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SycoMinute(s) - May 2018 : Strong rebound

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Following two months of contraction, stock markets rallied in April. Concerns over trade tensions between the US and China faded away, so did worries on declining leading indicators in the Eurozone, with the composite PMI stabilizing at a high level this month. The period also saw the euro receding against the dollar. In this environment, the Q1 2018 earnings reporting season got off to an encouraging start and acted as a key driver for the European markets.

Syco Minute

European stock markets rallied sharply in April, outperforming US indices, with the Euro Stoxx TR surging 5.0%.

The month had admittedly kicked off with escalating trade tensions between the US and China, as China retaliated following Donald Trump’s decision to raise tariffs on steel and aluminium imports in March, and both sides successively upped the ante. Geopolitical strain was also clear as Trump threatened to embark on air strikes on Syria, directly targeting Russia, which supports the Bachar al-Assad regime.

However, the trade context eased after Donald Trump announced his aim to send a delegation of economic advisors to Beijing and statements from Xi Jinping pointed to a potential increase in the cap on foreign investment in joint ventures (currently 50%) as well as a cut in import duties on some products, such as cars. Meanwhile, the announcement of a peace agreement between North and South Korea slated before the end of the year also helped alleviate geopolitical concerns.

Worries on declining leading indicators in the eurozone in February and March faded this month after the composite PMI stabilised at a high level (55.7), while the French index even posted gains in April despite previous expectations of a fresh decline.

The Q1 2018 earnings reporting season got off to an encouraging start and acted as a key driver for the European markets

The latest conclusions from the Fed’s Beige Book report pointed to a likely continuation of the central bank’s rate hike cycle to keep a grip on inflation, as reflected by the sharp surge in energy (Brent soared 8.6% over the month) and commodities prices, pushing up the 10-year Treasury yield above the 3% mark for the first time since 2014. On the other side of the pond, the minutes from the latest ECB meeting reflected concerns on the recent downturn in macroeconomic data, although the bank still claims it expects an uptick in inflation.

Against this backdrop, the euro shed 2% over the month, but displayed a near-11% gain year-to-date at April 30. Despite the currency’s strength over the past few months, the Q1 2018 earnings reporting season got off to an encouraging start and acted as a key driver for the European markets. There was a slew of M&A moves on both sides of the Atlantic, with Total to take over 74% of Direct Energie, Accor buying out Swiss hotel group Mövenpick, Eurofins gaining Labcorp’s food testing division Covance Food Solutions, Schneider Electric’s purchase of Indian group Larsen & Toubro’s electrical and automation unit, Servier’s takeover of UK pharma company Shire’s oncology business, and T-Mobile’s move on Sprint, etc.

Volatility was weaker in April than in March overall, but there were strong performance disparities and even the smallest disappointments continued to be severely penalised.

The opinions and estimates constitute our judgment and are subject to change without notice, as well as assertions about trends in the financial markets, which are based on current conditions in these markets. We believe that the information provided in these pages is reliable, but it should not be considered exhaustive. These data, graphics or extracts were calculated or made on the basis of public information we believe to be reliable but which nevertheless have not been subject to independent verification on our part. Past performance is no guide to future returns.

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