Weekly market update: It is urgent to wait

Friday July  2

Weekly market update

The week started with the return of health fears due to the rapid spread of the Delta variant in Europe, which could thwart economic recovery. However, the major indices cut their losses, with a string of record highs in the United States, thanks to good statistics and the new surge in oil prices. The monthly employment report, unveiled on Friday, was reassuring, with job creation well above expectations.

Indexes Over the past week, red dominates in Asia. The Nikkei recorded a weekly loss of 1%, the Shanghai Composite of 2.4% and the Hang Seng of 3.4%. In Europe, the picture is also negative despite the rebound at the end of the week. The CAC40 lost 1.2% while the Dax and the Footsie were almost stable. For the peripheral countries of the euro zone, Spain is the worst performer with -2.3%, Italy is losing 1% while Portugal is doing well, with a gain of 1%. On the other hand, the Dow Jones grabs 0.7%, the S&P500 and the Nasdaq100 have set records, with respective weekly gains of 1.2% and 2.2%.

Commodities All attention is focused on the OPEC+ meeting, where participants are struggling to reach an agreement. The cartel must decide on the evolution of production quotas from August. Supply should increase in the coming months, but the pace of its growth is still controversial. Within this framework, Brent crude oil is stabilizing on its highs around USD 75.6 while the US benchmark is gaining ground at USD 75. Gold and silver continue to move sideways. There is nothing new on the horizon, investors favor risky assets and want to believe in the scenario of a short-lived inflation peak. US real 10-year rates continue to ease, which has no significant impact on the price of the barbarian relic. Gold is trading at USD 1,785, while an ounce of silver costs USD 26.2. The copper market is taking it easy, although it has risen by more than 20% since January 1. In soft commodities, the price of corn has once again risen violently to 720 cents per bushel (see chart). In its latest report, the USDA revealed relatively cautious estimates of planting areas in the United States, which should make prices jump since, at the same time, Chinese demand remains considerable. Corn returns to recent highs

Equity markets There has been a lot of excitement about German automotive supplier Hella in recent weeks. In April, Manager Magazin reported that the Hueck family had commissioned the Rothschild bank to find a buyer for its 60% stake in the company. The share price gained 13% on April 27. A month later, the share price rose by nearly 10% after the same publication stated that candidates were lining up to buy the group, which is currently worth nearly 6.5 billion euros. Not only well-known funds such as Bain, Advent or Blackstone, but also industrialists including, according to MM, the French Faurecia and Compagnie Plastic Omnium, the German group ZF and the Chinese group Hasco. Finally, Knorr-Bremse was the first to make a move, confirming this week that it is considering a takeover, but that nothing has been taken for granted and that discussions are only at a preliminary stage. This news was not very well received by the market, as the share price of the German specialist in braking systems for railway equipment and commercial vehicles lost more than 10% during the week. Reuters took the opportunity to point out that Faurecia and Plastic Omnium are still in the running for Hella, whose share price hit an all-time high during the session at EUR 61.90 on Tuesday. This crowd of suitors has created a speculative premium that is pushing the Lippstadt-based company to valuation levels well above those of the sector. Evolution of the Hella share

Bond market Western government bond yields tended to fall this week, with the 10-year T-Bond at 1.43%. In Europe, the Bund is back to -0.24% and the French OAT is back below 0.10%. The Spain/Portugal block is down to 0.33% and Italian debt is back to 0.77%, just below the yield on the Greek bond (0.78%). The spread between the Bund and the BTP is back to around 100 points.

Foreign exchange market The dollar continued to strengthen against the euro, a movement that began at the end of May and was amplified after the Fed's decision to prepare the markets for a more restrictive policy. In figures, the single currency has risen from the doorstep of 1.23 USD a month and a half ago to USD 1.183. Over the recent period, the strengthening of the Delta variant of the coronavirus in several regions, particularly in Europe and Asia, is helping to support the greenback, which has even consolidated its status against the Swiss franc (CHF 0.9256). And again, traders point out that the robustness of oil has probably mitigated somewhat the appreciation of the dollar.

Economic calendar On the macroeconomic front, Chinese data disappointed. The manufacturing PMI came in at 50.9 (51 previously) and the services PMI fell to 53.5 (55.2 last month). On the other hand, most of the statistics in the euro zone exceeded expectations. The PMI index climbed to 63.4, unemployment fell to 7.9% and the CPI index was within the consensus at +1.9%. As for the producer price index, it rose by 1.3% while the market was expecting 1.2%. In the U.S., figures are much more mixed. The Chicago PMI index fell to 66.1 (75.2 last month), the ISM manufacturing index fell to 60.6 and construction spending fell by 0.3%. Only the Conference Board confidence index jumped to 127.3. As for employment data, ADP reported 692K private sector job creations and weekly jobless claims are at their lowest since the start of the pandemic (364K). The highlight of the week was the monthly jobs report. The unemployment rate rose slightly to 5.9% but 850K jobs were created over the period, with hourly earnings up 0.3%.

It is urgent to wait Financial markets continue to look up, even though European indices seem to have hit a plateau in recent weeks. The copious gains accumulated in the first half of the year need to be digested. Investors are fine-tuning their strategies ahead of the first indications of central bank monetary policy normalization. The Fed is expected to lead the way, even if it is trying to make markets understand that it is urgent to wait. The first half-year corporate earnings reports are due in ten days and should provide plenty of insights for the second half of the year, including the impact of supply and shipping tensions on earnings trajectories.