Despite profit taking, global equities keep on going
The month got off to a bit of a rough start, but global equities managed to finish November in positive territory (+1.8% for the MSCI AC World index in US dollar terms), marking the 13th consecutive month of gains.
Emerging markets turned in more modest gains (+0.2% for the MSCI Emerging in USD). Latin American markets fell (e.g., -3.2% by the Brazilian Bovespa index, in local currency) and emerging Asia posted modest gains, shaken by the rise in Chinese bond yields.
The top-performing developed markets were Japan (+3.2% for the Nikkei 225) and the US (+2.8% for the S&P 500), while European markets finished lower (EuroStoxx 50 was down -2.8%).
Eurozone stock markets fell steeply until mid-month and a subsequent rally was unable to overcome these losses.
Exhibit 1: Global equities rise for 13 months consecutively
European equities are in the thrall of the ECB
European markets were driven mainly by expectations of ECB monetary policy. While equity investors had welcomed the decisions of 26 October, along with forward guidance deemed accommodative, several governing council members reminded us in November that quantitative easing would not last forever.
More to the point, dissensions within the council became apparent, but that does not mean that the ECB plans to rush into normalising its monetary policy.
Eurozone equity markets were also roiled by the euro’s gains (it rose by 1.3% over the month versus a basket of currencies).
These two factors prevented equities from taking full advantage of very favourable economic indicators. The PMI composite index, which reflects the opinions of purchasing managers in manufacturing and services, hit a 79-month high in November at 57.5, pointing to 0.8% GDP growth (after 0.6% in the third quarter).
The European Commission’s economic sentiment index is now at a 17-year high, and in Germany, the IFO business climate index beat expectations and set a new record. The equity rally in the second half of the month reflected these highly encouraging survey data, leading to outperformance by some cyclical sectors (carmakers and basic materials).
Exhibit 2: Solid economic momentum in the eurozone - graph shows changes in GDP year-on-year and composite PMI index
Rally in US and Japanese equities continues
US equities rose on still-solid economic indicators and developments suggesting that Congress would approve tax cuts sooner than expected. While the House of Representatives and Senate continue to haggle over the details, investors welcomed the headway that appears to have been made, along with the prospect of some deregulation.
Cyclicals outperformed by far with the exception of IT stocks, which came in for profit-taking. The sub-index has nonetheless gained 37% so far this year versus 18.2% for the broad S&P 500.
In Japan, early November saw partial profit-taking after October's steep rally, driven by solid company earnings news and a weaker Japanese yen. Meanwhile, the economic environment suggests that, despite a few recent tweaks, the Bank of Japan will stick to its accommodative monetary policy. Export-driven sectors have fared well.
Exhibit 3: European equities (Eurostoxx 300) fell in November while the Nikkei and S&P 500 rose
Highlights outside of equity markets
- OPEC decided to extend the output-reduction agreement
At their 30 November summit, OPEC and its partners decided to prolong their output-reduction agreement by another nine months, until the end of 2018. This was no surprise given the statements that had been made by some big players. After closing in on USD 59 a barrel (a high since mid-2015), WTI crude oil ended November at USD 57.4/bbl, up 5.6% on the month.
Exhibit 4: Oil prices over the last 12 months
- US Treasury yield curve flattened
The highlight on the US bond market was the flattening in the yield curve, which temporarily sent the spread between 10-year and two-year yields to below 60bp, its lowest in the current cycle. It had been at 130bp at the start of the year.
The prospect of a policy rate rise in December sent two-year yields up by 18bp (to 1.78%), while long-term bond yields levelled off despite solid economic indicators.
Inflation is still 'disappointing' compared to the pace of economic growth, even though the jobless rate fell to 4.1% in October, and this is limiting upward pressure on long bond yields in an environment in which the Fed still appears to be wondering about inflationary prospects and in which the markets are pricing in only a modest tightening in 2018.
During his Senate confirmation hearing, incoming Fed chairman Powell assured politicians that he was firmly in favour of continuity.
Serious alarm on risky assets or just a pause for breath ?
Markets in risky assets were clearly put on notice in November. Global equities on the whole finished the month in positive territory, but this was not the case for eurozone markets, which were in the red on the month.
Between its 1 November high and its 15 November (intraday) low, the EuroStoxx 50 gave up 5.1%, a steep fall in just a few days. Was this a sign that investors are changing their point of view and that tougher times are ahead for equities, or was they merely pausing for breath after the strong rally so far this year?
Given how solid economic indicators are, including activity and confidence surveys, as well as hard data, it is hard to imagine that the bullish scenario is being completely discarded . With momentum favourable as the year draws to a close and the prospect of global economic growth continuing to accelerate, from 3.1% in 2016 to 3.6% in 2017 to 3.7% in 2018 (according to the OECD), the economic environment still looks promising.
Of course, macroeconomic factors are not the only drivers of global equities. Some technical and sentiment indicators have raised eyebrows, in particular with regard to US stocks, as the S&P 500 continues to set record after record. The year-end period generally means lower volumes, and this could also play a role.
With this in mind, the markets could well “pause for breath” again, particularly in reaction to political developments or central bank comments, but investors should ultimately hang their hats on fundamentals, which are still healthy.
Written on 30/11/2017