06/02/2020 - Markets: Monthly Commentary January

Markets-Monthly-Commentary-January

The Corona Virus puts a drag on markets

January began on a positive note for the stock markets. Then, however, the outbreak of the corona virus weighed on the stock markets due to its novelty and rapid spread. As a result, prices of high-quality government bonds rose and the price of gold climbed, while oil and industrial metals, among others, became cheaper.

The new year began on a positive note for the international stock markets in January, but then the outbreak of the corona virus took the wind out of the stock markets' sails. The German stock index DAX fell by -2.02% and the broad European stock index Stoxx Europe 600 lost -2.78%. In the USA, the S&P 500 index rose by 1.15% (USD basis: -0.16%) because the euro weakened against the US dollar. Hong Kong's Hang Seng Index lost 5.14%. The global stock index MSCI World rose by 0.63% (USD basis: -0.68%) - all index data (unless otherwise stated) is in Euro.

The markets didn’t lose their optimism in the beginning of the month when Iranian General Qassem Soleimani, suspected of terrorism, was killed by a drone on the orders of US President Donald Trump, which could have caused a war. There was too much relief at the provisional end of the US-China trade conflict with the conclusion of the "Phase One" agreement. In addition, good labour market data and a strong start to the accounting season in the USA, as well as better industrial production figures and retail sales from China, provided optimism in the markets.

The corona virus, which first appeared in the Chinese metropolis of Wuhan, tested this confidence and became a drag on the stock markets in the last third of the month. By the end of the month, around 10,000 people had been infected in China, and there were individual cases of infection in the USA, Europe and Japan. The novelty of the virus, its rapid spread and the as yet unsuccessful attempts to develop a vaccine unsettled the markets. Many market participants also reckoned with restrictions on international transport routes and on the travel & leisure sector.

As a result, the markets for government bonds achieved noticeable price gains. The yield on ten-year German government bonds fell from -0.18% to -0.45%, and the yield on their US counterparts fell by 40 basis points to 1.52%. Prices for oil and industrial metals, such as copper, continued to fall sharply. Gold, by contrast, was in demand as a safe haven. The price of gold climbed from USD 1,521 to USD 1,587/troz, a seven-year high.

In connection with the corona virus, the International Monetary Fund lowered its growth forecast for the global economy from 3.4% to 3.3%, and the capital markets began to price in a further interest rate cut by the US Federal Reserve in July. While the US economy grew by 2.3% in 2019, the German economy grew by only a moderate 0.6% year-on-year. In addition, incoming industrial orders for Germany were disappointing, exports declined, and the ifo business climate index surprisingly fell from 96.3 to 95.9 points.

On the other hand, the purchasing managers' indices for industry in Germany and the euro zone improved and industrial production increased. US President Donald Trump also sent a positive signal with the announcement that he would soon enter into talks with China on a "phase two" agreement.

 

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