Market Commentary 17th December 2018

Posted by melaniebond
Market Commentary 17th December 2018
Equity Indices
The FTSE 100 ended the week 1.8% up at 6,845 as investor optimism improved following positive comments from the USA and China over the ongoing trade war. This fed through to global markets with most indices up. Early week gains were not hugely affected by the vote of no confidence in Theresa May on Wednesday, with the FTSE 100 broadly flat through the second half of the week. Political stability is good for markets and therefore the news that the Prime Minister will be in power for at least the next year helped to offset the continued volatility caused by Brexit negotiations.

Mining companies fared well this week, with the sector as a whole up over 4%, led by Anglo American up almost 8%. It was a bad week for the big four supermarkets, with Tesco, Morrisons and Sainsbury’s all losing market share. Sainsbury’s were the worst affected, with its share price down 6.5%.

European equity markets followed UK markets with early gains before dropping off slightly towards Friday. The DAX was up 2.3%, with the FTSE All World Index – Europe ex UK up 1.4%. Increased positivity over the US/China trade war, coupled with slightly improved political stability in the UK, helped push markets up. However, gains were tempered with the news that a revised Italian budget had been rejected and growth forecasts in Germany being cut. Continued protests in France and news that business in the Eurozone is expanding at its slowest pace in 4 years caused a downbeat end to the week in European markets.
US equities fared badly this week with the S&P 500 ending the week 1.4% down. Despite President Trump tweeting about “Very positive conversations” with China and a continued freeze in tariffs, there is still ongoing concern over weak economic data from China. Talks between the two nations have been complicated by the recent arrest of Meng Wanzhou, CFO of Huawei, with China stating that the arrest is politically motivated. Despite Trump’s positive tweets, there are fears that talks could breakdown, leading to increased tariffs in early 2019. As such, whilst the UK and European markets posted gains following Trump’s comments, US markets are still wary.

Pharmaceutical giant Johnson & Johnson saw a drop of 8.5% in the face of thousands of lawsuits, as claims were made that they knew about asbestos tainting in their talcum powder since 1971.

Although markets in Asia mirrored the trend of equities in other regions, Asian equity indices were the most volatile over the week. The FTSE All World Index – Asia Pacific was up by 0.5% across the week and Japan’s Nikkei 225 index was up by 0.8%. Both indices had seen large gains earlier in the week, however continued uncertainty over trade relations between the USA and China, coupled with a survey by Japan’s central bank showing business conditions are expected to worsen, caused late week losses. Asian equities remain most sensitive to the US/China trade discussions.
Bond Yields
The 10-Year Gilt yield rose by 3.3% over the week to reach 1.24% on Friday. The yield rose earlier in the week due to rising equity markets. Investors were happier to invest into equities and UK Gilts were less favourable than other government bonds due to the political uncertainty. Following Theresa May’s victory in the vote of no confidence, Sterling rose, which caused yields to reduce slightly on Friday, albeit they were still up over the week.
10-Year German Bund yields ended the week flat at 0.25%. Bund yields had followed UK Gilt yields up early in the week as a result of rising equity markets. However, with the European Commission rejecting Italy’s amended budget, yields fell over the second half of the week. German Bunds remain a safe haven for investors as German government debt is usually favoured during risk-off periods.
US 10-Year Treasury yields followed their European counterparts in rising throughout the week, before dropping on Friday to finish the week 1% up at 2.89%.

Like the rest of the world, the demand for safe haven assets was dampened early in the week, before a slip in global markets resulted in yields reducing. Weaker than expected economic data from China released on Friday also helped to push yields down.

Following last week, when the yield curve inverted, this week saw yields on 2 and 3 year US government debt remain the same as on 5 year Treasury stocks. This will continue to worry investors, given that the main driver for policymakers to lower interest rates is slowing economic growth.

GBP / USD – Current 1.2583 Previous 1.2726

GBP / EUR – Current 1.1127 Previous 1.1185

Sterling was broadly flat against the US dollar and up 0.6% against the Euro this week. Sterling dropped on Monday as Theresa May called off the Parliamentary vote on Brexit, but rebounded strongly over the week as May won her vote of no confidence. Sterling remains at 20 month lows, although weak European economic data helped Sterling post gains against the Euro.

The Gold spot price fell by around 0.4% to $1,239 per ounce on Friday. With equity markets generally up over the week, the gold price dropped slightly. However, with investor confidence in the markets still low, Gold prices remained stable as investors were reluctant to move too much money from safe-haven assets to equities.
Oil prices remained stable throughout the week, with Brent Crude ending Friday 0.5% up at $60 per barrel.

The decision by OPEC and their key allies, including Russia, to cut oil output from January has resulted in a more stable oil price over the past few weeks.