In June, on the global stock market, a typical consolidation stage was observed, which was slowly entered by the markets as early as in May. Leading topic for investors both within certain markets and in global scale was rotation which resulted in multidirectional movement among key stock indices and among sectors and industries.

The first half of June was rather smooth on the global financial arena. ECB and U.S. FRS held their regular meetings on monetary policy and both central banks brought no surprises for the markets. ECB spoke about the need to extend the QE programme until the target level of inflation is reached, emphasizing that if any unforeseen circumstances appear impeding these targets, the Bank is ready to increase or extend the programme. In turn, FRS, as it was expected, increased the key interest rate by 25 b.p. yet not changing its predictions regarding future plans on increasing the interest rate.

Political events also stepped back into the background. Apparently, the investors got tired of the political influences affecting the markets over the last year, so neither the snap parliament elections in UK (which lead to another unpleasant surprise for the ruling party that lost part of its seats), nor the parliament elections in France (which, in turn, strengthened the positions of the newly elected president) caused no panic in the moods of participants of the market.

The peaceful course of events was shaken by the head of ECB Mario Draghi who by the end of the month delivered a comment on monetary policy differing from his own words said just a few weeks ago. Draghi was feeling positive about the development of Eurozone economy, pointing out that deflationary pressure is being replaced by reflationary one and hinting that the end of QE programme might arrive sooner than the market expects. Such unforeseen announcements triggered plummeting EUR against USD and other world currencies and caused growth of yields on European bonds. These events have prompted drop of stock prices of European companies, whereas the first ones suffered companies greatly depending on export incomes and for which stronger EUR is disadvantage.

On the other hand, growth of bonds’ yields caused high interest of stock gamblers to the financial sector, which was demonstrating outrunning dynamics both in Europe and USA. In Europe, this sector was the only one that managed to show positive performance by the end of the month. An additional stimulus for it was the partially solved problems of Italian banks. Italian government approved support to the banks in the amount of EUR 17b, thus Veneto Banca and Banca Popolare di Vicenza avoided bail-in, a situation in which the creditors have to share the losses of the company. Growth of prices of banks’ stocks was unable to compensate the drop in other industries, which resulted in Euro Stoxx 600 drop by 2.7% by the end of the month.

In USA, things were brighter – S&P500 grew by 0.5% within a month, yet there was certain nervousness obvious related to rather unexpected sharp drop of technological index Nasdaq 100, which includes stocks of the largest technology companies. Naturally, a number of investors was willing to fix the two-digit profit gained from the beginning of the year, yet drop of prices of such giants as Apple, Google, Facebook etc. in one day by more than 5% without any obvious reasons could not avoid questions. Just in the last week of the month, Nasdaq100 lost 4.5% which lead to general negative performance in June: – 3.96%. Yet the positive dynamics in other sectors, mainly in financial and healthcare sector, as well as recovery in materials sector helped the general market stay in positive numbers.

Markets of corporate and emerging markets bonds in June were also in consolidation stage. The most active pressure on prices was in bonds of energy exporters due to drop of oil prices, which affected the entire High Yield segment demonstrating lagging dynamics. Decrease of prices on oil market, which started in the end of May and supported by news of U.S. leaving Paris climate agreement, continued in the first half of June as well. Surplus of supply against demand remained, and this was not changed even by growing geopolitical risks – Saudi Arabia, UAE, Egypt and other Arab countries announced termination of diplomatic relations (and termination of overland, air and sea transport) with Qatar accusing the government of this country of support of terrorism. Political tension in Persian Gulf is usually perceived by the market as risk to supplies and triggers growth of oil quotations, yet in this case this factor was neglected and did not affect the decrease trend on the energy market, which had negative impact on Emerging Markets High Yield bonds.

On the other hand, drop of inflation expectations, resulting also in decrease of US Treasuries and Bunds, provided substantial support to High Grade sector, which lead to positive dynamics on the market in general. Yet the speech by Mr. Draghi at the end of the month supported by “hawkish” announcements of heads of other central banks, including the U.S. FRS, which eventually triggered sharp growth of on German bunds and U.S. Treasury yields, causing correction on other bond markets as well. This correction resulted in not only corporate and emerging markets bonds losing their previous gains from the beginning of the month, but also led them into negative territory.

In June the mutual funds under management of ABLV Asset Management demonstrated returns commensurate with market in general.

In the medium term, we are still taking waiting attitude. In bond funds, a significant part of assets is invested in medium term securities enabling to decrease volatility in case of negative events on interest rates’ market. In stock funds, last month the manager conducted partial rebalancing, cutting positions in cyclical sectors in favour of more defensive ones. Also, due to increased risk of higher short-term volatility on stock markets, a share of cash was slightly increased. Further decisions will be made depending on the development of situation on the financial markets.

ABLV mutual funds’ return as at 30.06.2017

¹ Except ABLV Multi-Asset Total Return USD Fund and ABLV Emerging Markets Corporate USD Bond Fund, for which return is calculated on funds’ period of operations.

Additional information

General information on ABLV mutual funds and management company ABLV Asset Management, IPAS, as well as all additional information can be found on ABLV Bank home page in the section “ABLV Mutual Funds”.

This comment is intended exclusively for informative purposes and cannot be considered as an investment recommendation or advice.