Market Commentary 13th August 2018

Posted by melaniebond

Market Commentary 13th August 2018

Equity Indices

The FTSE 100 finished the week virtually unchanged, with falls on Thursday and Friday, prompted by concerns regarding the Turkish economy and a rapidly depreciating Turkish lira, erasing the gains made earlier in the week. A stronger dollar and weaker sterling had helped to push the index higher at the beginning of the week.

Europe

Things were somewhat bleaker, with the broad gauge for European equities, the FTSE All World Index – Europe ex UK, falling circa 2% over the course of the week. European equities lacked direction through the first half of the week and on Thursday and Friday contagion fears from the Turkish economy and rapidly depreciating currency dragged the European index lower. Whilst the issues in Turkey are seen as isolated and are unlikely to have a meaningful impact on economic activity across Europe, there are concerns that certain European banks may suffer as a result of their debt exposures in Turkey, which eroded investor’s confidence in European equities.

In the US, the S&P 500 finished the week down by approximately 0.6%. The benchmark index remained around its record highs for most of the week, before edging back in the final two trading days of the week, mirroring the trend seen in most global equity markets regarding the concerns in Turkey. There was also continued threats exchanged between the US and China regarding further tariffs, however, it was the issues in Turkey that were driving markets at the end of the week.

Asia

The Broad Asia Pacific Equities gauge, the FTSE All World Index – Asia Pacific, finished the week slightly ahead by 0.2%. Again, much of the gains made earlier in the week were erased across Thursday and Friday as concerns regarding the Turkish economy put a number of emerging market currencies under pressure and a resulting sell off in Asian equities.

Bond Yields

Gilt yields continued to fall throughout the week, with the 10-year Gilt yield falling by circa 6 basis points to 1.24%, moving lockstep with a depreciating sterling, as investors were buying gilts in the aftermath of the Bank of England’s decision to raise interest rates in the previous week. Whilst this might seem paradoxical, with rising interest rates expected to push gilt yields higher, the Bank’s decision to raise interest rates was highly anticipated by markets with gilt yields having already priced much of the move in, however, it was the comments from Governor Mark Carney regarding the risks ahead regarding Brexit and the path for future interest rate hikes that drove gilts yields lower. Carney’s comments regarding the increased probability of a no deal Brexit would limit the Bank’s ability to further increase rates, thus disrupting any perceived start of a slow and gradual interest rate hiking cycle, this makes gilts more attractive if interest rates are anticipated to stay at these low levels for longer.

Europe

Falling government bond yields were also the trend in Europe, with the 10-year German bund yield falling circa 7 basis point to finish the week at 0.31%. It was only two weeks ago that this had been at 0.45%, therefore seeing yields fall by almost a third over this period. The concerns in Turkey drove much of the fall in yields at the end of the week, as investors rushed to buy the safety of high quality government bonds.

Bond yields also edged downwards in the US, with the 10-year Treasury yield falling circa 7 basis points to 2.87%. In relative terms this is a much smaller move than in the UK and Europe, due to yields being that much higher in the US.

Currency

GBP / USD – Current 1.277 Previous 1.3018

GBP / EUR – Current 1.1189 Previous 1.1229

It was a difficult week for sterling, depreciating against both the dollar and euro. The pound depreciated by circa 2% against the dollar and a more limited 0.1% against the euro. Sterling had fallen by almost 1% against the euro by the middle of the week, however concerns regarding Turkey weighed on the euro allowing sterling to recover some of the losses against the euro. Sterling has been under pressure following comments from both the International Trade Secretary Liam Fox and Bank of England Governor Mark Carney about the possibility of a no-deal Brexit when the UK leaves the European Union. This raises questions about the path for future interest rate rises, which weighs negatively on the currency. Market participants are also attempting to hedge their currency exposure to sterling, which further weigh on the currency.

Commodities

Gold

Gold was relatively unchanged over the week, finishing up at $1,210 per troy ounce. A stronger dollar and a rising rate environment in the US continue to weigh on the gold price. Even with the concerns in Turkey and a risk off move in markets at the end of the week, Gold failed to rally and remains anchored in this $1,200 range. With continued dollar strength and a rising interest rate backdrop, it is difficult to see a catalyst for gold moving higher, barring any unexpected financial shocks which see investors seeking gold as a safe haven.

Oil

Brent crude fell over the week, finishing lower by $1 at $72.81 per barrel. This is despite the US’s decision to re-instate sanctions against Iran, raising the prospect of tighter global supplies.

Portfolios

Despite the negative end to the week, the Growth portfolios across all risk scores recorded positive performance, however only the score six portfolio outperformed its benchmark, with the remaining risk score portfolios falling slightly behind. Overall the Growth portfolios demonstrated resilience in the face of negative equity market moves at the end of the week. The passive Lite portfolios performed better than the main Growth portfolios, with all but the score three risk portfolio, which was 1 basis point behind its benchmark, outperforming their benchmarks. The Ethical and Ethical Bias portfolios delivered similar performance to the Growth portfolios, however performance across all risk scores were slightly behind their benchmarks.