Performance, August 2017

06.09.2017

News

North Korea challenges the world community

  • US president, Donald Trump, threatened North Korea with fire and fury if it continues to threaten the US. The announcements were made after a report had shown that North Korea has developed a minor nuclear warhead, which can be launched in one of the country's missiles. The North Korean reaction to the sharp statement from President Trump was to present plans about an attack of the US military base in the Pacific island of Guam. The conflict escalated further due to a massive military exercise between the US and South Korea which was by North Korea seen as preparation for a coming invasion of the country. As a response to the military exercise, the North Korean leader sent a test missile over Japan.

Kansas City Fed's annual Jackson Hole conference – most important aspect was what remained unsaid

  • The world's two most important central bank governors were among the prominent speakers at Kansas City Fed’s Jackson Hole symposium. The Federal Reserve governor, Janet Yellen's, and ECB governor, Mario Draghi's, speeches had the strongest effect on the FX market since the euro rose to its highest level for more than two years. The most remarkable aspect was that Mario Draghi refrained from talking down the euro and that Janet Yellen did not send new monetary policy tightening signals.

Renewed optimism about 'disruption' in the equity markets

  • . In the corporate sector the expression 'disruption' is especially used about the phenomenon that the use of new technologies and formats changes the market situation considerably and for instance results in previous products and services becoming superfluous. Amazon has been the driving force within the shift from physical to online retail trade which has resulted in large turmoil within especially US retail trade. Amazon announced the purchase of the supermarket chain Whole Foods Markets in June – and in August, simultaneously with the approval of the acquisition, the company has now sounded the price war while the rest of the sector is shaking.

Market return

Global emerging markets maintained leadership in August – the dollar dropped back even further

  • The global emerging equity markets reported yet another month with positive returns despite rising geopolitical tensions in the Korean Peninsula. The markets rewarded a good accounts-reporting season in China, among other things. At the same time, the Brazilian president, Michel Temer, succeeded in obtaining enough votes in the Brazilian parliament to avoid impeachment proceedings. This put a damper on the fear of further turbulence in Brazil. Global equity markets have to a high extent been affected by foreign exchange fluctuations this year – and August was no exception. The revolving door of Donald Trump's Administration, most recently with goodbye to chief strategist Steve Bannon, does not benefit the dollar that shed a further almost 1% in August and has now fallen back by more than 12% this year. The IT sector continued to be in the lead – in August, the sector was supported by excellent financial statements from the mobile giant Apple. On the other hand, the energy sector still had a difficult time due to falling oil prices which were forced down by rising oil supply from the US.

Falling yield level in August

  • The interest-rate fall was reflected in short-term as well as long-term bonds. At the end of the month, 10-year government bond yields were 0.50% whereas 2-year yields were as low as -0.65%. Right now, the focus of attention is on any announcements about the ECB’s asset purchase programme which will expire in December. The markets had hoped for an announcement at the meeting of the central banks at Jackson Hole, but there was no news about this issue from the ECB. At end-August, the current callable bond series closed and were replaced by similar series with 3-year longer maturities. In this connection, we have seen a temporarily larger supply of callable bonds. Despite the rising supply, callable mortgage bonds performed excellently in August.
  • Corporate bonds, on the other hand, went through a more difficult patch in August. Due to the turmoil around North Korea and generally slower activity during the summer holiday period corporate bonds could no longer keep pace with developed-market bonds. The lower grade corporate bonds yielded a return close to zero.
  • Falling US yields and ample liquidity ready to be invested in new issues supported the emerging markets in August. The rapidly increasing oil prices in June and July up to USD 50 have, despite a minor fall in August, supported several oil-exporting countries. Moreover, the growth rates in the emerging markets seem to be improving, and very few countries are challenged by inflation. The US dollar has been challenged for a large part of the year so a trend to stabilisation in August was positive news for local rates and local currencies in the emerging markets. Isolated events include primary elections in Argentina that seen from the point of view of investors ended practically at the best case scenario which bodes well for the election in October and hence the reform process which is so very important for the country. Both Nye Obligationsmarkeder and Nye Obligationsmarkeder Valuta increased overweight in Argentina up to the election.