Market Commentary 4th February 2019

Posted by melaniebond
Market Commentary 4th February 2019
Equity Indices
The FTSE 100 saw daily gains every day last week, pushing back through 7,000 to end the week 4% up at 7,020. Signs that the US and China could resolve their trade dispute helped push almost all global markets into positive territory this week and a slight easing off in the value of Sterling also benefitted the export-heavy FTSE 100. MPs decision to reject an amendment which would allow the UK to leave the EU without a deal boosted share prices, as investor optimism increased.

Mining companies fared well as a whole, led by Antofagasta (+8%) and Rio Tinto (+7%), after rival, Vale, stated it would suspend 10% of production following its recent dam disaster in Brazil. British American Tobacco was also up 14% off the back of an upgrade in its stock rating from analysts.

Metro bank continued to see big losses, down 12% over the week, having hit a low of -24% on Wednesday. News concerning the misclassification of loans the previous week was compounded by a shock profits warning last week.

European equity markets generally fared well last week with FTSE All World Index – Europe ex UK up 1.4% and France’s CAC 40 up 2.7%. However, The DAX ended the week down 0.25% as the Eurozone’s largest exporter was hit by weak economic growth, global trade tensions and a slowdown in China.

Renewed hopes of a US/China trade deal, coupled with a reduced likelihood of a no-deal Brexit boosted European share prices on the whole last week. Germany and Italy were the exceptions with a second straight quarter of economic contraction technically putting Italy into recession. This poor economic performance (mirrored across the continent) has fed through to Europe’s largest economy, Germany.

US equities fared well this week, with the S&P 500 ending the week 2.4% up, with the NASDAQ and Dow Jones also up 2.5% and 2.2% respectively. US and Chinese diplomats held 2 days of trade talks which were hailed as positive and President Trump announced that he would soon sit down with Chinese President Xi Jinping to seal a comprehensive trade deal.

The Federal Reserve signalled it was unlikely to raise interest rates in the short term and with Boeing announcing record revenues US markets were buoyed.

The US Congressional Budget Office calculated that the recent shutdown had cost the economy $11billion and it is yet to be seen whether Trump and the Democrats will be able to reach a permanent deal before the temporary funding programme ends in 2 weeks.

Asian markets were also buoyed by strong US performance and positive comments surrounding US/China trade relations. The FTSE All World Index – Asia Pacific was up by 0.9% across the week and Japan’s Nikkei 225 index was up by 0.7%.

Asian investors are cautiously optimistic following the end of the US shutdown and hope for a trade deal, however they are still wary with regards to China’s economy. China’s manufacturing industry contracted more than expected in January. Most commentators see a reasonable trade deal as a good outcome for China which will avert a trade recession in the country.

Bond Yields
The 10-Year Gilt yield fell 1.5% over the week, ending the week at 1.25% on Friday. Bond yields bucked convention this week with UK and US government bond yields falling further despite rallies in their respective stock markets.

With a no-deal Brexit looking less likely, bond investors are less worried about a dramatic fall in Sterling, leading to higher inflation. As such, UK Gilts looked more attractive as the chances of increased interest rates reduces.

10-Year German Bund yields ended the week down 19% at 0.17% to reach near 2-year lows. Poor economic output in the Eurozone, a contraction in Italy’s economy and the Fed’s announcement that they would be cautious on future interest rate rises all helped to push yields down. German Bunds remain a safe-haven for investors amidst all the political and economic uncertainty.
US 10-Year Treasury yields ended the week 2.2% down at 2.68%. With the Federal Reserve taking a more dovish approach and announcing that it was unlikely to raise interest rates in the short term, the US bond market rallied despite strong performance in equity markets.

Investors are happier to buy bonds when they feel there is a reduced chance of interest rates rising as rising interest rates cause the fixed interest payments of bonds to lose value in real terms. As such, more certainty that interest rates will not rise is good news for bond investors.

GBP / USD – Current 1.3079 Previous 1.3196

GBP / EUR – Current 1.1417 Previous 1.1570

Sterling pulled back from last weeks rises, ending 0.6% down against the US dollar and down 0.9% against the Euro. A reduction in the chances of a no-deal Brexit caused a slight increase in Sterling mid-week, but with still plenty of political uncertainty around Sterling is unlikely to make any sustained gains.

Activity in the UK manufacturing sector slowed in January, which helped push Sterling lower towards the end of the week.

The Gold spot price ended the week up 1.1% at $1,318 per ounce on Friday. Despite rising equity markets, Gold remained popular as a result of continued political uncertainty. Despite positive talks coming out of the US/China trade discussions, there is still much to be ironed out in any potential deal and the US government could re-enter a shutdown mid-month.

With the Fed unlikely to raise interest rates in the short term, a weakening Dollar meant Gold remained attractive to foreign investors.

Oil prices rose this week, with Brent Crude ending Friday 4.7% up at $62.75 per barrel. Optimism on US/China trade relations, coupled with a strong adherence to OPEC supply cuts in January has helped underpin the oil market.