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MONTHLY MARKET REVIEW

In November global equities closed again with a rally, keeping up the pace of the all year 2019, regardless of geopolitical uncertainties spread out on the market. No conclusions yet on the negotiations between US and China about a trade deal, where tariffs updates are expected by 15th December. In UK the attention has been shifted on the upcoming election on 12th December.
The gradual climb higher finally lost momentum though, due to fresh concerns sparked by President Trump’s threats to impose new tariffs if a “phase one” trade agreement could not be reached. However, in the final week of trading, stocks pushed higher after some upbeat comments from China about how talks are progressing.

The UK and European equity markets also provided positive returns in November. Following on from last month, investors were happier to adopt a ‘risk-on’ stance with ‘cyclical’ parts of the market (companies whose performance is linked to the business cycle) outperforming ‘defensive’ areas.

While emerging equity markets got off to an encouraging start, these gains proved to be short-lived. Sentiment turned negative due to a mixture of economic, political and corporate factors. Plagued with strikes and anti-government protests across the region, Latin American equity markets came under the most pressure. By comparison, equity performance in Asia and EMEA (Europe, Middle East and Africa) was more mixed.

Within fixed interest markets, the more optimistic backdrop led to a rise in government bond yields. Rising government bond yields were in turn a headwind for corporate bond markets. High yield, which is typically more influenced by economic sentiment, was the best performing area of the market. Meanwhile, new issuance within the European investment grade market remained strong. Barclays reported €65.5bn of new euro denominated bonds issued in November. That’s the highest monthly issuance since 2009.

Central banks have largely been on the sidelines, with BoE only holding a meeting last month, where it made no changes to its monetary policy.

We have seen previously, since mid-September the FED had to inject about 450 billion dollars of liquidity in the American financial system, offsetting, basically in two months, half of the budget reduction made in almost two year. In fact, from middle of September there was a “crisis” on the Repo market (Repurchase agreement) which forced the FED to start a new phase of monetary expansion which is in fact a new QE. The Repo market is basically the market where financial institutions seek short-term financing, guaranteed by collateral (usually government bonds) to buffer temporary liquidity needs. Under normal conditions, the US Repo market is characterized by refinancing operations with overnight maturities of 3/5 billion dollars a day.
These transactions can even reach amounts of 10/15 billion dollars in particular situations related to technical maturities, such as tax payments or the subscription of government bond auctions. However, amounts that are then destined to return quickly enough once these temporary events are over.

But on September 17th these operations literally exploded at over 50 billion dollars and today they have reached figures exceeding 100 billion a day constantly and this structural lack of liquidity is no longer obviously connected to temporary problems. In such a situation, it is obvious that the US financial system suffers from a liquidity crisis of proportions which are not able to be mitigated by expansive monetary policies. The FED has therefore had to intervene systematically every day for over two months and the financial operators kept wondering how we came to this situation, given that officially no one has explained what is happening. The MBS (Mortgage-backed securities) reappeared in the Repo operations as a collateral, something that had not happened since 2008. It should be remembered that in the months preceding the 2008 crisis the Repo operations (liquidity requests with deposit of collateral) were on average of daily amounts oscillating between 15/25 billion dollars while today they are over 100 bln almost every day.

To the failure of the credit cycle in the consumer sector, 45% compared to the previous 12 months, would therefore also be added a potential credit reversal in a segment of the real estate market quite important for the numbers involved. If then the trade war with China, as it seems, is destined not to be resolved in the short term, the risks of a recession in 2020 become more and more concrete and Trump risks reaching the electoral appointment with the worst economic situation of the last years. The FED will therefore be forced, against its will, to continue to stop the situation with interventions but the economy will hardly be able to restart, given that this liquidity seems more used to “plug holes” in the system than to provide new fuel for debt growth , both for consumption and for real estate investments. The US stock exchanges immediately implemented the liquidity injection operations as a positive element and see these interventions as a guarantee to sustain new historical highs.

Nov-19 6 months YTD
S&P 500 12,60% 7,35% 19,51%
DAX 2,23% 5,27% 18,23%
GOLD -3,27% 12,01% 13,84%
WTI 2,50% -5,74% 18,20%
EURUSD -1,20% -1,40% -4,00%
GBPUSD 0,00% -2,80% -3,40%
USD1PY 1,40% 1,10% -0,10%

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