In equity markets, despite a difficult end to the month, which saw a surge in volatility to its highest level since mid-August at nearly 15% for the VIX index (calculated using S&P 500 options), equity markets rose by 5.6% in January as the MSCI AC World index in US dollar terms marked a fifteenth consecutive monthly rise.
The monthly rise is the third best performance in January since the first publication of data for this index in 1988. On 26 January, the index was up by 7.3% from the end of 2017 before it dipped going into month-end.
The MSCI Emerging Market index outperformed, ending the month up by 8.3%, thanks to the solid performance of the emerging Europe and Latin American markets, which benefited from the increase in oil prices (by 7.1% per barrel of West Texas Intermediate (WTI), the price of which briefly rose above USD 65/bbl, its highest level since the end of 2014).
Strong rise in global equity markets in January (MSCI indices in USD, monthly price returns in %)
Source: Bloomberg, BNP Paribas Asset Management, as of 31/01/2018
Currency moves stir equity markets
The major fluctuations seen in foreign exchange markets go some way to explaining the differences in performance between the main developed equity markets.
Excellent performance of US stocks in January
Note: Indexed, 01/01/2017 = 100. Source: Bloomberg, BNP Paribas Asset Management, as of 31/01/2018
Japanese equity markets suffered as a result of the yen’s appreciation by 3.1% against the US dollar, which itself was the result of a technical adjustment in purchases of Japanese government bonds by the Bank of Japan. The Nikkei 225 index, which was buoyant at the start of the year, rose to peaks not seen since 1991, but recorded a monthly rise of only 1.5% following profit-taking on tech and financials stocks and difficulties in sectors exposed to exports.
Eurozone equity markets underperformed as a consequence of the 3.6% rise in the euro against the US dollar, the currency having appreciated in January to its highest since the end of 2014.
The EuroStoxx 50 rose by 3.0%. Sectors sensitive to higher interest rates (utilities, real estate and telecommunications) and non-cyclical consumer goods fell, but cyclical and financials sectors behaved well.
US equity markets did better: the S&P 500 index gained 5.6%, driven by encouraging company earnings, with profits and revenue beating analysts’ forecasts at a much higher rate than average. The most sought-after sectors were consumer cyclicals, healthcare, tech and finance. Utilities and telecommunications were hit by the rise in long bond yields.
Weakening US dollar in January (DXY US dollar currency index)
Source: Datastream, BNP Paribas Asset Management, as of 31/01/2018
As we expected, investors are starting to show some nervousness about the bond markets, as shown by the significant upward pressures on German and US long bond yields in January.
Changes in 10-year yields for US Treasury bonds and German Bunds (in % between July 2016 and 2 February 2018)
Source: Bloomberg, BNP Paribas Asset Management, as of 02/02/2018
These trends cannot, however, be directly attributed to a rise in inflation, which is still at very moderate levels, but result more from expectations regarding the monetary policies of the major central banks.
After nearly 10 years of unconventional monetary policy, investors are alert to signs of imminent change, which could well be fully justified by strong economic growth.
Central bankers, for their part, remain very cautious and are mostly reiterating that their inflation targets have not yet been reached. Communication about the coming normalisation of monetary policies could become even more critical.
The next few weeks could be crucial, particularly including changes in the Fed’s leadership, as four policy committee seats are now vacant, and initial speculation about the reconfiguration of the ECB’s governing council, given that the vice-president’s term in office ends on 31 May. Other delicate issues returned to centre stage in January, such as the ‘currency war’ and the rise of protectionism.
Global equities were quite resilient in the face of these headwinds, mainly because the economic environment is still very positive, as shown by the strong start to the company earnings reporting season.
The solid global growth outlook and the tax measures passed in the US have led to upward revisions of profit growth forecasts. The IMF is now forecasting 3.9% global growth in 2018 and 2019 (up by 0.2 percentage points frrom its forecasts in October).
More and more economists and financial analysts are incorporating the potential consequences of the tax measures by the Trump administration, and especially the measures aimed at companies, into their estimates.