The Federal Reserve’s June meeting affected equity, bond, and foreign exchange markets. The equity markets once again closed out the past month with positive figures.
Our expert, Johan Gallopyn, analyzes the market trends of June 2021.
Equity market trends: Federal Reserve gives markets a brief scare
Equity markets had another positive month in June, closing a strong second quarter and an outstanding first half of the year. American equities did particularly well in the past month; this performance was amplified by the strength of the dollar. The US outperformance was only achieved in the second half of the month and was due to the stronger performance of growth stocks (more strongly represented on the US market) versus value and cyclical stocks (more strongly represented on the European markets).
However, the interest rate projections of the US central bank produced some price volatility in June. In a brief decline, investors mainly took profits on economically sensitive equities, which had risen sharply in recent months. The damage has already been fully rectified in the US, with the S&P 500 and the Nasdaq setting new records. The last time this happened for the Nasdaq was at the end of April. This is a clear indication that growth equities have once again taken the lead in market performance.
The global minimum tax of 15% agreed within the G7 was not a cause for concern for investors at that stage. The minimum tax would be introduced on income earned abroad by multinational groups. However, there is still a long road ahead to actual implementation and the final impact would be rather limited. Other factors influencing stock market sentiment include the advance of the delta variant of the coronavirus in Europe and the potential drag this could have on the normalization of activity (e.g. for tourism); and achieving partial agreement on an infrastructure plan in the US.
Bond market trends: higher inflation, lower interest rates
10-year yields in the US fell below 1.5% in June for the first time since early March. However, inflation in the US moved sharply higher. One explanation for the contradictory movement between interest rates and inflation seems to be that the fears of inflation that arose earlier in the year are already abating. Implied inflation expectations (10-year break-even rate) fell. The revised interest rate outlook issued by the Federal Reserve pushed yields for shorter maturities higher in the US, but 10-year yields dropped back a little. If interest rates were to rise more quickly, growth and inflation would be slowed down in the long run, and a smaller risk premium would be required for a long-term investment.
German interest rates oscillated around -0.2% in June, with the European Central Bank confirming its monetary policy last month, including the increased pace of the bond purchase program. After slightly higher spreads in May, interest rate spreads between the southern eurozone countries and German rates fell back somewhat in June. The funding to the member states as part of the EU recovery plan can start now that the spending programs have been approved by the European Commission.
Corporate bond spreads (investment grade and high yield) remained fairly stable during the past month.
Central banks: interest rate projection advances in FED ‘dot plot’
At its June meeting, the Federal Reserve signaled that it was starting to consider when to wind down its bond-buying program. The market consensus assumes that there will be a more tangible announcement after the summer and that the phase-out will start in early 2022. The surprise was the change in the ‘dot plot’, the expectation of the various members of the Fed about the future path of the benchmark interest rate. The median forecast of the Fed members indicated in June that there could be two interest rate hikes in 2023, up from 0 at the March meeting. In addition, more members (7 out of a total of 18 compared to 4 in March) are already expecting the first interest rate hike in 2022.
The European Central Bank left its monetary policy unchanged. It is still too early for the central bank to adopt a more restrictive monetary policy. The pandemic emergency purchase program runs until March 2022. After this date, the ECB has not yet expressed an opinion on its purchasing policy.
The Norwegian central bank kept its key policy rate at 0% but signaled that there would be a first interest rate increase in September. This will make Norges Bank the first central bank of a G-10 country to raise interest rates since the start of the pandemic. The interest rate path also indicated that it intends to raise interest rates by 0.25% in each of the next four quarters until mid-2022.
Currencies: USD stronger after Fed meeting
The dollar strengthened against the other major currencies in June. The dollar rose by 3.0% against the euro. The earlier interest rate projection in FED ‘dot plot’ means support for the currency.
The Norwegian krone remained relatively flat following the central bank’s interest rate announcement. The market already anticipated the outlook. The stronger oil price also failed to inspire the currency.
The currencies of the emerging markets presented a mixed picture in the past month. They were generally weaker against the stronger dollar. The drop in commodity prices was a negative factor. The Brazilian real was an exception, strengthening after the central bank hiked interest rates by 75 basis points and the prospect of more rate hikes before the end of the year to keep inflation under control.
The volatility of bitcoin and other cryptocurrencies remained very high in June. Bitcoin briefly fell below USD 30,000 in the past month but was then able to recover slightly. Increasing pressure from central banks for more regulation and the environmental impact of bitcoin mining were reasons for investor concern.
Commodities: industrial metals weaken, oil rises further
The Brent oil price continued its advance in June, reaching a level of USD 75 per barrel, which is about 10% above the level before the pandemic. This brings the increase since the beginning of the year to 45%. Also last month, the normalization of demand after the coronavirus pandemic was the main driver. The negotiations between the US and Iran on a new nuclear deal that would lift the embargo on Iran appear to have stalled. In early July, OPEC+ will decide whether to further increase supply by scaling back coronavirus production restrictions. Russia, as before, favors a broad easing, while Saudi Arabia wants to take a slower approach.
After the surge of the previous months, most industrial metals moved lower in June. The price of copper, for example, fell by almost 10%. This may be due to slower growth in China and the news that China is considering putting some of its strategic stock in metals such as copper, aluminum, and zinc on the market to control the price rise and counteract speculation.
Gold fell sharply last month (-7%), the weakest month in almost five years. The US central bank is adopting a less accommodating stance on its interest rate outlook, which weighed on the market. The somewhat firmer dollar is also a negative element for the price of gold.
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