Market Commentary 25th March 2019 from Charlie Hancock

Posted by melaniebond
Market Commentary 25th March 2019
Equity Indices
The FTSE 100 index started the week on a positive note and was up by around 0.8% by Thursday, however, sentiment towards equities turned negative on Friday which, allied with a rise in Pound Sterling, dragged the FTSE 100 down by 2%. Across the week, the index fell by 1.25%.

Friday marked the worst day of 2019 so far for the FTSE 100. Poor manufacturing data from the Eurozone and the US spooked investors, with a rise in Pound Sterling hurting export driven companies listed on the index. The FTSE 250 index also suffered the worst day so far during 2019 after falling by 1.8%, with more domestically focussed stocks not escaping the negative sentiment towards equities. Stocks in the financial sector were bruised as a result of the EU agreeing to Theresa May’s request to delay Brexit. Barclays share price was down by around 7% for the week, with Lloyds share price falling by around 5%.

European equity markets started the week on a positive note, with the major indices posting gains on Monday, however, this was short lived and the rest of the week saw daily falls. The FTSE All World Index – Europe ex UK was down by 2.25% across the week, with Germany’s DAX index falling by 2.5%.

Data showing that manufacturing output in Germany contracted for a third month in a row was released on Friday, which added to fears of a slowdown in the Eurozone’s largest economy. Figures from a recent Purchasing Managers Index (PMI) survey for March also came in below expectations, with Germany and France both weak. This painted a bleak picture for the Eurozone as a whole, prompting a sell off in European equities.

The S&P 500 index displayed a similar pattern to the FTSE 100 this week, with the index rising approximately 0.8% by Thursday, before faltering on Friday to finish the week down by 1.1%. Investors were negative towards US equities upon opening on Friday, as the negative data released in Europe had already been digested. The release of further data suggesting growth in US manufacturing slowed sharply for March spooked investors further.

President Trump commented that talks to reach a deal with China on trade were progressing well, however, this was not enough to alleviate concerns regarding a global economic slowdown. The only two major sectors in the S&P 500 index which were in positive territory were the typically defensive utilities and consumer staples sectors, with the other 9 major sectors all down across the week.

Asian equities bucked the trend this week, largely owing to the fact that most markets had closed before the negative data from Europe and the US was released. The FTSE All World Index – Asia Pacific was up by around 0.5%, with Japan’s Nikkei 225 Index rising by around 0.2%.

With sentiment on US-China trade talks improving later on in the week, most Asian equity markets rose. Chipmakers in the region had a particularly good end to the week, following a rise in US technology stocks on Thursday. The financial sector was weak after comments from the US federal reserve suggested there will likely be no rate rises this year, hurting expectations of banks being able to improve their margins.

Bond Yields
10-Year Gilt yields dropped sharply on Friday as investors chose to allocate capital towards government debt, with yields reaching 1.01% on Friday, some 16% lower than the level seen at the start of the week.
10-Year German Bund yields turned negative for the first time since September 2017, with yields at around -0.02% as the market closed on Friday. This was a sharp fall from the 0.08% yields seen at the start of the week. Investors typically seek the security of German government debt as concerns regarding the global economy heighten. Friday’s movement in yields reflected investor fears of a recession in Germany and weakness elsewhere in the Eurozone.
US 10-Year Treasury yields also fell as investors chose to allocate capital towards bonds and away from equities. The 10 year yield reached 2.44% on Friday, some 6% lower than the levels seen at the start of the week.

With significant amounts of capital flowing into government debt, a further section of the US yield curve inverted on Friday. The spread between yields on the 10-year Treasury note and the 3-month Treasury bill turned negative. Essentially, this represents the expectation from investors that interest rates will be higher in the shorter term than they will in the longer term. As central banks are often forced to cut interest rates in the event of a recession, this movement in yields shows that investors are fearing a recession may be on the horizon.

GBP / USD – Current 1.3217 Previous 1.3290

GBP / EUR – Current 1.1694 Previous 1.1736

Sterling weakened by around 0.5% against the US Dollar and 0.3% against the Euro this week. The Eurozone’s currency was weaker in its own right after negative data suggested that economic growth in the region will continue to be sluggish.

The gold spot price rose by around 0.7% for the week to reach $1,313 per ounce on Friday, after moving around throughout the week. Comments from the Federal Reserve suggesting that US economic growth will continue to soften sent the price up. The price fell back slightly on Thursday, before concerns from investors on Friday sent the price back up to near the mid-week highs.

Gold has historically been a benefactor of falling equity markets, as evidenced on Friday, although the strength of the US Dollar in recent years has discouraged foreign investors from allocating capital towards gold, given that most trades are priced in US Dollars.

The Brent crude oil price fell by around 1.6% this week, with prices reaching around $66 per barrel on Friday. After rising to more than $68 per barrel by the middle of the week, concerns around a slowdown in the global economy led markets to price in a reduced demand for Oil, sending prices downwards on Friday.