Market Commentary 10th December 2018

Posted by melaniebond

Market Commentary 10^th December 2018

Equity Indices

It was a difficult week for equities globally and the UK stock market was no exemption, with the FTSE 100 down by 4% across the week. The sentiment of investors across the globe was strongly risk-off during the week and with capital flowing away from equities, the FTSE 100 fell to a 2 year low. Stocks across all sectors were dragged down, although housebuilders such as Persimmon, Berkeley and Taylor Wimpey posted gains for the week. A stable oil price also helped Shell & BP to recover some of the week’s losses during trading on Friday.

Europe

European equity markets were negative across the board, with German equities in particular suffering as the trade war concerns which have affected markets for months resurfaced. The German DAX index was down by 5.9% across the week, with the broad FTSE All World Index – Europe ex UK down by 3.6%. Concerns regarding slowing global growth appeared to be the main contributor to the risk off attitude in markets this week. Consequently financial stocks, such as banks and insurers, were some of the worst performing European equities given their sensitivity to changes in economic growth.

US equities fell during Monday and Tuesday. The stock market in the US closed on Wednesday for George Bush Senior’s funeral, but upon opening again on Thursday stocks resumed their downward trajectory. The S&P 500 index was down by 5.6% for the week. Concerns regarding a slowdown in the global economy rattled investors and with little in the way of updates regarding US-China trade, markets continued to remain jittery regarding the uncertainty. Technology stocks were notably impacted during the sell off, with Apple’s share price falling nearly 10% across the week.

Asia

Although markets in Asia mirrored the downward trend of equities in other regions, Asian equity indices held up relatively well. The FTSE All World Index – Asia Pacific was down by 3.5% across the week and Japan’s Nikkei 225 index was down by 4%. Japan and China both published weaker than expected economic data during the week which added to worries about the global economy. The US and China have agreed to a truce on implementing further tariffs, but as they negotiate a trade deal over the coming months, Asian equities are likely to remain sensitive to the issue.

Bond Yields

The 10-Year Gilt yield was around 1.27% on Friday after yields fell approximately 3% across the week. The risk-off mood with investors across the globe saw capital flowing into bonds this week, however, continued uncertainty regarding Brexit meant that UK Treasury stocks were less favourable than other government bonds.

Europe

10-Year German Bund yields fell by 19.4% across the week to reach approximately 0.25% on Friday. Yields on German government debt have moved around significantly during the last 12 months, with current yields on 10 year Bunds some 70% lower than the 12 month high seen in February. German government debt is usually favoured during risk-off periods and it was therefore no surprise that a significant amount of capital flowed into these assets during the week.

US 10 Year Treasury yields fell by 4.4% across the week. As well as being a benefactor of capital flowing out of equities, yields were also pushed lower following data being published which showed that US job growth slowed in November and wage increases were lower than expected. Given the recent suggestion that the Fed will look to adopt a data driven approach at future rate setting meetings, this data lowered investor’s expectations for the speed of interest rate hikes in the near future. This week saw yields on 2 and 3 year US government debt exceed those of 5 year Treasury stocks. This is known as the yield curve inverting and essentially means that the market thinks interest rates will fall within the next 5 years. This is the first time the yield curve has inverted since 2008 and this worried investors, given that the main driver for policymakers to lower interest rates is slowing economic growth.

Currency

GBP / USD – Current 1.2726 Previous 1.2784

GBP / EUR – Current 1.1185 Previous 1.1276

Sterling was down by approximately 0.5% against the US dollar and 0.8% against the Euro this week. The Pound weakened amidst further political unrest in the UK as the vote in Parliament on the proposed EU withdrawal agreement neared. The US Dollar also weakened during the week on expectations of US interest rate rises slowing in the near future.

Commodities

Gold

The Gold spot price rose by around 1.5% to approximately $1,250 per ounce on Friday. Gold was seemingly a beneficiary of the capital flows out of equities across the globe, with a weaker US Dollar also making gold trades priced in USD more attractive to international investors.

Oil

After falling throughout the week as a result of concerns around slowing economic growth, oil prices rose on Friday as OPEC and their key allies, including Russia, agreed to cut their output of oil from January. This resulted in the price of Brent crude being broadly unchanged for the week, with prices around $62 per barrel on Friday.