Market Commentary 14th January 2019

Posted by melaniebond
Market Commentary 14th January 2019
Equity Indices
The FTSE 100 ended the week 1.6% up at 6,918 as the USA and China held negotiations over their ongoing trade dispute and reports indicated that signs of an agreement were positive. The summit was extended by a day as president Trump tweeted that talks were going well. This extension was seen by many as an indication that the two countries were determined to reach an agreement.

This positivity fed through to all global markets and the FTSE was threatening to break through 7,000 points on Thursday before dropping back as a result of an increase in Sterling. With the papers citing cabinet ministers as saying that Brexit may be delayed, Sterling rose against the Dollar and Euro, which negatively impacted the export-heavy FTSE index.

Tesco was the big winner of the week as it released strong Christmas sales figures and ended the week 8% up. However it was a mixed bag for the other big supermarkets as Aldi and Lidl continued to increase their market share.

European equity markets followed UK markets with early gains before dropping off slightly towards Friday. The DAX was up 1.3%, with the FTSE All World Index – Europe ex UK up 1.7%.

Increased positivity over the US/China trade war, coupled with the news that Brexit may be delayed, helped push markets up. News that Germany’s industrial output fell pointed to   a slowdown in the Eurozone’s largest economy and with continued protest in France it was a week of cautious optimism on the Continent.

US equities also fared well this week with the S&P 500 ending the week 1.8% up, with the NASDAQ and Dow Jones also each up over 2%.

The US released better than expected jobs data the preceding Friday and the head of the Federal Reserve, Jerome Powell, publicly stated that he was positive on growth prospects and would be cautious with further interest rate rises. These factors helped allay concerns that the US was heading towards recession, and with the week’s trade talks with China progressing well, US markets reacted positively.

There are continued concerns as the US Government shutdown became the longest in history over the weekend, however it appears as though markets are waiting to see how it is resolved before reacting.

Asian markets benefitted most from the positivity coming out of the US and China. Due to its proximity, both geographically and economically, to China, Asian markets are the most volatile when news emerges from China. The FTSE All World Index – Asia Pacific was up by over 2% across the week and Japan’s Nikkei 225 index was up by 1.6%.

With a spokesman for China’s foreign ministry stating that “If it’s a good outcome, it doesn’t just benefit the US and China, but it is also good news for the world economy.” it is clear that a resolution to the protracted dispute is beneficial to markets as a whole.

Bond Yields
The 10-Year Gilt yield rose by 3.2% over the week to reach 1.29% on Friday. The rising yield was due to an increase in equity markets as investors were happier to reallocate capital back to equities and away from bonds.
10-Year German Bund yields ended the week up 9% at 0.24%. Bund yields had followed UK Gilt yields up early in the week as a result of rising equity markets, reaching a 1 month of high of 0.28% on Wednesday, having been as low as 0.15% less than 2 weeks ago. With ongoing discussions on Italy’s amended budget, continued French protests and Brexit uncertainty, German Bunds remain a safe haven for investors.
US 10-Year Treasury yields ended the week flat at 2.7%. Early week rises were seen as the demand for safe haven assets was dampened by rising equity prices.

However, credit rating agency Fitch warned that the continued government shutdown could cause the country to lose its AAA credit rating. This potential downgrade would be a serious blow and makes US bonds less attractive than bonds issued by other countries. Further data showing cooling consumer and factory production inflation in China was released late in the week, which combined with Fitch’s statement pushed yields back down by close of business Friday.

GBP / USD – Current 1.2855 Previous 1.2723

GBP / EUR – Current 1.1196 Previous 1.1164

Sterling ended the week 1% up against the US dollar and up 0.3% against the Euro this week. Sterling fared well this week following reports that Brexit may be delayed. This news saw Sterling climb against the Euro. Growing expectations that the Federal Reserve may pause interest rate hikes weighed on the Dollar, which helped see Sterling post further gains, up nearly 2% in 2019.

The Gold spot price ended the week flat at $1,290 per ounce on Friday. Any potential outflows to equity markets were tempered by a falling Dollar with foreign investors weighing up buying back into equities as they rose with Dollar denominated gold becoming relatively cheaper due to currency exchanges.
Oil prices continued to rise this week, with Brent Crude ending Friday 5.5% up at $60.48 per barrel.

The OPEC production cuts, coupled with positivity in both equity markets and with US/China trade talks, has helped stabilise oil prices. As such oil prices are rising back up following a torrid final quarter of 2018.

Despite this, Asda has continued to cut forecourt prices. Asda are generally the first supermarket to cut prices, with others following shortly, which is good news for motorists.