Although slightly corrective (-0.4% for the Stoxx Net Return), the week was more volatile in European markets. In particular, it led to significant sector rotations, with growth in the food sector (FOO + 1.4%, integrated the previous week in our Euro Active portfolio), Financial Services (FIN : + 1.2%) and insurance (INS : + 0.9%). Marked decreases are also noted : Raw materials (BRE -4.7%), the Retail sector (RTA -3.4%) and of course Technology (TNO -2.2%), following the last Friday crash on the Nasdaq.
Europe Technology : TNO (Lyxor), weekly data
The Nasdaq Composite continued to drop much of the week to finish at -0.9%. All of this was not benign, as technology stocks, in particular the GAFAs (Google, Apple, Facebook and Amazon), were the main driver of the US market rally for many months. There is no objective reason for the slump apart profit taking as price of tech stocks are overheating, characterised by an uninterrupted rise since November 2016. The whole question is whether the fall in technology will lead to a general correction in the markets or if sector rotation is going to occur, for example, in the so-called value sectors. Initially, we saw a sector rotation, the S&P500 ended the week with relative stability (+ 0.1%) and coupled with good performance of financial and transport stocks. Construction stocks also performed well in the short term and showed a significant increase.
The FED raised its rates by ¼ bp as expected this week and hinted at a 3 rate hikes target for the year as a whole. It also plans to reduce its balance sheet, which has put some short-term pressure on S&P500 because it is a huge amount of money that will eventually exit US bonds and may trigger a rise in long rates. In addition, the FED is mindful of inflation that is approaching the 2% target, and believes that the US economy is growing moderately with a stronger investment.
Europe also reached a new stage with Greece providing a new €8.5bn loan to deal with summer maturities, while debt restructuring will be on the table later on. The Greek index (in our Euro Active portfolio) benefited this week and increased by 3%. There is no doubt that this debt should be restructured, as it is unsustainable, while Greece has fulfilled its commitments. But the issue now does not address the principle of debt restructuring but mainly on the timing. The German elections take place in September and Angela Merkel is unwilling to make massive debt write-offs just before the deadline, which would correspond to a transfer to European taxpayers and especially to the Germans, which would be strongly criticized.The restructuring of Greek debt is likely to take place in 2018, which will enable it to return to the markets and finally free itself from its creditors.
Europe is tackling its problems one after another while entering a more favorable economic cycle, which seems to lead to structural reforms, particularly in France or Emmanuel Macron should benefit from an absolute majority on Sunday.
Another notable feature of the week: The drop in oil prices once again fell below US $45 (WTI), owing to the fact that US stocks were inflated and that, at the same time, oil prices breaks significant technical level. The fall in oil prices, if it was to accelerate, could become a destabilising factor for the markets, as it was already the case in early 2016.
Oil : DBO (PowerShares), weekly data
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Although slightly corrective (-0.4% for the Stoxx Net Return), the week was more volatile in European markets. In particular, it led to significant sector rotations, with growth in the food sector (FOO + 1.4%, integrated the previous week in our Euro Active portfolio), Financial Services (FIN : + 1.2%) and insurance (INS : + 0.9%). Marked decreases are also noted : Raw materials (BRE -4.7%), the Retail sector (RTA -3.4%) and of course Technology (TNO -2.2%), following the last Friday crash on the Nasdaq.
Europe Technology : TNO (Lyxor), weekly data
The Nasdaq Composite continued to drop much of the week to finish at -0.9%. All of this was not benign, as technology stocks, in particular the GAFAs (Google, Apple, Facebook and Amazon), were the main driver of the US market rally for many months. There is no objective reason for the slump apart profit taking as price of tech stocks are overheating, characterised by an uninterrupted rise since November 2016. The whole question is whether the fall in technology will lead to a general correction in the markets or if sector rotation is going to occur, for example, in the so-called value sectors. Initially, we saw a sector rotation, the S&P500 ended the week with relative stability (+ 0.1%) and coupled with good performance of financial and transport stocks. Construction stocks also performed well in the short term and showed a significant increase.
The FED raised its rates by ¼ bp as expected this week and hinted at a 3 rate hikes target for the year as a whole. It also plans to reduce its balance sheet, which has put some short-term pressure on S&P500 because it is a huge amount of money that will eventually exit US bonds and may trigger a rise in long rates. In addition, the FED is mindful of inflation that is approaching the 2% target, and believes that the US economy is growing moderately with a stronger investment.
Europe also reached a new stage with Greece providing a new €8.5bn loan to deal with summer maturities, while debt restructuring will be on the table later on. The Greek index (in our Euro Active portfolio) benefited this week and increased by 3%. There is no doubt that this debt should be restructured, as it is unsustainable, while Greece has fulfilled its commitments. But the issue now does not address the principle of debt restructuring but mainly on the timing. The German elections take place in September and Angela Merkel is unwilling to make massive debt write-offs just before the deadline, which would correspond to a transfer to European taxpayers and especially to the Germans, which would be strongly criticized.The restructuring of Greek debt is likely to take place in 2018, which will enable it to return to the markets and finally free itself from its creditors.
Europe is tackling its problems one after another while entering a more favorable economic cycle, which seems to lead to structural reforms, particularly in France or Emmanuel Macron should benefit from an absolute majority on Sunday.
Another notable feature of the week: The drop in oil prices once again fell below US $45 (WTI), owing to the fact that US stocks were inflated and that, at the same time, oil prices breaks significant technical level. The fall in oil prices, if it was to accelerate, could become a destabilising factor for the markets, as it was already the case in early 2016.
Oil : DBO (PowerShares), weekly data