Weekly market update : A proneness to risk despite some headwinds

Monday January 28

Weekly market update

Despite the lack of progress on Brexit and the US budget, the main European indices have just seen a new weekly increase sequence. The "false" hopes of a rapid trade agreement between China and the United States, combined with upbeat corporate results, are allowing certain sectors, including banking, technology and the automotive industry, to rebound after a turbulent year-end.

Indexes Over the past week, in Europe, the CAC40 gained 0.9%, marking its fourth consecutive week of growth. The Dax gained 0.8% while the Footsie lost 1.9%. For the peripheral countries, Spain, Portugal and Italy recorded weekly performances of 1.1%, 1.3% and 0.2% respectively. In the United States, on Friday, the Dow Jones lost 0.6%, the S&P500 also paused, after a strong start to the year (-1%) and the Nasdaq100 lost 1.2%. In Asia, the Nikkei won 0.5% while the Shanghai Composite fell by 0.17% and the Hang Seng gained 1.7%.

Commodities Oil markets remained stable this week, despite the upsurge in oil stocks (+8 million barrels) and an explosive situation in Venezuela, where Nicolas Maduro is being challenged. Caution thus seems to prevail in the short term, as in the case of the stabilization of WTI prices at USD 53.5 per barrel. The calm also characterizes the evolution of precious metals over the week, with traders divided between the consequences of a global economic slowdown and the strength of the main stock market indices. Gold and silver therefore showed little change over the weekly sequence and are trading around 1295 and 15.6 USD respectively. Industrial metals remain under pressure and evolve in a dispersed order over the week, due to the persistence of the Chinese theme. As a result, copper and aluminium lost ground at 5585 and 1851 USD respectively, while tin (21055 USD), lead (2026 USD) and zinc (2606 USD) posted upward trends.

Equities markets After some difficulties in recent years, Europe's number one retailer is picking up momentum at the beginning of 2019, establishing the best performance of the Parisian index with a 17% increase. This increase comes after three years of decline, including the 17.3% in 2018. The brand headed by the recent President Bompard has just published its 4th quarter figures. Carrefour has reassured the market about its 2018 results, which will be published on February 28. EBITDA should reach €1.93 billion compared to the expected €1.87 billion thanks to the good performance of Brazil, whose food inflation is a favourable factor for margins. The share was hit hard by the social movement of the Yellow Vests in France, with the share price losing 15% while its benchmark index was only 5%. The beginning of the recovery therefore seems to be on the way, thanks initially to cost reduction, pending a commercial turnaround in the current year. Carrefour: CAC40's shining star

Bond market The sharp easing in ten-year bond yields shows investors' continued interest in so-called secured assets. Spain launched a 10-year loan via a banking syndicate that generated intense demand, pushing interest rates down (1.22%). This movement leads to the decline of the other references. The British Gilt (1.2%) does the same despite the unknown of Brexit, while the American Tbond stabilizes at 2.72%, in the middle of a shutdown. Spread between the Spanish 10-year-old and the Bund The sharp drop in yield over the Spanish 10-year period reduces the spread with the Bund (to 1.03%).

Forex market Forex traders will remember the surge in the British pound over the past week. The British currency gained 300 points against the yen at JPY 144, as well as against the dollar and the euro (GBP 0.862 for the EUR/GBP pair). The single currency has been holding steady in a pivotal area against the greenback (1.13/1.14 USD) for several months. Mario Draghi's speech had initially caused the euro to fall following his cautious comments on the European economy, but the European currency quickly recovered. The Aussie (AUD/USD) lost ground at USD 0.71 in line with disappointing statistics from China, with the Australian currency remaining closely linked to Beijing's activity. The cable Since December 2018, the British currency has been in demand by traders, despite the headwinds.

Economic data Growth in manufacturing activity and services slowed in the euro area to 50.5 and 50.8 respectively. The PMI composite index (private sector) is at its lowest level since 2013, at 50.7. Consumer confidence was disappointing, as was the Ifo business climate index in Germany. The only good news is that the ZEW index of economic sentiment in Germany has recovered slightly (to -15.0 from -17.5 previously). Finally, as agreed, the ECB kept its rates unchanged (the main interest rate, the refi rate, at 0.00%). Sales of existing homes in the United States declined. The Richmond Fed Manufacturing Index did not change (-2), nor did the Conference Board Leading Indicator (-0.1%). Unemployment registrations were pleasantly surprising (199K against 219K expected) and oil stocks amounted to 8 million barrels, while a decline of 0.2 million was expected. This week, the first version of quarterly GDP will be published in the euro zone, as well as consumer and producer price indices. In addition, we will know the unemployment rate, the Sentix index and retail sales. In the United States, we will look at the Conference Board index, the employment report (average hourly wage, unemployment rate and non-agricultural job creation), as well as the ISM index. The Fed will reveal the level of its interest rates (expected unchanged at 2.50%) and finally, as every week, crude oil inventories and unemployment registrations will be published.

A proneness to risk despite some headwinds Investors are gradually redirecting their risk exposure. Active management is therefore resuming its "brinkmanship". On the other hand, the selection of dossiers will be very rigorous in the use of the "risk" envelope, even if some sectors that were largely oversold at the end of 2018 (semiconductors, equipment manufacturers) regained interest in the eyes of stakeholders, hence this trend of vigorous adjustment in valuations. Admittedly, the market does not return to "Risk on" mode, but it monitors opportunities with regard to the "risk/return" profile. Investors are also regaining hope on the theme of Brexit, with the surge in the pound sterling, a symbol of a phase in which they are anticipating fewer impacts of trade disputes or political conflicts.