Market Commentary 8th October 2018

Posted by melaniebond

Market Commentary 8th October 2018

Equity Indices

Equity markets globally had a tough week, with the UK being no exception. The FTSE 100 index fell approximately 2.4% across the week, with a number of blue chip companies listed on the index releasing disappointing results. Ryanair and Royal Mail saw falls after releasing profit warnings, with Tesco shares also falling after posting disappointing half-year profit figures. British American Tobacco (BAT) shares were down around 4.5% on Thursday morning after news from the US that e-cigarettes are being looked at more closely by public health authorities. Shares in consumer staples giants such as Reckitt Benckiser and Unilever were also hit as companies considered to be ‘bond proxies’ (i.e. those which pay reliable steady dividends) were sold amongst a sell off in bonds globally.

Europe

European markets suffered amongst the general risk-off mood towards equities, with the FTSE All World Index – Europe ex UK falling by around 2.7% and the German DAX index falling 1.8%. The sentiment towards European equities did start off positive on Monday morning after a new US-Mexico-Canada trade agreement was agreed which could replace NAFTA, however, concerns around Italy caused markets to quickly extend on the losses seen during the previous week. EU officials weighed in on Italy’s decision to increase its deficit target, leading the Italian government to announce on Wednesday that they would seek a lower deficit target in 2020 and 2021. European bank shares benefitted after this announcement. Whilst Germany also released some positive news regarding robust factory orders and producer prices, the risk off attitude continued to weigh on European shares across the week.

US equities were resilient in the early part of the week, with the market broadly flat until Wednesday, however, sharp falls on Thursday and Friday left the S&P 500 index down by approximately 1.3% for the week. Whilst job growth in the US for September was weaker than expected, the unemployment rate fell to 3.7%, which is the lowest rate since 1969. This provided the Federal Reserve Chairman, Jerome Powell, with ammunition to comment that ‘extremely accommodative’ and low interest rates are not required anymore and there are likely to be several more hikes before rates reach a neutral level. Investors reacted negatively to the suggestion of potentially greater than anticipated rate rises, with US equities falling as a result.

Asia

Asian equity markets followed the weakness seen globally, with the FTSE All World Index – Asia Pacific down by around 3.1% across the week. Asian equities have historically suffered in an environment of rising US interest rates and it was therefore not surprising to see markets in this part of the world falling given the situation in the US this week. Shares in Technology companies and suppliers to companies like Apple fell after their US counterparts saw their share prices lose ground, with Banks and Insurers performing well amidst rising bond yields.

Bond Yields

The 10-Year Gilt yield rose by around 8% across the week, with the yield reaching 1.72% by the end of Friday. Risk-off periods usually see investors ditching equities in favour of government bonds, however, the news from the US on a tightening labour market and hawkish comments from the Federal Reserve prompted investors globally to also sell off government debt. Little progress in the way of Brexit negotiations is also prompting investors to sell Gilts, causing yields to rise as a result.

Europe

Yields in Europe followed a similar trend to the UK, with the 10-Year German Bund yield rising to 0.57% on Friday, an increase of around 21% across the week. Investors usually flock to the security of German government debt during periods where equities are out of favour which causes prices to rise and yields to fall, however, this week investors were negative towards both equities and bonds, with the price of German bunds falling and the yields rising as a result.

The 10-Year Treasury yield spiked at 3.23% on Friday, hitting the highest level seen for the last 7 years. News that we are seeing a 49 year low in the unemployment rate in the US, together with the comments from the Fed’s Chairman Jerome Powell on Wednesday, caused investors to speculate that interest rates may rise faster than expected. This meant a sell off in bonds with yields rising sharply as a result.

Currency

GBP / USD – Current 1.3094 Previous 1.3059

GBP / EUR – Current 1.1377 Previous 1.1233

The pound was up against both the US Dollar and the Euro across the week. After reports circulated on Tuesday that some progress may have been made on the Irish border issue which has been central to the Brexit debate, the pound rose against the Euro, which was being sold off after a senior official from Italy’s ruling party said he believed most of the country’s problems would be solved if it reverted to its own currency. The US dollar strengthened throughout most of the week before weakening slightly on Friday after data showed US job gains in September fell short of expectations.

Commodities

Gold

The Gold spot price rose by around 1.2% across the week, reaching around $1,204 per ounce on Friday. Gold has not been benefitting from any negative sentiment towards equities during recent months, however, with equities and bonds both out of favour this week, there was an incentive for investors to allocate capital towards Gold.

Oil

The price of Brent crude spiked during the middle of the week, exceeding $86 per barrel, before falling back slightly to around $84 per barrel on Friday. This week saw Russia’s energy minister comment that oil prices could hit $100 a barrel soon, with India also allowing businesses which have been hurt by the rising costs of crude oil to start seeking foreign loans to offset the impact. This news added to the general feeling that oil prices are likely to continue to rise.