Market Commentary 13th May 2019 from Charlie Hancock

Posted by melaniebond
Market Commentary 13th May 2019
Equity Indices
The FTSE 100 index suffered its worst week so far during 2019, falling by 2.4% across the week. A sell off in global equities came as the US-China trade war dominated headlines. Weakness in Sterling, which usually benefits the export heavy companies listed on the FTSE 100 index, was more than offset by the global sell off in equities.

The more domestically focussed FTSE 250 index fell by 1.7%, with data showing that the UK economy grew at a faster pace than expected during Quarter 1 of 2019 partially offsetting the impact of the sell off in equity markets.

Struggling travel business Thomas Cook delivered notable performance, with their share price rising by 4.5% across the week after Virgin Atlantic made an offer to acquire the long-haul section of the business.

European equity markets also suffered this week, with the FTSE All World Index – Europe ex UK falling by 2.9%. Germany’s DAX index declined by 2.8%. Heightened tensions in the US-China trade war impacted stocks across the region, with investors also nervous that the US may turn its attention to re-negotiating trade agreements with the EU in the near future.

Data showing that Germany’s industrial output rose unexpectedly in March, together with improved earnings results for several large DAX listed companies, helped to offset some of the falls caused by the global sell off. Banking stocks across Europe suffered weakness, with falls in HSBC shares and negative sentiment on Italian banks following earnings results harming the sector.

US equities did not escape the impact of the latest US-China trade developments, with the S&P 500 index suffering its worst week so far this year, declining by 2.2%. President Trump announced on Sunday that the US will increase tariffs from 10% to 25% on $200 billion worth of Chinese imports, due to talks not progressing as fast as he would like. Investors reacted negatively to this announcement, with US equities not able to escape the global sell-off which ensued.

Micro-chip makers, who generate a significant amount of revenue in China and Asia, suffered heavily. The Philadelphia Semiconductor Index, which tracks the performance of such companies, declined by 6% across the week.

The highly anticipated stock market listing of Uber Technologies Inc took place on Friday. The company’s share price fell by almost 8% during the day, with some citing unfortunate timing as the cause, given that the listing took place amidst a tough period for equity markets.

Asian equity markets have suffered the most throughout the US-China trade dispute, with this week being no different. The FTSE All World Index – Asia Pacific declined by 3.7% across the week. The Shanghai Stock Exchange Composite Index fell by around 4.5%, with Japan’s Nikkei 225 index declining by around 4%. The Japanese Yen strengthened this week as investors sold off the US Dollar and Chinese Yuan, which contributed towards a decline in Japan’s export driven companies.

In addition to the latest developments in the US-China trade dispute, underwhelming data on the Chinese economy contributed to negative sentiment towards equities in the region. Foreign trade statistics released during the week showed that exports contracted and imports increased during April. Inflation in China during April reached a 6 month high, with a widespread outbreak of swine fever prompting increases in food prices.

Bond Yields
10-Year Gilt yields fell by 6.6% across the week, with yields on 10 year securities declining to around 1.14% on Friday. The flow of capital away from equities and into government bonds, together with weakness in Sterling, both contributed to yields declining this week.

The yield on 10 Year Gilts is still some way above the 1% level seen during March this year when fears of a slowdown in the global economy re-surfaced, suggesting that investor sentiment has improved since then despite recent fears regarding global trade.

10-Year German Bund yields returned to negative territory this week, reaching -0.05% on Friday. Despite yields being so low, German government debt continues to attract investors, with the demand for these assets increasing notably when equities experience a sell-off.

As with UK Gilt yields, the current yield on German bunds is still higher than the yields seen during March of this year.

US Treasuries saw increased demand this week, although the movement in yields was not as pronounced as that seen in UK and German government debt. 10 Year Treasury yields declined to 2.47% on Friday.

Inflation data for the US released on Friday showed prices rising at their fastest pace for 6 months, but the headline rate came in below expectations, with meant that demand for US government debt remained strong.

GBP / USD – Current 1.2995 Previous 1.3173

GBP / EUR – Current 1.1573 Previous 1.1741

Sterling declined by around 1.4% against both the Euro and the US Dollar during the week. Reports that cross party Brexit talks may soon be abandoned appeared to be the main driver of weakness in the Pound this week.

The gold spot price rose by around 0.9% to $1,288 per ounce across the week. Gold prices benefitted from the nervousness of investors, with weakness in the US Dollar also contributing to increased demand for the precious metal.
The Brent crude oil price was broadly flat across the week at around $71 per barrel. Rising tensions in the Middle East have recently prompted fears of supply issues, however, this was offset this week by concerns that the impact of increased tariffs on Chinese imports to the US will result in reduced demand for oil.