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Equity market trends in June 2017

Modest gains in June

Equities generated modest gains in June, with the MSCI AC World (in US dollar terms) up just 0.3%, raising its year-to-date performance to 10.3%.

Modest gains in June

Equities generated modest gains in June, with the MSCI AC World (in US dollar terms) up just 0.3%, raising its year-to-date performance to 10.3%.

Emerging markets (as reflected by the MSCI Emerging index in US dollar terms) outperformed developed markets in June (+0.5%) as they have since January (+17.2%), driven mainly by solid Asian markets (click here to read more about returns of emerging market equities in the first half of 2017).

Economic indicators appeared to suggest a pausing of the economy for breath early in the month, leading to some tentativeness, but it was mainly the correction, starting on 27/06/17, in valuations that held back returns for the month of June.

Exhibit 1: Equity trends of the MSCI AC World Index and the MSCI Emerging Market Index (both indices in US dollar terms) from January 2017 through June 2017

Equity market

Source : Bloomberg, BNP Paribas Asset Management, as of 30/06/2017

European Central Bank (ECB) and profit taking

In Europe, investors were spooked by Mario Draghi’s comments at the ECB forum on central banking on 27/06/17 (held in Sintra, Portugal - see the photo above) suggesting that monetary policy had done its job and that normalisation would probably begin soon.

Although the ECB president did not specify any date and although normalisation still looks far off, the bond markets’ abrupt reaction and the spike in the euro exerted heavy pressure on European equities. The return of nervousness also led to underperformance of equity indices and what had been previously hot sectors, but did not result in a spike in volatility.

Exhibit 2: Changes in the yields of 10-year US Treasury note and German Bund from January 2016 through June 2017

Equity market

Source : Bloomberg, BNP Paribas Asset Management, as of 30/06/2017

Politics again…and oil

Among other factors that have driven financial markets in recent months, political issues once again pulled in opposite directions. The overwhelming ruling majority won in French legislative elections by President Macron's 'La République En Marche' party reassured investors as it will clear the way towards reforms.

The setback suffered by the Conservative Party in legislative elections in the United Kingdom on 8 June weakened Theresa May’s position just as Brexit negotiations were due to start, on 19 June. The new political landscape in the UK potentially complicates the Brexit negotiations.

In the United States, the Republicans decided not to try to push through the new healthcare law by 4 July, due to failure to rally a majority of Senators. This further pushes back the time when tax cuts can be officially discussed and voted on by Congress.

Falling oil prices, with West Texas Intermediate (WTI) trading as low as USD 42/barrel in June, did not affect equity indices very much, with the exception of oil exporters such as Russia.

Exhibit 3: Oil price (WTI) in USD per barrel from July 2016 through June 2017

Equity market

Source : Bloomberg, BNP Paribas Asset Management, as of 30/06/2017

Foreign exchange and bond markets have influenced equities

Profit-taking in June was a natural reaction in the wake of the rally in European equity markets since March. The consolidation was also driven by a stronger euro and the more hawkish tone to Mario Draghi’s remarks.

Exhibit 4: Equity trends in the S&P 500 and the EUROSTOXX 50 from January 2017 through June 2017

Equity market

Source: Bloomberg, BNP Paribas Asset Management, as of 30/06/2017

The EUROSTOXX 50 fell by 3.2%, while the S&P 500 managed to gain 0.5%. In the US, tech stocks in particular took a hit from investor cautiousness, with the NASDAQ down by almost 1%. The biggest losers in the S&P 500 were IT, utilities and telecommunications, as the latter two are vulnerable to rising bond yields. The financials sector was the big winner in both the US and European markets, where the changes in the Spanish and Italian banking landscape was well received. The operations to restructure some banks  demonstrate the ECB’s determination to play its supervisor role in full and to head off any systemic risks.

Meanwhile, the re-steepening of the yield curve that is likely to result from coming adjustments to the ECB’s monetary policy is good news for the banking system.

The weakening in the yen (down by 2.3% vs. a basket of currencies) provided some support for the Tokyo stockmarket, where the Nikkei 225 moved back above 20,000 points (a high since summer 2015). It closed up by 2%, driven by financials and exporting companies. Falling oil prices (which lost 4.7% in June) drove down the energy sector – more so in Europe than in the US.

What to expect for this summer?

While most people agree that political risk has receded in Europe, investors were shaken by the new postponement in the US of the law to repeal and replace Obamacare. However, these political uncertainties had only a passing impact on the financial markets although they do reinforce doubts as to whether the reflation story may have played itself out, with yet another postponement of a tax cut by the US congress.

The policy stance among central banks is becoming a cause of concern for investors, as seen in the bond markets’ fierce reaction to Mario Draghi’s 27 June remarks to the effect that “deflationary forces have been replaced by reflationary ones”. The ECB chairman sees this as a sign that monetary policy has been successful. The ECB tried, to downplay these remarks, mostly unsuccessfully and this reflects the aforementioned nervousness, which was illustrated once again by the spread of upward pressures to European and US government bond yields.

Now that the global economy appears to be on a slightly more favourable growth trajectory than the 3% pace of recent years and companies are reporting very good numbers, developments in financial markets over the next few months will very probably be driven by expected or actual changes in monetary policy.

Exhibit 5: Monthly variation in June 2017 of the S&P 500 Sectors

Equity market Source: Reuters Datastream, BNP Paribas Asset Management, as of 30/06/2017

Exhibit 6: Monthly variation in June 2017 of the MSCI EMU Sectors

Equity market Source: Reuters Datastream, BNP Paribas Asset Management, as of 30/06/2017
Written on 30/06/2017

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