- Despite some headwinds, the MSCI AC World (USD) index rose by 2.3% from the end of October; it is up by 20% so far this year.
- Long-term yields rose, particularly in ‘peripheral’ eurozone markets.
- Among the G10 currencies, volatility returned to its lowest of the year. The US dollar appreciated against developed and emerging market currencies.
Once again, comments blew hot and cold over the course of November. The situation in Hong Kong became part of the discussions on a trade deal when US Congress passed the Human Rights and Democracy bill that mandates an annual check that Hong Kong has enough autonomy to justify its special relationship with the US. This initiative, and President Trump’s decision to sign the bill into law, antagonised the Chinese authorities. Despite all that, hopes that the two countries will finally conclude a phase 1 trade agreement reasonably soon helped markets to advance on the back of a slightly improved view of the economic climate and monetary policies that are still accommodative.
Major US equity indices at all-time highs
In developed markets, the US indices, which closed at all-time highs in November, outperformed: the Dow Jones 30 rose to above 28 000 points in the middle of the month and increased by 3.7%. The Nasdaq gained 4.5% and the S&P 500 3.4%. Several sectors posted gains of around 5%: technology, finance and healthcare.
In the eurozone, equity markets were supported by a positive turn in business surveys and, more generally, by relief after the publication of economic indicators that seem to mitigate the risk of recession further down the road. Germany escaped a technical recession in the third quarter, allowing the DAX index to gain 2.9%. Equity indices also benefited from the slight drop in the euro against the US dollar (-1.2%). The EURO STOXX 50 gained 2.8%, driven by a solid performance by the cyclical sectors. Year to date, it is up by 23.4% vs. 25.3% for the S&P 500 (in local currencies and without reinvested dividends).
Despite a slight decline in the yen in November (-1.3% against the US dollar), the performance of Japanese equities was more modest than that of other major markets, with the Nikkei 225 index up by 1.6%. However, this followed solid rises in September (+5.1%) and October (+5.4%). A wait-and-see attitude by equity investors is therefore understandable at a time when the economy will be facing the consequences for consumption of the 1 October increase in VAT.
Exhibit 1: Emerging equities underperformed in November (as of 29/11/2019)
Slightly higher long-term yields (but only slightly)
The monthly rise of 9bp for the US 10-year yield looks modest compared to the 90bp fall seen since the beginning of the year.
The 10-year German Bund yield, which stood at -0.41% at the end of October, ended the month at
-0.36%, after returning to around -0.25% by mid-November, its highest since mid-July. The rise of long-term yields reflects the behaviour of US yields of the same maturity and an improved view of the economic climate. The slightly higher rates seen in the middle of the month may have been viewed by some investors as an opportunity for repositioning at somewhat more attractive levels.
Beyond these technical factors, several recent indicators have reassured investors by mitigating the risk of recession. Although only modestly, business surveys have picked up for the eurozone as a whole. The German economy has been the focus of particular attention. GDP grew in the third quarter and the composition of growth was quite favourable, after the country had faced a technical recession in the wake of the second-quarter contraction and the difficulties in the manufacturing sector.
Against this background, and while Christine Lagarde’s first official statements emphasised the importance of fiscal policy, expectations of further monetary policy measures ebbed. Observers expect the new ECB president to take advantage of this economic recovery to get her bearings and assess the situation before taking any major decision.
The rise in yields over the month was much more pronounced on peripheral eurozone markets (+18bp for the Spanish 10-year at 0.42%; +23bp for the Portuguese rate at 0.40%; +31bp for the Italian rate at 1.23%). Comments from the European Commission, which warned that budget forecasts in several countries (including Italy, Spain and Portugal) were at risk of “non-compliance with the Stability and Growth Pact in 2020”, could explain this underperformance. It should be noted, however, that France has also been warned because the country “has not sufficiently used favourable economic times to put its public finances in order”, but the yield differential with Germany did not widen and the yield on the 10-year OAT finished the month at -0.05%.
Exhibit 2: long-term yields moved away from the lows hit this summer (as of 29/11/2019); 10-year yields
2020: relief and uncertainties
Barring any major ‘incident’ in December, 2019 will have been a year in which the equity and bond markets achieved significant returns. As 2020 approaches, the question for investors is whether such a trend can continue. Although it is hard to imagine financial markets repeating themselves, certain factors could persist.
Despite the risks of protectionism and political uncertainty, we do not expect recession in 2020. Despite disappointing business investment, growth in the US will likely continue to be sustained by consumption, thanks to a strong labour market. In the eurozone, growth is expected to stabilise slightly above potential even in the absence of fiscal stimulus. Any meaningful decision in this area would be favourable, provided that public spending is used to finance structural investment and not current expenditure.
As far as the trade negotiations are concerned, the possible signing of an agreement between the US and China is likely to be welcomed, but it will not eliminate all the uncertainties associated with this issue. Tensions will continue and could spread to other trade relations.
More generally, investors will likely pay close attention to the election campaign in the US and, in particular, to the Democratic Party’s primaries. Markets could react to radical proposals from some candidates, notably on the regulation of several sectors (health, technology, finance).
Finally, after their pivot in early 2019, it is hard to imagine that the major central banks will change their policy stance in 2020 as inflation remains below the 2% target and the downside risks to growth are significant.