Weekly market update : Mind games

Monday July 29

Weekly market update

At the end of a volatile week punctuated by numerous corporate results and the ECB's monetary policy decision, many indices set new records before losing some ground over the weekend. Operators sold Mario Draghi's announcements, with some disappointing macroeconomic and microeconomic data also serving as a pretext for some profit taking. Nevertheless, the weekly balance sheet remains bullish for many financial centers.

Indexes Over the past week, Europe has gained most of the ground, with the CAC40 winning 1% or the Dax climbing 1.2%. The Footsie recorded a performance of 0.5%. In the peripheral countries of the euro zone, Portugal lost 0.8%, while Spain and Italy recorded gains of 0.4% and 0.8%. In the United States, the weekly results are also positive, the Dow Jones is stable while the S&P500 and the Nasdaq100 are at 1.3% and 2.1% respectively, after setting new absolute records on Wednesday. In Asia, the Nikkei gained 0.9% over the week, the Shanghai Composite 0.7%, while the Hang Seng lost 1.4%. Post ECB volatility peak

Commodities Oil prices are gaining some ground, still supported by geopolitical tensions in the Middle East. In the latest development, Iran is reported to have launched a ballistic missile test to improve the range and accuracy of its arsenal. Brent is trading around USD 63.6, while WTI is trading at USD 56.3 per barrel. Gold and silver stabilize on this weekly sequence, traders are hesitant, divided between the rise of the U.S. dollar and the promises of central bankers, inclined to quickly relax their monetary policy. On the base metals side, nickel is beginning a breathing phase following its surge last week while lead continues to move forward at USD 2123 per metric tonne. Silver/gold ratio: sudden reaction of the grey metal against gold

Equities markets Greek shares: To announce that the sun is shining brightly in Greece will not surprise anyone. But to proclaim that the legendary summer heat wave, bordering the Aegean Sea, is spreading on the Greek financial markets may surprise many people. Indeed, the Greek Equity Index (ESE) was boosted to more than 43% of performance over the year, a world record for 2019. The recent elections that saw the triumph of the right with Mitsotakis and his promise to restore prosperity to the country have rekindled investors' buying inclinations. This new political situation has led to an explosion in Greek values. At the same time, the bond market benefited from the interest rate boom thanks to the accommodating policies of central banks. The yield on the 10-year bond fell below 2%, which is below the interest generated by the US debt. The main stocks that contributed to the strong rise in the ESA index are logically found in the banking sector, which has been laminated since 2008. Attica Bank is valued at 270% and Pireaus Bank (225%). Profile Systems, a technology company, is on the performance podium with its 215% earnings, closely followed by Kekrops (real estate) which is up by 180%. While it is worth highlighting this exceptional 2019 vintage (all the components of the index are evolving positively), a slight decline shows that this surge in Greek equities follows an unprecedented decline since the 2008 crisis. The proof is that the current levels of the index (-83% since the end of 2007) are still below the lowest levels of 2008. Graph of the Greek index

Bond market The bond market continues to be supported by the very accommodating comments of central bankers. Records are falling one by one. In Europe, the bund takes advantage of Germany keeping its triple AAA, to post a return of -0.37% while the French OAT generates -0.11%. Spain also offers a historical level on its "ten-year" loan at 0.34%. At the same time, Italy benefits from this context and sees its debt negotiated on a 1.5% basis. Further south, Greece becomes the hero of the bond market. The country is committed to further market reforms. The 2042 debt yield fell from 25% (in the summer of 2012) to less than 4%. Athens was even able to invest a 7-year loan at a yield of 2%. This is a sign that investors are still looking for returns, pushing Greek 10-year government bonds to an all-time high. Indeed, for the first time in its history, the bond yield fell below 2%. Switzerland is also part of this bond peak, with its reference to -0.77%. In Europe, the majority of these negative-rate securities are sovereign bonds, but more and more corporate bonds are also involved. In the United States, the Tbond stabilized above 2%, a few sessions after J. Powell's intervention on a theoretical reduction in the key interest rate.

Forex market Focusing mainly on the behaviour of the euro, traders were able to intensify their trades in the single currency following the ECB's communication. The volatility was strongly evident at the time of Mr. Draghi's intervention as the EUR/USD parity "swung" by about 100 basis points while remaining below USD 1.12. Against the Swiss franc, the European currency is attempting a technical rebound at CHF 1.11 (+50 basis points). The disappointing European PMIs published earlier this week had added pressure on the euro. The threat of an exit without EU approval from Mr Johnson remains the nightmare scenario in business circles. Political uncertainty will not decrease and will continue to weigh on the pound, which remains low against the yen (JPY 135), the greenback (USD 1.25) and the euro (GBP 0.89). In the southern hemisphere, the Australian dollar fell by more than 1% after the central bank governor announced that he wanted to lower key rates again. The probability of a decrease at the October 1st meeting has increased to 90%. The AUD is now trading at 0.692 against the dollar.

Economic data The IMF has announced a downward revision of its global growth forecast for 2019, calling it depressed and moderate, in a context of persistent trade tensions between Beijing and Washington and a difficult Brexit in Europe. The International Monetary Fund now expects growth of 3.2% this year and 3.5% in 2020. Disappointment in Europe with the PMI manufacturing indices. The euro zone's rate stood at 46.4 points against the expected 47.7 points. Germany's manufacturing PMI was also disappointing, at 43.1 points compared to 45.1 anticipated. Still on the other side of the Rhine, German entrepreneurs' morale reached a new low since 2014 in July, at 95.7 points against 97.4 points the previous month. Across the Atlantic, as every month, the University of Michigan measured American consumer confidence, resulting in an index of 98.4 points for July compared to the expected 98.8. The economic statistics of the United States contrast with those of the euro zone. Orders for durable goods rose by 2% in June after a decline of 2.3% in May, and weekly unemployment benefit claims totalled 206,000 claims, 10,000 fewer than the previous week. US GDP grew by 2.1% in Q2 (first estimate) compared to only +1.8% expected. This week, the highlight will be the Fed's intervention and then at the end of the weekly sequence, traders will analyze the monthly employment report, including the unemployment rate.

Mind games The markets are sweating with some concerns and are therefore evolving in total confusion, as is the case with European indices during Mario Draghi's recent speech. Driven upwards by speculative purchases and then quickly marked by equally disconcerting declines, the indices are subject to temporary peaks in volatility. Psychology is therefore playing a full role in the financial markets at the moment. Nevertheless, it must be noted that the graphic supports hold, validating a daily upward trend. One third of the S&P500 and CAC40 published this week with no real index impact. To date, the publication season has not delivered any unpleasant surprises but has not invalidated the slowdown in NBI (-3.7% in mass profits out of the 155 companies that published in the Stoxx600). At the same time, the erosion of PMI indicators continues, leading to an increased dependence of markets on monetary policy. As a result, J. Powell's last summer intervention will be followed by the financial planet. After promises that have fueled the upward trend in the markets, it will be necessary for speeches to be transformed into action, and here again, the psychological aspect should play an important role.