Weekly market update : Less stress, despite uncertainty

Monday May 25

Weekly market update

Last week, after a good start thanks to renewed hopes for a Covid-19 vaccine and a gradual recovery in economic activity, financial markets ended slightly down. Operators made a few clearances, caught up by fears of a second wave of contamination and rising tensions between Beijing and Washington. The new protectionist measures raise fears of future customs sanctions.

Indexes Over the past week, most indices have risen. In Asia, the Nikkei gained 1.7% while the Shanghai Composite lost 1.9% and the Hang Seng 3.7%, as China wants to impose new national security laws on Hong Kong. In Europe, the CAC40 recorded a weekly performance of 4.3%, the Dax gained 5.9% and the Footsie 3.1%. For the peripheral countries of the euro zone, Portugal scored 6%, Spain 3.3% and Italy 2.4%. In the United States, the Dow Jones rose 2.9%, recovering its losses from last week. The S&P500 rose by 2.8% and the Nasdaq100 by 2.5%.

Commodities Crude Oil stabilized last week at its highest level since March 10, continuing to benefit from hopes of lower production and improved global demand. The new drop in U.S. inventories also reassured markets, which are anxious to see the supply/demand imbalance resolve. Brent is trading around USD 34 per barrel while WTI is trading close to USD 32. After setting a new annual record at USD 1,765, the gold ounce stabilized at around USD 1,730. Silver, on the other hand, had a near-zero weekly performance, ending the week close to USD 17. The Industrial Metals sub-fund has made significant gains over the last five days, partly supported by good data from China. Copper rose to USD 5387 per metric ton, as did aluminium and nickel to USD 1487 and USD 12762 respectively.

Equities markets The Mercadolibre share has achieved an exceptional stock market performance. The statistics are impressive, with 44% in 2020, cumulating 1680% over ten years. The company, created in Argentina, hosts the largest e-commerce (auctions) and online payment ecosystem in Latin America. The company is present in 18 countries, including Brazil (60%), Argentina (20%), Mexico, Colombia, Chile, Venezuela and Peru and is the market leader in each of these countries. First quarter results were robust, with revenues of USD 652 million, up 70% compared to the same period, even though the bottom-line remains negative. The Chairman remains very optimistic about the outlook. He added: "Although less affected than others, our business was impacted mainly in the first weeks of the imposed blockades, with a rebound throughout April. We remain determined to do our part, giving our merchants the means to continue their operations and ensuring the delivery of goods needed by households. We believe that MercadoLibre has the opportunity to emerge from this situation stronger and with an even greater sense of purpose". Exceptional performance of the Mercadolibre stock

Bond market 10-year rates were relatively stable last week, marked by a gradual easing of lockdown restrictions and hopes for a vaccine. A slight decline was seen in many countries. Market participants seem to be torn between positive signals from the gradual lifting of quarantine measures and fears of a second wave of infections. In Europe, the prospects of debt pooling have benefited the most affected countries. The Italian construction industry dropped 24 basis points to 1.62%. In Spain (0.63%) and Portugal (0.73%), the balance sheet is more or less the same, with 10-year rates contracting more minimally. The OAT trades at a yield of -0.052%. However, the decision was not seen in the same light in Germany, where the Bund rose to -0.502% (against -0.528%). On the margin, Switzerland continues to benefit from exceptional financing conditions with a return of -0.56%. On the other side of the Atlantic, the return of Sino-American tensions had caused a slight rebound in the American 10-year-old at the beginning of the week. However, Jerome Powell's speech, as well as advances in the development of a vaccine, calmed markets, allowing the T-Note to return to almost equilibrium, at 0.649%. In Hong Kong, on the other hand, unemployment figures caused a slight pressure on rates. China's decision to set up a National Security Law did nothing to improve the situation, leaving rates at 0.687% (compared to 0.497% on Monday).

Forex market Forex traders temporarily abandoned safe-haven currencies, which benefited the single currency. The euro regained a buying momentum following the joint Franco-German announcement of a EUR 500 billion fund. The single currency climbed against the yen to 118 JPY (+300 basis points) and against the Swiss franc (+100 points) to 1.06 CHF. This configuration is duplicated against the greenback, even though the parity is enclosed between two clearly identified limits (see graph). Recent technical movements are showing upward on the pound sterling. Despite weak employment figures, the currency used in the UK is trading at 1.22 against the greenback and 0.895 against the euro. The return of turmoil in Hong Kong has interfered with the behavior of the Australian Dollar, a value that is very sensitive to Chinese economic news. The Aussie dropped 80 basis points against the dollar to 0.652 USD, which can be considered as a legitimate pullback against the rise of the past few weeks, initiated from the low point of USD 0.574. On the emerging market side, the Argentine peso continues its free fall to trade at 68 against the greenback. At the beginning of the year, it took 60 currency units to acquire one dollar. The Argentine government extended for the second time the deadline it had set for the restructuring of its 66 billion dollar debt. Evolution of the EUR/USD exchange rate

Economic data Over the past week, few statistics were on the agenda, but overall they exceeded expectations. In Germany, the Zew index came out at 51 vs. the expected 30, while PMI indices were mixed. The manufacturing index disappointed (36.8 vs. 39.3 expected) while the PMI services index rose to 31.4 (consensus 26.3). In the euro zone, the CPI index just missed the consensus (0.3% vs. 0.4% expected) and the PMI indices surprised pleasantly, at 39.5 and 28.7 respectively, while the market was expecting 38 and 25. These nevertheless remain well below the 50 mark, reflecting a destruction of activity. In the United States, the figures were more contrasted, with building permits at 1.07M (consensus 1.0M) while housing starts fell to 0.89M (consensus 0.95M). Existing home sales came out as expected at 4.33M. As for activity, the Flash PMI indices exceeded expectations, at 39.8 and 36.9 respectively. This week, will be unveiled durable goods orders, GDP, household spending and income, as well as Michigan's confidence index. In Europe, there will be few statistics: in Germany, IFO, CPI and import prices. French GDP is expected to decline by 5.8% and the CPI index for the Euro zone will be released next Friday. Slight improvement in the US and German Flash PMI indices

Less stress, despite uncertainty Depending on the bets taken by investors, indices form up and down configurations. It is clear that the various elements of concern remain manageable for markets, a situation confirmed by the sharp decline in volatility indicators. This is despite fundamentals appearing to have deteriorated sharply with PMIs, even though they are still at very low levels. At the same time, the resurgence of the deterioration in political relations between the world's two largest powers cannot be sustained over the long term if trade links are maintained. In such a context of uncertainty, monetary policies and fiscal stimulus packages are essential.