months of negative performances, equity prices rose in March. The rally is the most pronounced in the emerging markets, especially those of Latin America. Rising commodity prices, a weaker dollar and signals of economic stabilisation caused prices to rocket (MSCI Latin America +20.4% in USD). The global MSCI Emerging Markets index was up 13% in USD or 8.0% in EUR. March also saw a surge in the US market, thanks to the prospects of slower interest rate hikes, somewhat better economic figures and a weaker USD. This weaker USD caused the performance expressed in EUR to remain confined to +1.8%. Although the European market closed up 2.8% in March thanks to the ECB, the recovery nevertheless lagged somewhat behind that of the other regions. Since the beginning of this year, the euro area is still in distinctly negative territory (MSCI EMU -6.6%). The euro area is still fighting its own demons, both at institutional level (Brexit risk, discord on how to handle the refugee crisis) and at economic level (inflation too low, smouldering problem of Greece). The Japanese stock market posted the weakest performance, both over the past month and since the beginning of this year (MSCI Japan -10.9% in EUR). The Japanese economy remained particularly weak, which fuels concerns about corporate profits.


2. Bond Markets

European bond yields fluctuated significantly in the course of the month. The yield on the 10-year German bund rose from 0.11% at end-February to just over 0.30% in mid-March and then toppled back to 0.15%. The better developments on the commodities markets made for a ‘risk-on’ attitude among investors, which initially depressed the prices of safe bond investments and pushed up yields. The extra monetary easing by the ECB then ensured that yields fell again, which also caused the spreads of the peripheral countries to narrow significantly in the past month. The Italian 10-year rate fell to 1,22%, resulting in a narrowing by 25 basis points of the spread with Germany in March.  During the first quarter, country spreads remained reasonably stable on balance. The US yield largely followed the same course in March, with the short end of the interest rate curve putting up the best performance. The prospect of slower interest rate hikes contributed to this result. Corporate bond spreads declined significantly, in anticipation of the purchases by the ECB. In this respect, the financial issuers lagged behind the non-financial; the latter proved in March to be able to more than compensate for the widening of the spreads in the first months of the year.


3. Central Banks and Monetary Policy

The central banks were once again a focus of attention in March. The European Central Bank issued an extensive new set of measures, which were very much to the liking of the market. In addition to cutting the reference rate and the deposit rate (by 5 and 10 basis points to 0% and -0.4% respectively), the asset purchase programme was increased from 60 to 80 billion euro and from now on corporate bonds are also eligible. In addition, a further 4 long-term refinancing operations were launched to increase the liquidity supply allowing banks to finance their lending at a negative interest rate. The US central bank did not alter its policy, but revised its expectations for the number of future interest rate hikes down from 4 to 2 in 2016. In a statement later in the month, Fed Chairman Yellen confirmed that she would continue to proceed prudently with regard to raising the interest rate, citing the international context as her main argument. Yellen therefore remains more dovish than other Fed members who wish to increase interest rates again more rapidly (even as early as April). During March, the interest rate was cut in New Zealand (to combat the low inflation) and in Norway (weak economy due to the low oil price). In both countries, the door was explicitly left open for further interest rate cuts.


4. Currencies

It is striking that the currencies posting the best performance during the first quarter are those where the central banks made further cuts to the interest rate and announced additional monetary stimulus, namely the EUR and the JPY. Is this an example of ‘sell on the news’? The fact is that the weakening of the EUR in 2014 and 2015 anticipated a lot of policy divergence with the US. In addition, the downward adjustment of the expected interest rate hikes for this year during the latest meeting of the Federal Reserve led to a weakening of the US currency (USD -4.7% against the EUR). The GBP managed to more or less hold its own, in spite of persisting Brexit uncertainties. At its last meeting, the Bank of England recalled that the next interest rate movement will certainly be upwards because the period of low inflation could come to an end later this year. The currencies of the commodity related countries logically rose, with even the Brazilian real (+ 6.4% against the EUR) staging a recovery during the past month, in spite of the economic (recession) and political (possible impeachment of President Rousseff) problems plaguing the country.


5. Commodities

The oil price (Brent) continued its upward trend in the first week of the past month (+10.3% in USD) and then stabilised at around the 40 $/barrel mark. The better economic signals, the weaker dollar and the announced production freeze at the present level supported the oil price. An agreement on this freeze should finally be reached by 17 April, but it seems that its impact will be limited. Of the participating countries, Saudi Arabia is indeed the only producer that would be able to raise its level of production further anyway. Moreover, Iran insists on restoring its production to the level of before the trade embargo. The fortunes of the other commodities were mixed. Gold closed more or less unchanged (+0.1% in USD): the upwards trend was wiped out in the course of the month by comments by Fed members opting for more rapid interest rate hikes.



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