Weekly market update : Central banks are not giving up

08/31/2020 | 09:48am
Monday
August 31
Weekly market update
intro Nothing affects the straight-line trajectory of American indices. Weekly gains amplify August performances, close to euphoria (+12% on the Nasdaq).
Indexes

Over the past week, in Asia, the Nikkei is relatively stable (-0.16%). At the same time, the Hang Seng gained 1.2% while the Shanghai Stock Exchange stood out and posted a gain of 2.7%.

The upturn characterizes the trajectory of European indices, with the Euro Stoxx 50 up 2.1%. The CAC 40 (+2.5%), the DAX (+2.5%) and the IBEX 35 (+2.3%) did slightly better. Conversely, the Footsie and Italy underperformed the broad European index, with performances of +0.2% and +1.4% respectively.

In the United States, the FED unveiled its new strategy at the Jackson Hole symposium, and US indices are soaring even higher. The Nasdaq is the fastest growing index (+3.2%). The S&P 500 (+2.9%) and the Dow Jones (+2.7%) follow closely behind.
Commodities

Hurricane Laura set the pace for the last few sessions across oil markets.It brought a little more than 80% of oil production in the Gulf of Mexico to a halt. However, operators are already anticipating the resumption of US production as oil prices once again ended the week close to balance. Brent is thus trading at USD 45 a barrel while WTI is trading around USD 42.

Powell's accommodating speech from Jackson Hole has provoked varied reactions on the price of precious metals. Initially weakened, prices then regained strength over the weekend. Gold is trading close to its highest point in the weekly sequence, at USD 1960, as is silver at USD 27.5.

The time has come for prices to stabilize in the base metals compartment. Copper consolidates around USD 6600 per metric ton, nickel advances cautiously at USD 15100, while tin rebounds to USD 17700.
Equities markets

After gold, silver is under the spotlight. Traded on the London Stock Exchange, Fresnillo is the world's largest silver producer with 54.6 million ounces extracted in 2019. This activity represents 36.5% of its turnover. Fresnillo is also the second largest gold producer in Mexico. Sales of the yellow metal account for nearly 50% of its revenues. The remainder concerns zinc and lead.

We cannot speak of a growth value for Fresnillo, because its sales have been relatively stable since 2017 and have only increased by 1.3%. This is explained in particular by its correlation with precious metal prices. While gold has been successful since last summer, silver has only recently woken up.

Fresnillo, on the other hand, surfed very well on the upward trend of gold and silver. Its share price has appreciated by 92% since the beginning of the year and the value now reaches a capitalization of more than 10 billion dollars. In order to buy it, an estimated 2021 PER of 21.2x will have to be paid, i.e. almost half the average PER since 2010 of 40.9x.

Fresnillo stock

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Bond market

The Jackson Hole Symposium continues to be a very important event for financial markets. Indeed, Federal Reserve Chairman Powell's keynote address drove yields skyward on both sides of the Atlantic. In the future, the Fed will focus more on an average inflation target of 2%. This paves the way for a temporary overshoot of that figure, without forcing the Fed to raise its key rates.
The 10-year US bond market barometer varied by more than 100 points on the announcement, bringing the yield on the Tbond to 0.76%.

The bearish camp on sovereign bonds seems to have taken a large advantage over the week. The German bund is trading on a raised basis of -0.38%, as is the French OAT which is approaching symbolic zero. Italy sees its debt at 1.04% and Spain's at 0.41%. As for Switzerland, its 10-year bond benchmark is trading at a yield of -0.43%, following the same trajectory as other government securities.
Forex market

Last week, the euro held up well against the dollar, despite the resurgence of the pandemic in Europe and fairly robust U.S. statistics. It must be said that the two sides of the Atlantic are not really at the same stage of the pandemic, which explains part of the discrepancy in the indicators of industrial dynamics. The session was agitated on Thursday in the wake of Jerome Powell's statements, but everything seems to be back to normal. Forex traders are in an atmosphere of strengthening the single currency, pushing long positions to a level rarely seen.

Forex traders were very cautious about their yen positions, preferring to ease with the rumor of Prime Minister Abe's resignation. The yen weakened against all of its major counterparts such as the dollar at JPY 106.5 and the euro at JPY 126.

As for emerging currencies, the ruble has remained under pressure in recent days, in the wake of tensions in Belarus, a Russian satellite state, and the probable poisoning of Russian opponent Alexei Navalny, transferred from Siberia to a care unit in Germany. It takes 75 rubles to buy a dollar against only 70, two months ago.

The rise of the single currency against the yen

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Economic data

Last week, we have seen the publication of the GDPs of several European economies. They are all at historic lows, confirming that the Old Continent is entering recession. In the second quarter, the Norwegian economy contracted by 5.1% while Germany contracted by nearly 10%, a rate not seen since the Second World War. The Swiss economy also contracted by 8.2%. France dropped by nearly 14%.

In the U.S., the number of new claims for unemployment benefits has fallen to 1,006K. However, U.S. consumer confidence deteriorated to 84.8 against the expected 93.
Central banks are not giving up

American indices are on the rise, setting all-time records on a daily basis. Yet concerns about global growth or health risks dominate investor commentary.

Despite everything, it seems that this upturn in US equities can be explained by expectations of a spectacular recovery in corporate earnings capacity, thus delivering an attractive risk premium.

This advantage will last as long as the rates offered by risk-free bonds remain so low, a scenario that is quite plausible considering the Fed's latest message.
Patrick Rejaunier
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