Market Commentary 15th October 2018

Posted by melaniebond

Market Commentary 15th October 2018

Equity Indices

The FTSE 100 fell by approximately 3.3% across the week to the lowest level seen since April. Concerns regarding higher interest rates in the US continued to be the main driver, with markets reacting negatively to the possibility of rate rises being steeper than expected. The FTSE 100 also suffered after the Bank of England commented on the risks a no deal Brexit would pose to banks, with the Bank also highlighting concerns regarding lending to risky businesses in the UK. Burberry shares fell around 9% on Wednesday after Morgan Stanley said that its sales prospects in China are poor, making it one of the worst performing stocks of the index this week. Tobacco stocks continued to perform poorly this week with Imperial Brands and British American Tobacco both falling sharply on Friday. Lower oil prices also had a negative impact on Shell and BP shares during the week.

Europe

The FTSE All World Index – Europe ex UK fell by around 2.8% across the week, with the German DAX index sliding by approximately 3.5%. European equities had a difficult week amidst the sell off in equities globally, with continued concerns around the Italian government disagreeing with the EU on its fiscal stance also making investors nervous. After Italy’s government said it wouldn’t back down from its budget plans, a sell off in Italian government debt and shares in Banks and Financials ensued, with investors fearing that Italy’s credit rating may be downgraded in the near future.

The S&P 500 index fell by around 5.2% between Monday and Thursday, before recovering slightly on Friday to finish the week down by around 4%. US equities continued to fall after concerns regarding higher than expected interest rate rises took hold. President Trump also expressed his dissatisfaction at the Central Bank, saying that the Fed is ‘going loco’, which appeared to fuel the sell-off in equities even further. Technology stocks in particular suffered during the sell off, with analysts (including Barclays) commenting that these companies are likely to post disappointing results in the upcoming earnings season.

Asia

Asian stocks were badly impacted during the global market turmoil this week, with concerns about a slowing domestic economy in China also hurting investor sentiment. The FTSE All World Index – Asia Pacific had fallen by around 4.1% by Thursday, before rallying on Friday to finish the week down by 2.9%. Concerns about the Chinese government trying to reduce the reliance of companies on debt-fuelled growth, as well as the fallout of US-China tariffs, lead to falls in shares listed on the Shanghai Stock Exchange. Japan’s Nikkei 225 Index hit its lowest point for 2 months during the week as a strengthening Yen caused exporting companies (such as those in the Automobiles sector) to decline.

Bond Yields

10-Year UK Gilt yields fell slightly across the week to reach to 1.63% on Friday. The fall in yields came as mixed news for the UK was released during the week. The Government’s City minister, John Glen, confirmed on Monday that he agrees with Bank of England estimates which show 5,000 financial services jobs moving from London to the EU by March 2019. The Office for Budget Responsibility said on Tuesday that a no deal Brexit could have a severe impact on the UK economy and public finances. On the flip side, Chancellor Philip Hammond said at the International Monetary Fund annual meeting on Friday that Brexit negotiations are progressing and that the UK could see an increase in economic growth if a deal is reached.

Europe

Yields on 10-year German Bunds fell 6% across the week to reach 0.5% on Friday. Yields on Italian government debt rose during the week as concerns around the Italian government’s fiscal plans continued, with some analysts commenting that Italian sovereign debt is likely to receive a downgrade by credit rating agencies in the coming months. Consequently, the spread between Italian and German government debt increased to the widest point for around 5 years.

10-Year Treasury yields in the US pulled back slightly across the week to reach 3.16% on Friday. The decrease in yields came as the US Labour Department said consumer prices rose 0.1% during September, below expectations of around 0.2%. Although inflation is expected to continue to pick up due to a tight labour market prompting wage growth, this announcement did make bonds appear more attractive to investors with a rising demand for government debt in the US causing yields to fall slightly.

Currency

GBP / USD – Current 1.3159 Previous 1.3094

GBP / EUR – Current 1.1378 Previous 1.1377

Sterling rose by approximately 0.5% against the dollar during the week and was broadly flat against the Euro. Improved sentiment on a Brexit deal being reached helped Sterling to maintain ground, with a falling US dollar on news of weaker than expected inflation also benefitting the GBP to USD exchange rate.

Commodities

Gold

The Gold spot price increased by around 2.4% across the week to reach $1,217 per ounce on Friday. Gold prices reached an 11 week high as trading volumes increased significantly, prompted by falls in equity markets across the globe. Gold has been struggling to benefit from volatility in equity markets in recent months as US equity markets have remained strong when other regions have performed poorly, however, with US equities also suffering this week, investors chose to allocate capital towards Gold.

Oil

The price of Brent crude fell by around 4% this week as OPEC revised down global demand forecasts for this year and 2019, citing risks from trade wars and weakening finances in Emerging Markets. Analysts still believe Oil prices will continue to rise in the short term as US consumption remains strong and geo-political issues continue to disrupt supply