Market Commentary 28th January 2019

Posted by melaniebond
Market Commentary 28th January 2019
Equity Indices
The FTSE 100 ended the week 2.3% down at 6,809 as a jump in the value of Sterling had negative consequences for companies which generate a lot of their income abroad. The Oil giants (BP and Shell) were particularly hit by a stronger Sterling, and as these companies represent c15% of the index, their poor performance weighed heavy. The weekly loss was the first in 2019 and ended a 4-week winning streak.

The FTSE 250, generally seen as generating more of its income in Sterling, fared slightly better, albeit still ending the week 0.6% down. The increase in Sterling was not felt as strongly, however the index is not totally immune from currency movements and coupled with poor economic data from China and weakening IMF growth forecasts, saw slight losses across the week.

Airlines fared well this week after a positive research note from analysts, with EasyJet up over 10% and AIG (owners of British Airways) up 1.5%. The biggest loser of the week was FTSE 250 Metro Bank, which lost 34% over the week as it revealed that it had misclassified the risk of almost £1.5billion of loans.

European equity markets fared well on Thursday and Friday, wiping out early week losses to end the week up. The DAX was up 1.3%, with the FTSE All World Index – Europe ex UK up 0.8%.

The IMF trimmed global growth forecasts on Monday (citing geopolitical tensions, a China slowdown and risks of a no-deal Brexit), which hit European markets. However, hopes of a US/China trade deal, and reports that Labour may back a motion to eliminate a no-deal Brexit, helped push European markets into positive territory by the end of the week. The ECB also announced they would leave interest rates unchanged, which eased investor fears that the bank would begin to tighten monetary policy.

US equities also fared well this week with the S&P 500 ending the week 1.2% up, with the NASDAQ and Dow Jones also up 2% and 1.4% respectively.

Positive earnings reports helped push US markets higher, with the likes of Starbucks reporting greater than expected sales. Despite US Commerce Secretary, Wilbur Ross, stating that the US and China were “miles and miles” from a trade deal, there is still optimism that a deal will be reached.

The longest US Government shutdown in history was temporarily ended, as an agreement for 3 weeks of funding was reached. However, this did not have any material effect on markets as investors wait to see whether a permanent solution can be reached between Trump and the Democrats.

Asian markets were also up by the end of the week, following strong US performance. The FTSE All World Index – Asia Pacific was up by 0.2% across the week and Japan’s Nikkei 225 index was up by 0.2%.

Asian markets were adversely affected on Monday as China reported annual economic growth of 6.6%, its lowest rate of expansion since 1990. However, quarterly growth figures came in as expected and well performing US markets helped push Asia into positive territory by then end of the week. The end of the US government shutdown also raised hopes for a US/China trade deal.

Bond Yields
The 10-Year Gilt yield fell slightly by 0.8% over the week, ending the week broadly flat at 1.31% on Friday, reflecting the fall in UK equity markets. UK investors looked to de-risk as UK indices fell for the first time in 2019.

The 10-Year Gilt yield is up over 11% since the start of the year, pushed higher by 4 weeks of rising equity markets.

10-Year German Bund yields ended the week down 27% at 0.19%. Bund yields had followed UK Gilt yields down early in the week as a result of falling equity markets. However, a number of contributing factors saw bund yields fall even further throughout the week, bucking the convention of yields rising in tandem with equity markets. Weak German economic data (German manufacturing activity shrank for the first time in 4 years), coupled with a weakening Sterling and statements from the ECB that Euro zone growth outlook had moved to the downside helped increase demand for German bunds. Some analysts are reporting that they would not be surprised to see bund yields return to 0%.
US 10-Year Treasury yields ended the week broadly flat at 2.76%. Statements from the IMF and ECB concerning global growth helped push yields lower over the week, with the temporary end to the government shutdown causing a spike on Friday.
GBP / USD – Current 1.3196 Previous 1.2872

GBP / EUR – Current 1.1570 Previous 1.1330

Sterling fared particularly well this week, ending 2.5% up against the US dollar and up 2.1% against the Euro. Following reports that a no-deal Brexit is likely to be avoided, coupled with strong employment data, Sterling broke through $1.30 for the first time since early November. In addition, Sterling hit almost 1-year highs against the Euro.

The Gold spot price ended the week up 1.9% at $1,305 per ounce on Friday. Falling equity markets early in the week helped push gold prices higher as investors de-risked and any potential outflows back to equity markets late on were tempered by a falling Dollar. Foreign investors continued to buy Dollar denominated gold, helping push prices further up.
Oil prices fell slightly this week, with Brent Crude ending Friday 1.8% down at $61.64 per barrel. January has been a more stable month for oil prices, compared to the final quarter of 2018. Indications that the US may increase output, coupled with weaker Chinese economic data (suggesting reduced demand) caused a slight fall in oil prices.