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Patrick
Rejaunier

Equity Analyst
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Weekly market update : Investors must fasten their seat belts

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08/12/2019 | 10:44am EDT
Monday
August 12
Weekly market update
intro
Financial markets were heckled last week again, caught up by fears about global growth and continued trade tensions. However, higher-than-expected Chinese exports and the Fed's hope for further action by the end of the year helped to limit the damage. Nevertheless, the balance sheet remains bearish for most major indices.
Indexes

Over the past week, the indices have shown volatility, reacting violently to the intensification of trade tensions before attempting to rebound.

In Europe, the CAC40 finished with a weekly loss of 0.6%, the Dax lost 1.6% and the Footsie 1.9%. For the peripheral countries, Spain fell by 1.5%, Portugal by 0.7% and Italy by 3.4%, in a context of political crisis after the collapse of the ruling government coalition.

In Asia, the Nikkei dropped by 1.9%, the Shanghai composite by 3.3% and the Hang Seng by 3.6%.

In the United States, the Dow Jones posted a 1% decline over the week and the S&P500 lost 0.5%, despite the sharp rise on Tuesday and Thursday. The Nasdaq100 is down by 0.6%.
Commodities

Uncertainty is growing on the oil markets, which are still concerned about the health of the global economy, while the trade dispute between the United States and China is intensifying. As a result, expectations of oil demand are falling, prompting producing countries engaged in a supply reduction process to explore other options to support prices. The WTI loses 4.8% at USD 52.5 per barrel.

Risk aversion affects equity markets, which naturally benefits safe-haven assets. Gold and silver thus gain ground over the weekly sequence. The gold metal is now trading at around USD 1500 per ounce, while silver is at USD 17.

The atmosphere is not festive in the industrial metals compartment. Tin, aluminum and zinc sink into the red. Only nickel jumped to $15,500, boosted by fears that Indonesia, the main producing country, would ban its ore exports in 2022.

Gold regains its status as a safe haven

image
Equities markets

Earning more than 20% in a session where Wall Street's major indices fell by 2% is a real achievement. SolarEdge therefore had its day of glory with a historic bullish score bringing the overall performance of the share over 2019 to 83%.

The manufacturer of photovoltaic products generated sales of $325 million during the period, also exceeding analysts' forecasts estimated at $215 million. For the next quarter, the company expects to exceed $400 million. This outlook is consistent with the average increase in sales since 2014 (45% per year). The company of Israeli origin is a privileged partner for first-class installers and integrators.

Since 2006, the company has revolutionized the solar industry by inventing a system for collecting and managing the energy of PV installations (photovoltaic). Its sales are made in 130 countries on five continents.

The SolarEdge stock rises post-earnings

image
Bond market

The bond market is benefiting from a thirtieth week of net inflows, pushing yields to an all-time low. The top prize goes to Swiss debt, which is close to -1% over the ten years to -0.98%.

The Bund also reached a new level at -0.58%. Data on German industrial production in June did not meet consensus expectations, while the OAT is following the same path (-0.30%).

There are other negative interest rate loans on the Old Continent, such as in Sweden (-0.27%) or the Netherlands (-0.18%). Spain is approaching symbolic zero with a bond benchmark of 0.22%.
On the other hand, investors are more reluctant about the Italian bond, which is down to 1.69%, following the country's political tensions.

In the United States, the Tbond is falling in the wake of concerns about world trade, to a 3-year low of 1.70%.
Forex market

In a context of globalized tensions where trade conflict is drifting towards a currency war, volatility is recovering sharply and safe haven values are doing well. This allows the Swiss franc to continue to rise: the EUR/CHF traded at its lowest level at 1.086, and the USD/CHF pair at 0.97.

At the same time, the yen remains sought by traders (USD/JPY at 106), although the Bank of Japan is intervening in the bond market to lower short-term yields and curb the rise of the Japanese currency.

In China, the sharp decline of the yuan (USD/CNY to 7.05) is seen as a response to Trump's actions on international trade, in order to reduce the cost of additional customs duties. Parity is at an 11-year low.

On the Old Continent, the euro is slowing down in its rebound against the dollar to USD 1.12 since the intensification of Italian uncertainties. Across the Channel, according to some experts, the no-deal has become credible enough for the EU to prepare for it. The pound continues to decline. Exchanges against the yen (GBP/JPY at 128.3) and against the dollar (GBP/JPY at 121) marked new lows.

New Zealand remains highly exposed to escalating trade tensions between the United States and China. The New Zealand dollar has fallen by nearly 4% against the US dollar over the past two weeks to USD 0.64 while the National Bank has surprisingly cut rates from 1.5% to 1%.

Evolution of the USD/CNY exchange rate

image
Economic data

In August, investor sentiment deteriorated further in the euro zone (-13.77 compared to -5.8 last month), returning to its lowest levels since October 2014. Penalized by the uncertainties surrounding Brexit, UK GDP contracted in the second quarter (-0.2%) for the first time since 2012.

This week on the Old Continent, we will look at the German ZEW confidence index and the first GDP estimate in the second quarter.

In China, service activity recorded the lowest increase since last March in July (PMI index at 51.6). Producer prices fell by 0.3%, the first time since 2016. Nevertheless, despite the trade war with Washington, its exports rose again (+3.3% year-on-year, after -1.3% in June).

In the United States, the PMI services index also declined (53.7 after 55.1 previously) and the core producer price index fell by 0.1% (+0.3% in June). The consumer price index will be released this week, as well as retail sales, the PhillyFed index, building permits and the University of Michigan confidence index.
Investors must fasten their seat belts

Volatility is at its peak on financial markets and investors must prepare for the ride. Indeed, a break in the serene behavior of market participants has just caused strong erratic movements on all listed assets. Equity indices are suffering, but the currency battle is becoming obvious and safe haven stocks are flourishing, as are allocation transfers to gold, the Swiss franc and the yen, not to mention sovereign bonds.

The taxation of international trade is an aggravating factor for the Chinese economy, which is seeing its currency fall sharply, more by the weakening of its economic situation (mainly in the manufacturing sector) than by real manipulation by the Chinese monetary authorities.

In Asia, destabilization is intensifying. In addition to the escalation of the trade war, there has been a deterioration in relations between Tokyo and Seoul, the Kashmir region has become dangerous and Hong Kong is on fire. On the Old Continent, the British and Italians are still unable to find a solution to their political complications.

Central banks will have to be very diligent in providing equities with the necessary safety net, even if monetary stimulus is not necessarily the most effective weapon against the resurgence of protectionism.
Stocks mentioned in the article
ChangeLast1st jan.
CAC 40 1.22% 5300.79 Real-time Quote.12.05%
CHINA-SHANGHAI COMP 0.28% 2823.82 End-of-day quote.13.05%
DAX 1.31% 11562.74 Delayed Quote.9.51%
DJ INDUSTRIAL 1.20% 25886.01 Delayed Quote.10.97%
HANG SENG 0.87% 25749.62 Real-time Quote.-0.37%
NASDAQ 100 1.59% 7604.108768 Delayed Quote.20.13%
NASDAQ COMP. 1.67% 7895.993811 Delayed Quote.19.00%
NIKKEI 225 0.06% 20418.81 Real-time Quote.2.02%
S&P 500 1.44% 2888.68 Delayed Quote.13.59%

Patrick Rejaunier
© MarketScreener.com 2019
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