Weekly market update : The rush to safe havens

Monday August 19

Weekly market update

Donald Trump's August 1 tweet, like an earthquake, is still causing the market to feel jolts.The past week has been marked by an increase in volatility. With the sharp declines partially offset by purely technical rebounds, concerns about the consequences of the trade dispute, mainly on the Chinese economy, and the risks of recession are the basis for these erratic movements and rising stress.

Indexes Despite the attempt to rebound on this day of clearing options and futures, the indices closed the weekly sequence in the red. Penalized by renewed concerns about the health of the U.S. economy, Wall Street's flagship index, the S&P500, experienced a sharp drop on Thursday, the second largest since the beginning of the year. It has fallen by 1.2% over the last five sessions, the Dow Jones by 1.7% and the Nasdaq 100 by 0.7%. In Europe, the extended indices, the Stoxx Europe 600 and the Euro Stoxx 50, sold 0.6% and 0.2% respectively. The Italian Eb and the Greek index remain in balance. The Ibex 35 in Spain fell by 1.1%, the German DAX by 1.2% and the CAC 40 by 0.5% to 5300 points. The FTSE 100 suffered more, losing 1.9%. In Asia, the Nikkei fell by 1.3% and the Hang Seng by 0.8%. On the other hand, Shanghai Composite won 1.8%.

Commodities Oil prices are on the rise again. The market remains at the mercy of the various developments linked in some way to the Sino-American trade war, indirectly driving the growth forecasts for oil demand in the coming years. Brent is trading around USD 58.7 while WTI is trading around USD 54.8. Gold and silver set annual highs on this weekly sequence, driven by rising risk aversion in the so-called risky asset markets. The gold metal made an excursion beyond USD 1530 per ounce, while the silver momentarily exceeded USD 17.4. Few changes in the base metals sector, which remains under pressure due to the intensification of trade conflicts. Copper, aluminum and zinc are stagnating while nickel continues to advance at nearly USD 16,000. The price of nickel soars

Equities markets Headed for South America to discuss the turbulence on the Merval index. The Buenos Aires stock exchange has just won a 30% air gap after the Argentine presidential primaries. Investors worry about the Peronist Party of the winning duo (Fernandez-Kirchner) being at the helm of the country again, imposing a protectionist policy. In this type of country, often marked by instability, capital moves very quickly. This has been the case for more than a year because the national peso is constantly losing value against the dollar, thus reducing its purchasing power. Street people who cannot afford the greenback buy massive amounts of everyday consumer goods to protect themselves against soaring inflation (currently close to 60%). Some of the 20 stocks in the index lost more than 50%. This is the case of Emprosa (national EDF), which could see the implementation of an interventionist policy on its selling prices. An analyst does not hesitate to explain that equities will for a long time "trade less on their intrinsic values or fundamentals but more in line with macro-political developments in the short term", thus leading to a lot of volatility.

Bond market Another historic week for bond yields. The worsening macroeconomic outlook is encouraging investors to intensify their interest rate positions, leading to government bonds on a remuneration basis never seen before. The yield on American 2-year bonds was even briefly exceeded by the 10-year yield (1.54%), a precursor to a recession. This fundamental shift affects all European references. The Bund traded at -0.71%, as did the French OAT at -0.43%. The Iberian debt also takes advantage of the trend to generate a return close to zero. In Italy, despite political difficulties, the 10-year rate fell from 20 basis points in one week to 1.36%, far from the 3% a few months ago. Once again, and as a result of the strength of its currency, Switzerland is seeing its 10-year debt rate fall to -1.2%. US 2 and 10 year returns getting closer

Forex market Volatility remains intense in the currency market and the exchange rates affected by this renewed nervousness affect all continents. In a context of widespread concerns, traders are focusing on safe haven currencies. The Yen is trading at a 30-month low against the euro (JPY 117.7) or against the greenback (JPY 106). The Swiss franc maintains its notoriety by once again being privileged. The Swiss currency is increasing its domination against the single currency, at CHF 1.08, and against the dollar (CHF 0.97). On the Asian side, the renminbi sees the pressure deflate slightly, to find a break-even point above the CNY 7 for a dollar. In Latin America, the Argentine peso, which made the week's headlines, experienced a violent downward movement from ARS 45 to ARS 60 per dollar in a few hours to stabilize at ARS 58. On the Old Continent, the pound sterling still shows no positive signs but balances against the dollar at USD 1.21, while the single currency weakens against the greenback at USD 1.108, thus returning to the relevant graphic support of USD 1.107. The continuously bullish course of the Argentine peso

Economic data In Europe, German investor sentiment (ZEW index) fell in August to -44.1 points from -27.8 points expected, reaching its lowest level in 8 years. Industrial production fell by 1.6% (consensus -1.4%) and, not surprisingly, GDP in the second quarter was +0.2%. In the US, many statistics have been published. Inflation rose in July, as evidenced by the consumer price index at +0.3%. Retail sales (0.7%), building permits (1.34M), the New York Fed Manufacturing Index (4.8) and Philadelphia Manufacturing Index (16.8) were pleasantly surprising. On the other hand, weekly unemployment registrations (220K), production capacity utilization rates (77.5%), industrial production (-0.2%) and housing starts (1.19M) were disappointing. This week, the consumer price index, the PMI (manufacturing and services) indices, as well as consumer confidence, will be unveiled in the euro zone. In the United States, existing and new home sales, crude oil inventories and weekly unemployment data are expected. Then, at the end of the week, there will be the traditional big meeting at the end of the summer for central bankers from all over the world, the Jackson Hole Economic Symposium, at which Jerome Powell will give a speech. Zew index at its lowest level since December 2011

The rush to safe havens After a first half marked by serenity in the financial markets, the end of the 2019 financial year looks much more dangerous. Indeed, since the latest American intentions to increase customs duties on Chinese goods, investors, fearing the emergence of a recession, have partially redirected their allocations towards safe haven assets. While gold still shines in this type of environment, the Swiss franc and the yen are also in demand. On the bond side, risk-free borrowing is surrounded by historical euphoria. The quest for security has led to a steady decline in Western sovereign debt yields, leading to a flattening of yield curves. These intensive trade-offs are the result of the gloomy outlook for the global economy that only central banks can soften. But do they still have the weapons?