Weekly market update : Arbitrage is short-lived

Monday September 21

Weekly market update

The cautious speeches of central bankers during the pandemic and the need to maintain monetary stimuli for an indefinite period have prompted investors to limit initiatives last week amid renewed concerns about a slowdown in the economic recovery. European markets have nevertheless held up well, but the feverishness of the American technology compartment could be a source of volatility in the coming sessions. This week starts with steep drops on all stock markets.

Indexes Showing some nervousness, major indices have evolved in scattered order last week, even if performances seem to be insignificant. In Asia, the Nikkei eroded by 0.2%, the Hang Seng by 0.3% while the Shanghai Composite gained 1.4%. In Europe, the CAC40 lost 0.8% over the week, the Dax 0.15%, as did the Footsie. For the peripheral countries of the euro zone, Spain is stable, Portugal and Italy lost 1.3%. In the U.S., the Nasdaq100 fell by 0.4%, while the S&P500 rose by 0.3% and the Dow Jones by 0.8%.

Commodities Despite some pessimism from OPEC and the International Energy Agency (IEA) on the evolution of demand, oil prices have rebounded sharply last week. In their latest monthly note, the two institutions revised their global demand forecast downwards, pointing to the dangers of an upsurge in coronavirus cases on global growth. Saudi Arabia also reiterated its determination to support prices, calling on its allies, notably the United Arab Emirates, to respect their production quotas. Brent is trading at USD 43 while WTI is trading above USD 40. Consolidation continues in the precious metals segment. Silver is a perfect illustration of this sequence of stabilization as the closing prices of the grey metal were all around USD 27.1 this week. Gold also stood still at USD 1950. On the base metal side, zinc is up to USD 2460, while nickel and aluminum are down to USD 14900 and USD 1740 respectively.

Equities markets Listed on the stock exchange in 2000, Pharmagest Interactive is celebrating its 20th anniversary of listing this year. The company is a leader in France in the publishing and integration of software packages for pharmacies, laboratories and retirement homes. But it intends to become the leading European healthcare platform by creating an ecosystem to connect healthcare professionals around the patient. And so far, if you think in financial terms, it's working pretty well. Its revenues doubled between 2009 and 2019, while its net income tripled over the period. The business should continue on this trajectory since 2/3 of the revenues are recurring and the company will take advantage of growth opportunities in e-health (telemedicine, teleconsultation...). Pharmagest Interactive is majority owned by La Coopérative Welcoop, a pharmacists' cooperative, which allows the group to be close to practitioners and therefore have a good understanding of their environment. This success and results have benefitted shareholders, with a return on equity that has never fallen below 20% on a historical basis starting in 2009. Its share price has risen from €10 in 2012 to nearly €80 today. Over ten years, we are talking about a variation of around 800%. Pharmagest Interactive

Bond market In the absence of significant events, the Bund's spreads with securities issued in the euro zone barely moved during the week. The yield on the German 10-year bond remained at -0.49%. The French OAT also stabilized at 0.22%. The same spread pattern was seen on the Italian (0.97%) and Spanish (0.27%) benchmarks. Still in Europe, the Greek debt does not show any stress from investors, the Greek security producing a limited yield of 1.06%. Outside the euro zone, the Swiss ten-year is still largely negative at -0.51%, even if the current level is far from the record level of -1.1%. In the U.S., yields on US 10-year Treasury bonds remain low, although moving into positive territory (+0.68%). The Fed will have a more assertive influence on the yield curve in addition to its control of the money market, which will make it possible to maintain this low interest rate situation for a long time to come.

Forex market After recently reaching a high of USD 1.20, the euro balanced around 1.1850 without finding a new direction. The single currency thus remains framed by well-defined technical limits (1.17/1.20). Across the Channel, the rebound of the British currency with more than 200 basis points from its lows against the Swiss franc (1.18 CHF) and as much against the greenback (USD 1.30) comes as a surprise, as it comes at a time when the BOE is studying the possibility of introducing negative rates. In Asia, currencies are gaining ground. The yuan continues its rise against major currencies (CNY 6.74 against one dollar). The yen follows the same movement and appreciates by 150 basis points against the single currency (JPY 124). The Japanese currency imitates this course against the Swiss franc at 0.86, as well as against the greenback at JPY 104.7. The Turkish lira is bogged down a little more at 7.55 against the dollar. At the beginning of the year the parity was at TRY 5.9. Ankara's currency fell to an all-time low against the dollar after the U.S. Federal Reserve highlighted uncertainty about the economic rebound, thereby dampening risk appetite in emerging markets. Finally on the South American side, Argentina imposes a 35% withholding tax on purchases of US dollars as it tries to support the Argentine peso, whose value has almost halved in the last two years (see graph). Sharp fall of the Argentine peso against the dollar

Economic data Chinese statistics exceeded expectations last week, with industrial production rebounding by 5.6% (5.1% expected). Retail sales, for their part, rose by 0.5%, their first increase since the beginning of the pandemic. As for unemployment, it stabilized at 5.6%. There was little news in the euro zone, with industrial production up by 4.1%, a better-than-expected trade balance at 20.3B, a CPI index in line with expectations at -0.2% and the level of current accounts at 16.6B. In Germany, the Zew index, which reflects the confidence of German investors and analysts in the economic outlook, came out at 77.4, a 20-year high (see chart). In the United States, apart from the Empire State Manufacturing Index (17) and the PhillyFed Index (15), most figures were disappointing. Retail sales grew by only 0.6%, industrial production by 0.4%. Building permits and housing starts were worse than expected, as were weekly unemployment registrations (860K vs. 825K expected). The key event was the Fed's status quo, with the Federal Reserve reiterating its commitment to keep rates at current levels, even if inflation moderately exceeds 2% for some time. Sharp rise in the Zew index in Germany Source Forexfactory

Arbitration is short-lived September marks a strong differential between the path of growth values and other so-called "value" or cyclical values. It is true that the stellar valuations of technology companies are undergoing legitimate corrections given their levels, but the low interest rate environment should limit this correction phase. Arbitrage in favor of cyclicals is limited, to date, to simple speculation and therefore not permanently registered in investors' allocations. To validate a change in strategy in favor of stocks that are more exposed to economic cycles, a real recovery would be required, but at this stage, only a catch-up is taking shape, which still leaves growth stocks with a bright future.