Market Commentary 18th February 2019

Posted by melaniebond
Market Commentary 18th February 2019
Equity Indices
The FTSE 100 saw another week of daily gains, ending the week 1.5% up at 7,236 (its highest level since early October). The main cause for rising equity markets was yet again positive news from the US and China trade talks. Investor optimism continued to rise as the two countries held further negotiations and although there has been no resolution to the ongoing dispute, President Trump hinted that he could extend the 1st March deadline for increased tariffs.

Inflation in January fell from December’s figures and this helped ease investor fears of interest rate rises in the near future. The Bank of England recently voted to maintain interest rates and with lowering inflation, coupled with Brexit uncertainty, it is unlikely to increase rates in the short term.

Big winners for the week included AstraZeneca, who declared positive full year results, ending 10% up and Micro Focus (parent company of Hewlett Packard), who saw weekly gains of 9.2% as sales exceeded analyst expectations

TUI posted losses of 15% off the back of a Q4 loss (resulting from a weaker pound over the summer and too many Spanish holidays to sell).

European equity markets fared well last week with the FTSE All World Index – Europe ex UK up 2.2% and Germany’s DAX up 2.6%.

US/China trade talks helped push global equity markets up and an ECB board member announced that further cheap multi-year loans to banks would be possible, which would help ailing Euro zone banks, particularly in Italy. Germany’s economy did not grow in Q4 of 2018, but this was a slight improvement from a 0.2% contraction in Q3.

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 2.1% and 3.3% respectively. US and Chinese diplomats held further trade talks in Beijing over the week, with further talks scheduled for Washington this week. White House Press Secretary, Sarah Huckabee Sanders, stated that good progress had been made. The two sides are still in disagreement about certain aspects, particularly the amount of state support for Chinese companies, but it is clear that an end to the trade dispute is of benefit to both countries.

President Trump announced on Friday that he would declare a National Emergency in order to raise funds for his border wall. With legal challenges likely, and Congress still to approve this, it is yet to be seen whether he will succeed in raising the c$7billion he wants and how this will affect stock markets.

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 0.7% across the week and Japan’s Nikkei 225 index was up by 0.2%.

With Asian markets greatly influence by China, Asian investors are more cautious over a resolution to the ongoing trade war. With evidence of a weakening Chinese economy (increasing unemployment and reducing production), Asian equity market gains were reduced compared to their global counterparts.

Bond Yields
The 10-Year Gilt yield fell 1.7% over the week, ending the week at 1.16% on Friday. Bond yields continued to buck convention this week with UK and German government bond yields falling further despite weekly gains in their respective stock markets.

With the Bank of England maintaining interest rates and inflation falling in January UK, Gilts remain an attractive proposition for investors. With the Brexit deadline approaching, and no clear path forward in place, UK and European bond yields have continued to fall.

10-Year German Bund yields ended the week down 17% at 0.10%. With central banks remaining dovish on interest rate rises, bonds remain popular even with equity markets rising. With Germany reporting that its economy did not grow in Q4, the country only narrowly avoided recession and German bunds are now close to returning to negative yields, which have not been seen since 2016.
US 10-Year Treasury yields ended the week 0.4% up at 2.66%. With rising equity markets following positivity coming out of the US/China trade talks, US investors were happier to move away from bonds and back into equities.

In addition, President Trump signed a budget deal to avoid a further government shutdown, which helped buoy investor confidence and caused further outflows from bond markets.

GBP / USD – Current 1.2889 Previous 1.2944

GBP / EUR – Current 1.1410 Previous 1.1432

Sterling fell against the other major currencies last week, ending 0.4% down against the US dollar and down 0.2% against the Euro. With the government losing another Brexit vote in parliament (this time on whether MPs support Theresa May’s Brexit strategy) Sterling slipped.

Political uncertainty continues to hamper any potential currency gains.

The Gold spot price ended the week up 1.1% at $1,322 per ounce on Friday. In spite of rising equity markets, Gold remains popular as a safe haven asset due to continued political uncertainty. Although the talk coming out of China/US trade talks is positive, there is still much to be ironed out in any potential deal.
Oil prices rose this week, with Brent Crude ending Friday 7.7% up at $66.25 per barrel. OPEC production cuts have helped push prices back up and Saudi Arabia announced this week that they may cut production by more than planned in March. With the global economy slowing, OPEC are forecasting a fall in oil demand, which may temper the chances of oil prices rising to 2018 highs.