Analysis of today's markets
Enrique Marazuela, CFA CAd, director of investments at BBVA Private Banking.
Stock exchanges in results mode
Last week's movements were the result of two opposing forces: a bearish one, the doubts being sown by the Delta variant, and a bullish one, which is where we would point not only to the excellent quarterly results; but also the reassuring statements and actions from central banks.
Next week, will see a wave of business results, which may support and even provide a breath of fresh air to the stock market, pandemic-permitting. But there is also another notable event: meeting of the Federal Reserve. Analysts are now focused on the moment the Fed announces a gradual reduction in bond purchases. The consensus is that an announcement will be made at the global meeting of central bankers at Jackson Hole at the end of August, and it will be executed no later than January 2022. It actually seems to be already reflected in the markets, so if the script is followed, nothing should change, but as the saying goes, "the devil is in the details", so even if it happens as described, some details may deviate from the plan.
Last week saw the ECB meeting, after which the operators interpreted the announcements after it as a clear sign that the lax tone of their monetary policy will continue for a long time. Information on activity was better in Europe than in the United States, but was in line with what was expected. Taking a broader view than the weekly outlook, it seems that China and the United States have already reached their maximum growth rates (important—they will continue to grow, but not as fast as they have done so far) and that Europe is not far from achieving it.
If we only look at weekly market index closures, we see progress, but if we analyse more closely we can see that there was a strong return movement during that period in share prices. The significant drops at the beginning of the week were sealed with the notable rises in subsequent days. The European Stoxx600 (a wider European index than the EuroStoxx50, with 600 securities rather than 50, and because it covers the whole of Europe and not just the eurozone) saw a 2.3% decline on Monday and ended the week up 1.5%. Some US indexes have again set historical highs and also recorded progress during the week.
In stock markets, the good season of results is a beacon of light, which may represent not just a consolidation of current levels, but a catalyst for new increases. In this coming week, many companies will be reporting their results, which may be crucial to determining the meaning of the stock exchanges.
During the week there was calm and price progress, and the resulting reduction in yield in the bond markets, whose 10-year references were 1.28% for the dollar denominated bond and -0.42% for the euro denominated (taking the German bond as the euro reference). It would have been logical that, with the ECB's declarations, European bonds would have seen a boost, but since the announcement was in line with expectations, the news was already baked into pricing.
We continue to recommend to over-weighting risk assets in general and stock in particular. It is true that we have to weigh up arguments in favour and against, but the expectations of low interest rates and economic growth, which will drag business profits, leave a clear balance in favour of this kind of asset.
The characteristic note in the currency markets was stability, where the dollar stood at 1.177 against the euro. During the week there was movement back and forth in oil, which ended at $74 in its Brent reference, but managed to drop below the $69 mark during the week. This regression prompted the OPEC+ agreement to increase production and fears of a slowdown due to the incidence of new coronary variants.
In short, the delta variant is having an impact on the markets, as reflected in the lower returns on bonds. Stock has been able to neutralize this downward pressure thanks to the excellent business results, which this coming week will reach their peak. We continue to be overweighted in stock, and although the current prominence of the pandemic may give us a scare, we would take advantage of to increase positions.
Have a good summer.