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OFFON

Patrick
Rejaunier

Equity Analyst
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Weekly market update : Buyer's impulses crush volatility

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04/08/2019 | 10:26am EDT
Monday
April  8
Weekly market update
intro
Despite mixed statistics in Europe, China and the United States, financial markets kept rising last week, with growing hopes of a trade deal between China and the United States. The two superpowers seem to be on the way to reaching a historic agreement in the next four weeks, enough to maintain risk appetite among traders.
Indexes

Over the past week, all financial centers made significant progress and China posted the best weekly performance (+5%). The Hang Seng gained 3.1% and the Nikkei 2.8%.

In the United States, gains are more modest, with the major indices already flirting with their historical records. At the time of writing, the Dow Jones is up 1.9%, the S&P500 is up 2% and the Nasdaq 2.6%.

In Europe, the CAC40 gained 2.4%, the Dax 4.1% and the Footsie 2.4%, despite the new request for a postponement for Brexit on 30 June. For the peripheral countries of the euro zone, Portugal gained 2.2%, Spain 3.1%, and Italy 2.1%.
Commodities

Like equity indices, the CRB, the world commodity price indicator, has been on an upward trend since the beginning of the year (+10%), duplicating the S&P500's trajectory (see graph). Among its components, Brent, one of the largest weights, trades at the highest annual level at USD 69.20, in contrast to precious metals which still do not deviate from their graphical basis (USD 1290 for gold and USD 15.1 for silver).

As for industrial metals, they are stabilizing, like copper, aluminum or nickel. On palladium, the consolidation phase is intended to be more abrupt. Investors are taking profits, trading at USD 1350 per ounce against a historic high of USD 1600, following a deterioration in real demand. This decline occurs at a time when platinum is exploding from 12% to USD 900 per ounce.

It should be noted that the strong growth of cocoa has increased by 15% over the past two weeks. This movement is fueled by a drought in Africa, particularly in Nigeria and Cameroon, which is affecting global demand.

Correlation between equities and commodities

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Equities markets

Cisco as a leader

The world leader in network equipment for the Internet has been leading the Dow Jones since the beginning of the year. The performance over the three months remains impressive graphically, with 40 sessions of increase out of 66. In 1984, the famous Leonard Bosack and Sandra Lerner, husband and wife at the time and both computer scientists at Stanford University in San Francisco, created Cisco, the name of a district in Menlo Park, California (Facebook also has its headquarters in this municipality). Its logo also represents the Golden Gate Bridge. In 1986, the company launched its first router, while its initial public offering came quickly in 1990. Cisco, defeated by its founders following a difficult stock market career, bought up to 80 startups during the Internet bubble.

Today, the Californian company is getting closer to its zenith rate (USD 63.3 in 2000). When presenting its second quarter of 2019, the group generated a net profit of USD 2.8 billion compared to a loss of USD 8.8 billion in 2018 due to the tax reform. Its business allows it to market equipment but also subscriptions for services or online software, a more lucrative segment. In addition, the group, whose capitalization amounts to 245 billion dollars, has just announced an additional 15 billion share buyback program, bringing the total to 24 billion.

Evolution of Cisco shares (+26% in 2019)

image
Bond market

The bond market is evolving without much direction, with sovereign bond yields remaining in low areas. The US Tbond is trading at 2.52% while the FED seems satisfied with a prolonged status quo in its interest rate policy. In Europe, consolidation is also taking shape on the bund, which is now at zero against a negative return a week earlier. The French OAT remained below 0.40%. In Spain (1.1%) and Italy (2.5%), rates rose slightly but without pressure.

In a still marginal way, Switzerland sees its 10 years producing a negative interest (-0.33%) as well as Japan, which has been generating long loans for ages, close to the negative.
Forex market

The possible trade agreement has given rise to an appetite for risk. Investors sold the yen, which fell to JPY 111.7 against the dollar (+150 basis points). The Swiss franc is also subject to currency traders' arbitrations. The USD/CHF pair rises to parity (+100 basis points).
On the other hand, the new situation benefits currencies correlated with China, such as the Australian dollar, which is gaining several dozen basis points against major currencies, especially since the Bank of Australia is showing no sign of easing its monetary policy.
On the Old Continent, traders remain attentive to the British pound, which shows little volatility, at 131 against the greenback. For its part, the euro is experiencing a new excess of weakness but is stabilizing on the support of USD 1.12, a strong graphic support.

EUR/USD graph

image
Economic data

Inflation in the euro zone fell in March (CPI to 1.4% compared to 1.5% in February over a year), as did retail sales, which fell from 0.9% to 0.4%. The unemployment rate remains unchanged at 7.8%. In Spain (56.8), Italy (53.1), Germany (55.4) and more broadly in the euro zone (53.3), the PMI service indices were pleasantly surprising. In France too, it rebounded to 49.1 but remains below the 50 threshold. In the United Kingdom, the statistics were disappointing and show a contraction in activity (to 48.9, against 51.3 in February and a consensus of 51.0).

This week, the Sentix index, industrial production and ECB interest rates will be released. Mario Draghi will hold a press conference on Wednesday, after the Central Bank's monetary policy meeting.

Across the Atlantic, retail sales (core index at -0.4%), durable goods orders (0.1%), the ADP survey (129K) and the ISM services (56.1) all missed expectations. Regarding the NFP report, the average hourly wage increased by only 0.1% (consensus 0.3%), the unemployment rate remains at 3.8% and job creation has rebounded (from 33K in February to 196K in March). Crude oil inventories stood at 7.2 million barrels (a decline of 0.7 million was expected) and unemployment registrations at 202K (consensus 215K).

This week we will see the level of inflation (CPI and PPI indices) and the Michigan index. Then, as every week, crude oil inventories and unemployment registrations will be released.
Buyer's impulses crush volatility

Fueled by hopes of a Sino-American trade agreement and that there will be no hard Brexit, the index rise persists, forcing managers to invest to avoid falling behind their benchmark.

The recovery of the automotive sector has played a major role in this additive advance in equity markets in Europe and especially in Germany. As a result, the rise is self-sustaining, with graphic barriers jumping one after the other.

It remains to be seen whether the pillars of the upward movement are characterized by real solidity (global growth, etc.), making it possible to consider testing other more ambitious graphic zones, while keeping volatility to a minimum.
Stocks mentioned in the article
ChangeLast1st jan.
CAC 40 1.20% 5633.84 Real-time Quote.17.37%
DAX 1.74% 12503.39 Delayed Quote.16.39%
DJ INDUSTRIAL 0.07% 27171.9 Delayed Quote.16.48%
EURO / SWISS FRANC (EUR/CHF) -0.23% 1.09832 Delayed Quote.-2.01%
HANG SENG 0.40% 28465.65 Real-time Quote.9.69%
LME ALUMINIUM CASH 0.30% 1833 End-of-day quote.-1.35%
LME COPPER CASH 1.98% 6066 End-of-day quote.3.89%
LME NICKEL CASH -1.77% 14425 End-of-day quote.38.17%
NASDAQ 100 0.90% 7905.119269 Delayed Quote.23.77%
NASDAQ COMP. 0.71% 8204.137338 Delayed Quote.22.78%
NEW YORK COCOA 1.11% 2467 End-of-day quote.1.98%
NIKKEI 225 0.95% 21620.88 Real-time Quote.7.26%
PALLADIUM 0.07% 1524 Delayed Quote.19.21%
S&P 500 0.28% 2985.03 Delayed Quote.18.74%
SILVER 0.92% 16.459 Delayed Quote.4.86%

Patrick Rejaunier
© MarketScreener.com 2019
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