Market Commentary 1st October 2018

Posted by melaniebond

Market Commentary 1^st October 2018

Equity Indices

The FTSE 100 continued to build on the positive performance of the previous week, rising throughout most of the week before experiencing a pull back on Thursday and Friday to finish the period up by around 0.7%. With oil prices continuing to climb, BP and Shell saw their share prices rise during the week, with EasyJet’s share price declining. Next was a notable performer, with their share price rallying around 8% on Tuesday after raising their profit guidance for the year.

Europe

European equity markets performed less favourably for the week, with the FTSE All World Index – Europe ex UK falling by around 1.3% across the week. The German DAX index was down by around 0.8%. The beginning of the week saw a return to European markets reacting negatively to trade war issues, with markets falling as the latest round of US-China tariffs came into effect. Further worries regarding instability in the Italian government and a higher than expected budget deficit target caused investors to be nervous later in the week, with European bank shares in particularly negatively impacted.

The S&P 500 index fell by around 0.5% between Monday and Wednesday, before recovering slightly to finish the week down by approximately 0.2%. Equity markets fell as the Trump administration re-affirmed its protectionist approach and hard-line stance on international trade, with the US Trade representative stating that they are prepared to move ahead on a trade deal with Mexico that excludes Canada. As the third quarter drew to a close, the rhetoric on the US economy was largely positive, although some analysts warned that earnings and profits which will be released for the third quarter may not be as strong as those for the first half of the year. The late week bounce back in equity markets was largely attributable to the giants of the tech sector, with Apple, Facebook, Alphabet and Twitter all rising on Thursday.

Asia

Asian equities started the week positively, before falling back on Wednesday as markets digested the Federal Reserve’s decision to raise US benchmark interest rates by a further 0.25%. The FTSE All World Index – Asia Pacific index was down around 0.6% after the Fed’s decision was announced, however, markets did recover on Friday, with the index finishing the week up by around 0.15%. This came amidst positive news in Japan, with data showing that unemployment has fallen further with industrial output and retail sales up compared to the previous year. Japan’s Nikkei 225 index reached its highest intraday level for 27 years on Friday morning.

Bond Yields

The 10-Year Gilt yield fell slightly across the week to around 1.57% on Friday. This week saw no notable progress in Brexit negotiations and there was little in the way of economic data released for the UK. The Office for National Statistics (ONS) confirmed that the UK’s current account deficit widened to -£20.3 billion for the second quarter of the year, which was higher than expected, but there was nothing else notable released during the week to cause any significant moves in Government Bond yields.

Europe

Government bond yields rose during the early part of the week after the European Central Bank President Mario Draghi said that he sees a “relatively vigorous” pickup in Eurozone area inflation. This rise in yields was short lived however, with the 10-Year German Bund yield falling back to finish the week at 0.47%, a fall of around 8% across the week. After negotiating for two months, the Italian government announced on Thursday evening that it has decided to increase the 2019 budget deficit to 2.4% of GDP, which was significantly higher than the expected deficit target of 1.5-2%. This announcement saw investors allocating capital towards the security of German Bunds, with the spread between yields on Italian and German government debt widening significantly.

The 10-Year US Treasury Yield rose slightly during the early part of the week ahead of the Federal Reserve’s decision to raise interest rates, before falling slightly to finish the week down marginally at 3.06%. The Fed confirmed that US inflation hit their preferred inflation gauge for August, and the chair of the Fed, Jerome Powell, told reporters on Wednesday that they don’t see inflation being higher than their expectations in the near future. This caused yields on US government bonds to fall slightly from the 3.09% level seen at the start of the week.

Currency

GBP / USD – Current 1.3059 Previous 1.3271

GBP / EUR – Current 1.1233 Previous 1.1132

Sterling fell by around 1.6% against the US Dollar across the week, whilst rising by 0.9% against the Euro. With little news to impact Sterling directly, these moves were largely caused by a strengthening US Dollar and a weakening Euro. News that inflation in the US hit the Fed’s preferred inflation gauge during August prompted a rise in the Dollar. Italy’s announcement on its target budget deficit was deemed to be in direct defiance of the EU’s guidance and made investors nervous about the country’s debt situation. As a result the Eurozone currency fell throughout Friday.

Commodities

Gold

The gold price was down by around 0.7% across the week, with the price per troy ounce sitting at around $1,190 on Friday. A strengthening US dollar is usually a negative driver for gold prices, with the precious metal posting a monthly decline for September. This was the sixth straight monthly decline in the gold price.

Oil

The price of Brent Crude continued to rise, finishing the week at around $83 per barrel. The price rise came as OPEC agreed to take no further action to increase production even as supply from Iran continues to decline. The price has been rising ahead of Iran sanctions coming into effect in November, but this lack of action by OPEC caused the market to fear that greater supply issues may be on the horizon. The general consensus is that oil prices will continue to rise from current levels over the coming months, with analysts debating whether or not prices will reach $100 per barrel during 2019.

Portfolios

With mixed performance in equity and bond markets, most portfolios were marginally up for the week. The lower risk Score 2 and Super Cautious growth portfolios experienced slight falls of 0.04% and 0.05% respectively, with all other strategies posting positive performance ranging between 0.1% and 0.5% for the week. All growth portfolios marginally underperformed against their benchmarks, apart from the Score 6 strategy. The Ethically Biased portfolios all posted positive performance for the week, with Score 6 again being the only strategy to outperform its benchmark. Performance for the ‘pure’ ethical portfolios was not as strong, with all of the risk strategies posting a slight loss and underperforming against their benchmarks. The passive Lite portfolios were all positive across the week, with gains ranging between 0.07% and 0.38%. As with the actively managed portfolios, the only risk score to outperform its benchmark was the Score 6 – Very Adventurous strategy.