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At the halfway mark of the year, it is interesting to see which asset classes in the financial markets have risen most and which have fared worst. Investors were particularly pleased with the main commodities, but the stock markets of the most industrialised countries also delivered positive surprises.
Cryptocurrencies, which after reaching record highs in April, fell back, reversing much of the gains made in the first half of the year.
Among the main commodities, Wticon oil rose 51%, followed by Brent crude, up 45% since the beginning of the year. Among the industrial metals, copper and aluminium gained 22%. Contributing to these rises was the strong recovery of the economy after the shock recorded last year following the coronavirus pandemic.
Precious metals struggled, with Gold leaving 5% on the ground since the beginning of the year while Silver fell -2.24%.
Agricultural commodities were in no particular order: on the one hand, soybeans jumped 43% while cocoa fell 9%.
Equity indices in the Old Continent above all shone after a dark 2020: in Paris, the French Cac 40 stood out with +18%, followed by the Eurostoxx 50 index with a progress of 14.7%. Our FTSE MIB also did well, rising 12.8%, while the Dax in Frankfurt was up 12.7%.
Wall Street was no exception either. The S&P 500 index gained 12.9%, while the Nasdaq 100 technology index climbed 10.7%.
Asian stock markets fared less well, with the Nikkey in Tokyo up just 5.2% and the Shanghai Composite Index in China up just 2.3%.
Overall, the Msci World index was up 11%.
After a strong start in the first half of the year, the main cryptocurrencies have been hit by selling in the last two months. Bitcoin has almost wiped out most of its gains with a gain of only 14% while Ethereum has risen 140% since the start of the year. For dogecoin, despite heavy selling in recent weeks, it has risen by 480%.
Cryptocurrencies were penalised by the Chinese government’s decision to restrict mining activities in the country and warnings from major central banks about the potential risks of investing in this asset class.
Following the rally in the first half of the year, Carmignac’s managers have identified the strategy to be adopted on the markets between now and the end of the year. According to the French management company, investment opportunities can be found in the coming months by taking advantage of the divergence in economic recovery across countries.
In the US, the economy is booming while Europe is only slowly emerging from recession. This means betting on companies that have not yet benefited from the recovery in the Old Continent.
As far as equity markets are concerned, according to Carmignac, investment opportunities in the coming months will mainly be found in companies that will benefit from the economic recovery (especially in Europe), while a cautious attitude towards more cyclical sectors will be required, as consensus optimism is largely reflected in market positioning.
According to Carmignac, 2021 is an exceptional year for equity markets but, with a return to some form of normality, earnings growth in global equity indices should resume its long-term trend from next year. Therefore, companies that are favoured by long-term growth drivers (numerous in the US and China) should also be favoured.
As for bond markets, the still very low yields are forcing people to look for investment opportunities off the traditional beaten track. According to Carmignac, investment opportunities are to be found in emerging market stocks or in stocks in business sectors that are slightly more exposed to economic trends.
In commodities, a growing group of analysts (including Glencore and Goldman Sachs) see the possibility of oil returning to $100, a level last seen in 2014.
Justifying future rises would be, in particular, the prospect of tight supply relative to demand coming forward in the coming months.
The era of expansionary monetary policies to boost the economy is coming to an end, after the FOMC announced a change in monetary policy, predicting a double hike in interest rates by 2023, which is also affecting gold and silver.
Markets were surprised by the change in the Fed’s policy forecast and Treasury yields rose sharply, increasing risk and driving equities and gold lower and sending the US dollar soaring.
As Ole Hansen Head of Commodity Strategy for BG Saxo points out, gold has suffered its biggest drop in five months. “Although no rate hike is expected before 2023, the fact that the Fed suddenly signalled a willingness to consider tightening was something that unprofitable investment metals took into account and as a result, gold, already on the defensive after being pushed back above $1900, veered lower.”
Gold, which had not traded consistently in the days leading up to yesterday’s FOMC meeting, slumped due to simultaneous movements in the dollar and yields.
Gold remains the most sensitive commodity to interest rates and the dollar, and while the latter reached a two-month high, it was the movements in Treasury yields that spooked the market.
While dollar strength will be a challenge, gold should be able to sustain rising yields as long as it is driven by rising inflation expectations. This, however, is not what we saw yesterday, so once again the million-dollar question is, “Will inflation be a passing phenomenon or more lasting?”. For now, the market is trusting the Federal Reserve’s judgement and until the data potentially proves them wrong, gold, and with it silver, could face another difficult period.
According to analysts at Mps Capital Services, gold prices have punctured various short-term supports, falling below $1,800. This is a negative technical signal as prices have returned below the old bearish trendline that connected the historical highs with those of 2021.
A positive factor is that gold is still trading above the long-term bullish trendline which passes around 1724. Analysts point out that just below it there is also an important static support at 1706, so the holding of these two levels becomes particularly important to avoid the end of the uptrend that would be confirmed by a descent below 1676 dollars.