Market Commentary 11th February 2019

Posted by melaniebond
Market Commentary 11th February 2019
Equity Indices
The FTSE 100 had a strong start to the week, with a rally on Monday and Tuesday pushing the index up by around 2%. The index was broadly flat on Wednesday, before falls on Thursday and Friday eroded some of the week’s gains, leaving the index up by around 0.5% for the week.

After data published early in the week showed the UK services sector stagnated in January, the pound weakened which helped to boost the FTSE 100. BP was the stand out performer this week after posting better than expected profits for the fourth quarter of 2018, with the oil giant’s share price up by 4.6% for the week. UK banking stocks also had a strong start to the week, but the gains in this sector were eroded by close of play on Friday.

European equity markets fared worse than the UK this week, with the FTSE All World Index – Europe ex UK down by 1.6% for the week. Germany’s DAX index was down by 2.4%. Both indices started with positive performance, but the falls in the later part of the week dragged the indices into negative territory, wiping out all of the early week gains.

Data released during the week showed that German manufacturing orders fell sharply in December, adding to concerns regarding economic growth in the Eurozone. Most sectors struggled this week, with major players in the Auto, Technology and Banking sectors all reporting downbeat results. The German travel company TUI fared particularly badly, with their share price down by nearly 23% for the week after slashing their profit forecast.

The S&P 500 followed the pattern of equity markets elsewhere around the globe, rising on Monday and Tuesday before pulling back to finish the week down by around 0.6%. US equities were resilient throughout January and the first week of February, partly owing to positive sentiment on the US-China trade war, however, hopes for a swift resolution waned this week which took a negative toll on US equities. Investors are contemplating the possibility of the US raising import tariffs on Chinese goods from 10% to 25% from 1st March.

President Donald Trump’s State of the Union address speech on Tuesday disappointed investors, after little was mentioned regarding policy changes to benefit the US economy. US equities were particularly strong during January and the first week of February, after nearly 2/3rds of corporations reporting earnings for Q4 2018 beat analyst expectations. There is therefore some speculation that the pullback this week was partially driven by investors profit taking, as US corporates begin to announce weaker revenue forecasts for the coming months.

Asian markets experienced a softer rally during the early part of the week in comparison to other regions, but tracked global equities downwards during the second half of the week. The FTSE All World Index – Asia Pacific was down around 1% across the week. Japan’s Nikkei 225 index was down by around 2.6%.

Chinese stock markets were closed during the week to celebrate the Chinese New Year, which also resulted in less activity in other Asian markets. The positive performance in the Technology sector globally helped to boost stocks in the region during the early part of the week, however, Asian markets were bruised on Thursday and Friday as concerns regarding US-China trade re-surfaced. This was particularly evident in the slide in Japan’s Nikkei 225 index, which is largely export driven.

Bond Yields
The 10-Year Gilt yield was down by 10% for the week, with yields at around 1.15% on Friday. UK government bond yields tracked lower in line with bond yields across the globe, as investors moved capital away from equity markets during the later part of the week.

The Bank of England held it’s first policy meeting of the year on Thursday, with interest rates remaining unchanged. The Bank are mulling Brexit concerns together with mixed economic data, and as a result it is no surprise that interest rates were left unchanged. The UK labour market is increasingly tight and wages are starting to rise in real terms, however, consumer and business confidence remains subdued and so economic growth has been slowing. The Bank cut their UK growth forecasts for 2019 and 2020 to 1.2% and 1.5% respectively.

10-Year German Bund yields fell sharply this week, down by around 50% to yields of 0.09%. Weak economic data for Germany, together with continued economic woes elsewhere in the Eurozone left investors in Europe nervous, prompting increased purchases of German government debt. German bunds are now close to returning to negative yields which have not been seen since 2016. The Italian government issued a new 30 year bond which attracted more buyers than anticipated, helping to push down yields across the region.
US 10-Year Treasury yields were down by around 3.3% across the week, with yields at around 2.63% on Friday. Concerns regarding the US-China trade deal returning dragged yields down as investors sought the relative security of government debt over US equities.
GBP / USD – Current 1.2944 Previous 1.3079

GBP / EUR – Current 1.1432 Previous 1.1417

The Bank of England leaving interest rates unchanged on Thursday and warning of several factors weighing on the UK economy weakened the Pound. Sterling was down by around 1% against the dollar this week, but was slightly up against the Euro after the European currency was dragged down as a result of concerns about the economic health of the Eurozone.

The Gold spot price was up slightly across the week, rising by around 0.3%. The spot price per ounce on Friday was around $1,317. Despite the dollar strengthening slightly this week, Gold remained in demand due to investor concerns around the globe.
Oil prices fell by around 1% this week after the inflationary impact of OPEC’s production cuts started to falter.

Inventory reports published during the week showed increased supply, which, coupled with concerns around global growth, pushed prices lower. Consequently Brent crude was trading at around $62 per barrel on Friday.