After a substantial rebound in January and February, equity markets continued to rise in March, but at a slower pace, as investors showed concern over the return of political uncertainties. Almost three years after the Brexit referendum, the British Parliament’s second and third rejections of the treaty for the UK’s exit from the European Union, negotiated over many months by Theresa May with Brussels, led to a further extension of the deadline for negotiations (April 12th) and fuelled new fears that the UK would leave the EU without a deal. The upcoming European elections (May 26th) also created further uncertainty for the markets.
In addition, investors focused on signs suggesting a slowdown in global economic growth. In the US, but also particularly in Europe, the most recent macroeconomic indicators were disappointing: the Eurozone PMI declined by 0.6 point in March to 51.3, weighed down by its industrial component, particularly in Germany (44.7).
Following these publications, central banks confirmed their shift to an accommodative stance, which sometimes went beyond market expectations: most members of the FOMC are now anticipating no more interest rate hikes this year (compared to December 2018, when two hikes were expected, on average, for 2019); in Europe, the ECB announced that its key rates would remain at current levels at least until the end of 2019, six months longer than previously planned, and that it would launch a third round of large refinancing operations for banks with very attractive terms and conditions (LTROs) between 2019 and 2022. These announcements caused all sovereign bond yields to decline (10-year US treasury rate 2.26%, 10-year Bund -0.07%, 10-year OAT 0.24% and 10-year Italian rate 2.49% as of 29.03.19).
In this environment, defensive stocks largely outperformed during the period: telecom, utilities, consumer goods and healthcare stocks rebounded with gains ranging from +3.8% to +4.8% in March – while the Euro Stoxx TR index rose by +1.4%.
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