Stocks Retreat in June on Stimulus Tapering Concerns
Dr. Jan-Carl Plagge, Head of Applied Research
Europe stocks fall, euro rises as investors price in a potential reduction in ECB monetary support.
Global stocks fell in June when measured in euros, and the common currency jumped, on investors’ expectations the European Central Bank may be preparing to reduce its extraordinary monetary stimulus.
The STOXX® Global 1800 Index retreated 1% in euros1 for the month but rose 0.4% in dollar terms. The EURO STOXX® 50 Index of companies in the Eurozone dropped 3%, its worst monthly performance in one year. The pan-European STOXX® Europe 600 Index fell 2.5%.
The STOXX® USA 900 Index, measured in dollars, rose 0.7% for an eighth straight month of gains.
ECB President Mario Draghi said at a speech in Portugal on Jun. 27 that deflationary forces in the Eurozone have been replaced by reflationary ones, and that the central bank will need to “accompany” the region’s burgeoning economy. Investors interpreted the comments as sign that the existing monetary stimulus is nearing the beginning of its end.
While Draghi was far from suggesting policy tightening is near – in fact he reiterated that “a considerable degree of monetary accommodation is still needed” – the market move nonetheless highlights the sensitivity that asset prices have to stimulus after years of extraordinarily loose policy.
Draghi’s presentation coincided with newly hawkish comments from the heads of the Bank of Canada and the Bank of England.
June’s performance pared a one-year rally for European equities, as markets have reacted positively to ballot defeats of populist parties this year and signs build up that the Eurozone economy is gathering pace. The EURO STOXX 50 Index is still up 6.7% in 2017 and 23% since June 2016.
The common currency rose 1.6% against the dollar last month. The STOXX EURO STOXX 50 Corporate Bond Index was little changed in June after posting its biggest four-day retreat since November 2016 during the month.
UK stocks retreat following national vote
The STOXX® UK Total Market Index decreased 2.6% in local currency terms and 3.4% in euro terms last month after Prime Minister Theresa May lost her Parliamentary majority in a general election, casting further doubt on the UK’s process of leaving the European Union. It was the third-worst performance among 64 national indices tracked by STOXX, with only benchmarks for Portugal and Belgium faring worse.
Banks, financial-services companies lead advance
The STOXX® Global 1800 Banks Index led gains in June among 19 industries after rising 4.1%, taking its advance in the past year to 39%.
The Federal Reserve approved plans for all 34 of the biggest US banks to raise dividends and to buy back shares, a sign the central bank judged their capital situation secure enough. It was the first time in seven years of so-called annual stress tests that every bank assessed by the Fed won the approval.
The STOXX® Global 1800 Financial Services Index and the STOXX® Global 1800 Health Care Index followed, with respective gains of 2.5% and 1.3%.
The three worst performing industries during the month were the STOXX® Global 1800 Retail Index, the STOXX® Global 1800 Technology Index and the STOXX® Global 1800 Telecommunications Index. All three retreated more than 4%.
1 Performance figures are net of dividends.
EURO STOXX® 50 Index
STOXX® Global 1800 Index
STOXX® Europe 600 Index
STOXX® UK Total Market Index