Market Commentary 10th September 2018

Posted by melaniebond

Market Co

Market Commentary 10th September 2018

Equity Indices

The FTSE 100 had another difficult week with the index falling approximately 3%. A stronger pound versus the dollar did not help the index, which derives circa 70% of revenue internationally. Additionally, falling commodity prices weighed on the index which has a high weighting to miners and oil producers. Concerns regarding global trade and Chinese services data which disappointed dragged down commodity prices more broadly and led the large London listed miners and oil producers to fall.

Europe

Markets also struggled in Europe, with the broad gauge for European equities, the FTSE All World Index – Europe ex UK, falling for five consecutive days and finishing the week circa 2.75% lower. This was mainly driven by the movements in Asia and concerns regarding global trade and the difficulties that emerging markets are facing in the wake of higher US interest rates and a strengthening dollar. The DAX fared a little worse than the overall European index, recording a circa 3.1% fall for the week. With a greater number of export focused companies listed in Germany, the DAX is much more sensitive to developments in global trade and fears in emerging markets than the broader European equity market.

Despite recording a fall for the week, US equities performed much better than UK and European equities, with the S&P 500 finishing the week down by just 0.9%. In a shortened trading week, with no trading on Monday due to the Labour Day public holiday, the S&P 500 pulled back from the highs seen from the previous week. Despite a solid report released on Friday regarding the state of the US jobs market in August, investors were warily eyeing the news headlines for the announcement of a fresh round of trade tariffs against China. President Trump said on Friday he could move “very soon” to impose tariffs on $200bn worth of products with taxes on another $267bn “ready to go on short notice”. That would mean virtually all of China’s US exports could become subject to duties.

Asia

Asian equities also had a tough week with the broad Asia Pacific equities gauge, the FTSE All World Index – Asia Pacific, ending the week down by 2.6%. With the growing concerns of trade escalations with the US, Chinese equities struggled with the CSI 300 falling 1.4% and in Hong Kong the Hang Seng index falling circa 2.7%. Japanese stocks were also under pressure, falling circa 1.7% over the week.

Bond Yields

Looking at UK Gilts, the 10-year yield continued to edge up climbing from 1.40% at the beginning of the week to close at 1.48%. This was 5 basis points higher than where the 10-year yield closed in the previous week at 1.43%. A more positive reading for the August UK Services PMI helped to push yields higher on Wednesday, which painted a more positive picture for the UK economy compared to the less positive Manufacturing PMI and Construction PMI for the month of August which were released earlier in the week. Consumer Inflation Expectations for the third quarter also came in slightly higher, which puts upwards pressure on the 10-year yield.

Europe

Government bond yields in Europe rose across the week, with the 10-year German Bund yield rising from 0.33% to 0.39%. It is quite unusual to note that bond yields rose for the week, despite European equities sharply selling off. This breakdown in correlation where both government bond prices and equity prices fell in tandem across the week is indicative of bonds struggling to perform as we move further through the economic cycle and globally interest rates look set to be on a rising trajectory. It will be interesting to follow whether government bonds continue to offer downside protection over the coming months in the event of any periods of stress in equity markets.

In the US, the 10-year Treasury yield rose from 2.86% to finish Friday at 2.94%. Most of the upwards movement in the 10-year yield was following the release of the US Jobs Report for August, which showed US job growth accelerated in August, with wages having their largest annual increase in nine years. Average hourly earnings rose 2.9% year-on-year (consensus: 2.8%), versus July’s pace of 2.7%.

Nonfarm payrolls surged by 201,000 jobs last month, ahead of the estimate of 191,000, boosted by hiring at construction sites, wholesalers and professional and business services, the Labor Department said. If this increased pace of wage inflation is sustained, then it puts upwards pressure on core inflation going forward and increases the likelihood of the Fed’s pace of interest rate hikes. This in turn raises the yield on US treasuries, notably at the longer 10-year horizon.

Currency

GBP / USD – Current 1.2920 Previous 1.2870

GBP / EUR – Current 1.1183 Previous 1.1080

In a volatile week for sterling, mainly dominated by Brexit news, sterling finished the week higher against both the dollar and euro. Sterling was 0.4% higher against the dollar and 0.9% higher against the euro. Most of the gains against the euro came on Friday after the EU’s chief Brexit negotiator Michel Barnier sounded some positive notes on the UK’s plans about the future relationship with the EU. Sterling remains acutely sensitive to news regarding Brexit at present.

Commodities

Gold

Despite the negative week for equity markets globally, the gold price failed to bounce and finished the week marginally lower at $1,197 per troy ounce, a fall of approximately $4. Continued US dollar strength is seemingly undermining gold prices and structurally a rising rate environment is negative for the gold price. With gold failing to benefit in times of equity market volatility recently, there seems little benefit in having exposure to gold presently.

Oil

Oil prices fell across the week, with the Brent crude price falling from $78.15 to $76.83 per barrel, a fall of approximately 1.7%. As mentioned above this weighed on oil producers listed in London, with the FTSE 100 falling sharply across the week. Much of the sell off was driven on Wednesday as emerging-market stocks continued to fall, while a basket of the most-vulnerable currencies dipped to the lowest in more than a year. Oil is falling amid concern that “emerging-market contagion is going to suppress economic growth and limit demand,” said Gene McGillian, manager of market research at Tradition Energy

Portfolios

Following a challenging week for equities and with bond yields rising, all portfolios recorded losses. All Growth Portfolios, including the Super Cautious Portfolio, underperformed their benchmarks. Score 2 Growth was down -1.54% and the higher risk portfolios fell by a greater amount, with Score 6 falling the most at -2.64%. The Super Cautious Portfolio had the smallest loss at -0.44% and was negatively impacted by rising bond yields, given there is very limited equity exposure in the Portfolio. The passive Lite Portfolios all under performed their benchmarks and fared a little worse than the Growth Portfolios. Score 2 Lite had the smallest loss at -1.65% and Score 6 had the largest loss at -2.89%. This indicates the benefit of active management in periods of market stress, where downside can be more limited than the overall falls in the major market indices, which is what the Lite portfolios track. The Ethical and Ethical Bias Portfolios performed similarly to the Growth Portfolios and there was little to separate the performance here. Score 2 Ethical Bias recorded the smallest loss at -1.41% and Score 6 Ethical Bias fell the most at -2.63%.

h September 2018