Market Commentary 21st January 2019

Posted by melaniebond

Market Commentary 21^st January 2019

Equity Indices

The FTSE 100 index was up by 1.6% across the week. After rising by around 0.5% on Monday, the index pulled back throughout the remainder of the week before a sharp rally on Friday left the index just below the 7,000 mark at 6,968. The political noise coming out of the UK regarding the ‘Brexit deadlock’ in parliament had some impact on UK equities, but reports that US officials may pull back on Chinese import tariffs were seemingly the main driver for the upward movement this week.

Housebuilders were the stand out performers in the FTSE 100 this week, with Persimmon PLC up by around 7% and Barratt Developments PLC up by around 5%. ITV shares were down by around 4% across the week after Bank of America Merrill Lynch said that traditional TV viewers are disappearing faster than previously expected.

Europe

European equity markets also fared well this week, with the FTSE All World Index – Europe ex UK rising by around 1.8%. Germany’s DAX was up by 3.2% for the week, with the trade sensitive index benefitting from the progressive comments from the US regarding China.

European banking stocks benefitted from Theresa May’s Brexit withdrawal agreement failing to achieve parliamentary support, with investors deeming a no deal scenario as less likely, however, this sector was then hit on Thursday after Europe’s sixth largest bank, Société Générale, issued a profit warning. Automakers were the strongest performing sector on Friday, with stocks in this sector continuing to benefit when trade war talks turn positive.

Despite the already prolonged US government shutdown, US equities were the strongest performing region this week, with the S&P 500 index up by around 3.4%. The index posted gains each day of the week, with a significant rally on Friday. Reports surfaced which suggested that China had offered to increase purchases of US goods over the coming years, potentially resulting in the US trade deficit with China closing by 2024. These reports, coupled with news that US officials may look to reduce tariffs on Chinese imports, provided a boost to US equities late in the week.

Investors continued to digest a new round of earnings reports for quarter 4 of 2018, which were generally strong. Tesla shares fell by around 10% across the week after the company issued a profit warning and announced job cuts. VF Corporation, the parent company of Vans and The North Face, saw their share price rise by around 15% last week after reporting better than expected earnings.

Asia

Asian markets benefitted the least during the week’s rally in global equity markets, with the FTSE All World Index – Asia Pacific rising by 1.6%. Most indices in the region were flat for the week, with Chinese shares amongst the strongest performers. Japanese stocks struggled as the Yen strengthened, with notable weakness in the automobile and financial sectors.

Data released during the week confirmed disappointing figures for Chinese foreign trade in December, however, this news did not come as a surprise to the market and exports growth for 2018 as a calendar year were still strong at 9.9%.

Bond Yields

The 10-Year Gilt yield rose to around 1.35% on Friday, 3.8% higher than the start of the week. Theresa May’s defeat in the commons did cause yields to decline sharply when the market opened on Wednesday, however, this was reversed by the rally in equities dampening the demand for government debt later in the week.

Europe

10-Year German Bund yields rose 13% across the week to around 0.26% on Friday as the risk on mood of investors during the week saw capital flow away from government debt in Europe. The spread between German Bund yield and Italian sovereign debt narrowed as concerns on Italy’s fiscal policy faded.

US government debt followed a similar pattern to fixed interest markets around the globe, with 10-Year Treasury yields rising to around 2.78% on Friday, an increase of 3% across the week. The US treasury yield curve edged back towards the normal upward sloping shape as the yield on 5-Year Treasuries rose 0.1% higher than the yield on 2-year stocks. This came as the market digested comments from Federal Reserve officials suggesting that interest rate rises in 2019 may be less aggressive than last year. US debt markets have had little to react to this week in the way of economic data, with the government shutdown delaying the release of important data such as retail sales.

Currency

GBP / USD – Current 1.2872 Previous 1.2855

GBP / EUR – Current 1.1330 Previous 1.1196

Sterling strengthened during the week and was up by 0.13% against the US Dollar and 1.2% against the Euro. The Brexit impasse in Parliament resulted in EU leaders stating they will attempt to resolve matters to reduce the disruption of Brexit and chancellor Philip Hammond also told business leaders that a no deal scenario will be taken off the table.

Commodities

Gold

The Gold spot price fell by 0.75% across the week, reaching $1,282 per ounce as investors chose to allocate capital away from precious metals. A strengthening US dollar during the week also reduced the demand for investors purchasing gold with cash in other currencies.

Oil

Oil prices continued to rise this week, with Brent crude posting a rise of around 6.3% to reach $62.70 dollars per barrel on Friday. OPEC published new quotas for its member countries under the production cut plans which have been in force since the start of the year, with this continuing to have the desired effect of propping up prices.