After a period of wavering, the European market went into correction with a 2.1% fall for the Stoxx600 Net Return this week, while the US Index (S&P500) limited the damage (-0.6%), supported by the banking sector (+ 3.3% for the tracker XLF - Financials), and despite the fall in technology (Nasdaq composite: -1.9%).
We had identified technical signals for this correction in recent days, but the catalyst came on two fronts simultaneously the first is the relapse in the technology sector, after a first downward leg that had already been a first shock for the indexes two weeks ago. But it is the ECB and the less accommodating words of Mario Draghi who really ignite the correction. For the first time, the ECB's President suggested that European growth was strengthening and signalled that the accommodative monetary policy of the ECB would not last forever. We can already imagine that Quantitative Easing (purchases of sovereign and private bonds by the central bank) will be reduced by the end of the year, and to come to an end in the second part of 2018.
At the same time, the rate hike in the US and the Bank of England is also strengthening its policy in the face of rising inflation. This change in tone has had an immediate impact on several markets simultaneously : First, the government bond market has seen a strong appreciation, particularly in Germany, where the 10-year bund rose to 0.457% (compared to 0.257% a week earlier). This has also been reflected in the money market by a strong appreciation of the euro against the Dollar, which has exceeded 1.14.
Bank Europe (BNK), weekly chart :
The Equity market also reacted strongly to the fall, with technology stocks suffering the double penalty of the rise of the euro (while much of the sales are in dollar terms) and the fall of the Nasdaq, as well as sectors exposed to interest rates such as Concessions, Utilities or the Construction sector. Conversely, banking stocks benefited from the Movement as the rate hike was positive for the build up of banks' margins, which also did not have exposure to the dollar.
Utilities Europe (UTI), weekly charts :
It should be noted that China escaped this consolidation process this week. The Shanghai composite was up 1.1% for the second consecutive week.
Other collateral loosers of these expectations of rising interest rates and reflation in the global economy are gold (-1.2%) and emerging countries that are likely to experience outflows to the US, which are becoming more attractive (US 10-year bonds are currently remunerated at 2.25%).
Moreover, the week was also marked by a sharp rebound in oil (+ 4.9% for Brent), following more reassuring US figures, while profit taking was realised before the maturity of the futures (shorts buy-back). The long-term downward trend in oil is far from being ended, and a relapse is expected. Equity markets could be disrupted some time, if central bank policy change is confirmed. However, Q2 2017 results will soon be published in the US and Europe, and should have significant market influence.
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After a period of wavering, the European market went into correction with a 2.1% fall for the Stoxx600 Net Return this week, while the US Index (S&P500) limited the damage (-0.6%), supported by the banking sector (+ 3.3% for the tracker XLF - Financials), and despite the fall in technology (Nasdaq composite: -1.9%).
We had identified technical signals for this correction in recent days, but the catalyst came on two fronts simultaneously the first is the relapse in the technology sector, after a first downward leg that had already been a first shock for the indexes two weeks ago. But it is the ECB and the less accommodating words of Mario Draghi who really ignite the correction. For the first time, the ECB's President suggested that European growth was strengthening and signalled that the accommodative monetary policy of the ECB would not last forever. We can already imagine that Quantitative Easing (purchases of sovereign and private bonds by the central bank) will be reduced by the end of the year, and to come to an end in the second part of 2018.
At the same time, the rate hike in the US and the Bank of England is also strengthening its policy in the face of rising inflation. This change in tone has had an immediate impact on several markets simultaneously : First, the government bond market has seen a strong appreciation, particularly in Germany, where the 10-year bund rose to 0.457% (compared to 0.257% a week earlier). This has also been reflected in the money market by a strong appreciation of the euro against the Dollar, which has exceeded 1.14.
Bank Europe (BNK), weekly chart :
The Equity market also reacted strongly to the fall, with technology stocks suffering the double penalty of the rise of the euro (while much of the sales are in dollar terms) and the fall of the Nasdaq, as well as sectors exposed to interest rates such as Concessions, Utilities or the Construction sector. Conversely, banking stocks benefited from the Movement as the rate hike was positive for the build up of banks' margins, which also did not have exposure to the dollar.
Utilities Europe (UTI), weekly charts :
It should be noted that China escaped this consolidation process this week. The Shanghai composite was up 1.1% for the second consecutive week.
Other collateral loosers of these expectations of rising interest rates and reflation in the global economy are gold (-1.2%) and emerging countries that are likely to experience outflows to the US, which are becoming more attractive (US 10-year bonds are currently remunerated at 2.25%).
Moreover, the week was also marked by a sharp rebound in oil (+ 4.9% for Brent), following more reassuring US figures, while profit taking was realised before the maturity of the futures (shorts buy-back). The long-term downward trend in oil is far from being ended, and a relapse is expected. Equity markets could be disrupted some time, if central bank policy change is confirmed. However, Q2 2017 results will soon be published in the US and Europe, and should have significant market influence.