Weekly market update : Growing uncertainty

10/05/2020 | 11:38am
Monday
October  5
Weekly market update
intro Risk aversion has dissipated somewhat last week, against the backdrop of hopes for a US stimulus plan, allowing financial markets to regain some ground. Nervousness remains palpable, however, due to lingering health fears and restrictions in Europe. Uncertainty also with the absence of agreement between Democrats and Republicans, as well as the Donald Trump's Covid-19 diagnostic.
Indexes

Over last week, in Asia, the Nikkei fell by 0.75% after the Tokyo Stock Exchange closed on Thursday due to a serious technical problem. The week was also shortened for Hang Seng and Shanghai Composite due to holidays. The Hong Kong index gained 1.26% while the Chinese index remained stable.

In Europe, the CAC40 recorded a weekly performance of 1.5%, the DAX rose by 1.3% and the Footsie by 0.3%. For the peripheral countries of the euro zone, Italy gained 1.5%, Spain also gained 1.5% and Portugal 2%.

The important technical support areas have been preserved for the moment, like the Eurostoxx50, which has been consolidating horizontally since June (see graph).

In the United States, with technology in the lead, the Nasdaq100 climbed by 2.7%. The Dow Jones was up 1.6% and the S&P500 was up 1.8%.

Stabilization of the Eurostoxx 50 index since June

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Commodities

Cold snap on oil markets. The nagging fears of a global supply surplus, which will not find its counterpart in demand, caused oil markets to capsize. The increase in Libyan exports is not unrelated to this new market sentiment, which has been accentuated by fears of new containment measures in Europe. Brent crude oil fell below the symbolic $40 a barrel while WTI is trading on the week's highs, close to $37.

Precious metals, on the contrary, have the wind in their sails, buoyed by increased volatility on the equity markets. Gold is almost perfect with 4 bullish sessions and is trading above USD 1,900 per ounce. Silver is stabilizing at USD 24.

Base metals are digesting the previous week's decline. Copper is back up to USD 6164, tin rises to USD 17500, while nickel stands still at USD 14500.
Equities markets

Lonza Group is a Swiss group that supplies chemicals and pharmaceuticals on a global scale. The company operates primarily in two segments: bio-pharmaceuticals and nutritional ingredients (70.4% of sales) and specialty ingredients for food, hygiene and healthcare products (28.6% of sales).

Although the group experienced some difficulties with the health crisis, notably due to delays in clinical trials, it maintained its operational performance, with sales up by nearly 8% in the first half, largely driven by the bio-pharmaceutical products and nutritional ingredients segment. Lonza even plans to refocus exclusively on this segment by outsourcing its specialty ingredients business through a sale in the second half of the year.

The Bio-Pharmaceuticals and Nutritional Ingredients business also benefited from a 10-year collaboration with Moderna for the manufacture of the drug substance for the Covid-19 mRNA vaccine, subject to positive clinical trials.

On the stock market, Lonza Group's share price has benefited greatly from its fundamentals, rising 61% over 2020. On a track record from January 2019 to today, the Swiss stock has doubled its market capitalization to CHF 42.8 billion. This allows it to climb the ranks of the Swiss Market Index, where the Group is now the sixth most highly valued stock.

Evolution of the Lonza Group share over the last 2 years

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Bond market

The week will have allowed the different bond references to test the lowest yields. The German Bund returned to the levels of the Swiss 10-year at -0.54% and the French OAT followed the same path, at -0.26%.

These exceptional conditions allow the States to finance their massive support and recovery plans. Italy is also benefiting from this strong easing of yields and sees its debt return to 0.8%, a historic low, as well as for Spain at 0.22%.

Further to the south of Europe, Greece is also falling into this spiral of low rates, with Athens seeing the yield on its major loan fall below 1%.

Only the American Tbond saw a slight rise in its yield, to 0.66%, as a result of the hopes of a fiscal stimulus plan of 1600 billion dollars.


Convergence of German and Swiss 10-year yields

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Forex market

In the euro zone, the single currency recovered at the end of the quarter, rebounding against the yen to JPY 123.5 and against the dollar to USD 1,172.

The greenback also suffered some profit-taking in favor of riskier currencies, as signs of trade-offs in the U.S. fiscal stimulus negotiations favored this type of trade-off. Overseas, the pound sterling rose against the Swiss franc to CHF 1.19 and against the US currency to USD 1.19. Volatility surrounds the British currency in the light of the negotiations between London and Brussels on their trade relations.

Following a certain lull in the equity market, safe haven currencies neutralize each other by replicating the prices of the last weekly sequence. This was the case for the USD/JPY at 105.
For its part, the Swiss franc remains under the control of the SNB, which sold 90 billion francs in the first half of the year, a record since 2012 and the euro crisis.

Among emerging currencies, the Turkish lira remains under pressure, with the USD/TRY exchange rate at an all-time high of 7.80.

In the southern hemisphere, the Australian dollar regained basis points against various counterparts. The AUD/USD is trading at USD 0.72. Demand from Forex traders intensified, with a surge in the yuan, whose currency is closely correlated with the Australian dollar.
Economic data

China's economic activity continued to expand, with the manufacturing and services PMI indices improving to 51.5 and 55.9 respectively.

In Europe, excluding the PPI and CPI indices, which came out at 0.1% and -0.3% respectively (consensus 0.2% and -0.1%), the figures were broadly in line with expectations. The PMI manufacturing index remained at 53.7, as did unemployment at 8.1%.

Numerous American statistics were on the agenda last week and most of them pleasantly surprised, such as the Conference Board index at 101.8, the Chicago PMI index (62.4), promises of home sales (+8.8%), construction spending (+1.4%) or GDP at -31.4% (consensus -31.7%).

Employment data was mixed, with an ADP survey reporting 749K private job creation (650K expected) or weekly unemployment registrations at 837K (consensus 850K). The monthly employment report, meanwhile, reported a falling unemployment rate of 7.9%, with only 661K jobs created (consensus 900K) and an hourly wage up 0.1% (compared to 0.5% expected).
Growing uncertainty

The fourth quarter did not start off on a quiet note. Uncertainty factors are multiplying and once again transmitting stress to the investment community. Overall, investors were generally dreading the end of the year, with the intertwining of the health crisis and economic concerns.

In addition to the difficulties in reaching an agreement on a U.S. stimulus plan at Brexit and the risks of containment, there is also the great uncertainty surrounding the U.S. elections with Donald Trump's positive diagnosis.

Market stability will depend on these many factors, but also to a large extent on the implementation of fiscal policies, which are indispensable complements to the abundant monetary policies that have been in place for several years.
Patrick Rejaunier
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