Market Commentary 20th May 2019 from Edward Cameron

Posted by melaniebond

Market Commentary 20^th May 2019

Equity Indices

The FTSE 100 ended the week 2% up at 7,349 on Friday, as a significant weakening in Sterling positively affected the export heavy index. A poor week for Sterling was the main cause for a rise in the index, as UK and European markets rose, whilst US and Asian markets fell.

Sterling fell as cross-party Brexit talks between Labour and Conservatives broke down and amid mounting pressure on Theresa May to resign imminently. As a result, the FTSE 100 fared well as company earnings abroad are able to be transferred into Sterling at a more favourable rate. Gains in the more domestically focussed FTSE 250 were more muted as a consequence, with the index rising 0.7%.

The oil sector led the way last week off the back of rising oil prices, with both BP and Shell up over 4%. Greggs share price rose almost 14% off the back of better than expected sales, helped by the release of its Vegan sausage roll.

Vodafone fell over 10% after it cut its dividend for the first time in almost 30 years. ITV fell over 4% with underwhelming Q1 results compounded by negative press coverage of The Jeremy Kyle Show and its immediate cancellation.

Europe

European equity markets also rose last week, with the FTSE All World Index – Europe ex UK up 0.7%, France’s CAC up 2.1% and Germany’s DAX up 1.5% across the week. European markets benefited from President Trump’s decision to delay potential tariffs on cars and car parts. The US have delayed tariffs by 180 days and are set to embark on negotiations over car imports.

It was a volatile week for US equities, with markets dropping sharply on Monday, before rallying over the week to limit losses. The S&P 500 ended the week 0.8% down, the NASDAQ 1.3% down and the Dow Jones 0.7% down. All 3 indices suffered on Monday as markets reacted to US tariffs on $200billion of Chinese goods increasing from 10% to 25%, and the news that President Trump is ready to increase tariffs on a further $300billion of goods. All 3 indices fell over 2.4% on Monday, in the worst day for US equities since January, with Apple losing over 6% as a result of 20% of its sales coming from China. It was the 4^th straight weekly decline for US equities, the worst such run since 2016.

However, following Monday’s losses, markets rose off the back of good earnings reports from the likes of Walmart and Cisco, coupled with strong consumer confidence. A number of good earnings reports over the past few weeks, coupled with a relatively low yielding bond market and a more cautious Federal Reserve helped equities rally throughout the week.

Asia

Asian markets ended the week down as the US/China trade war took a turn for the worse. The FTSE All World Index – Asia Pacific was down by 1.8% across the week, with the Hang Seng down 2.1% and Japan’s Nikkei down 0.5%.

Asian markets mirrored their US counterparts by falling sharply on Monday, however did not benefit from the same bounce-back later on in the week. With China already imposing tariffs on 90% of US imports, it is felt that they do not have the scope to retaliate as hard as the US. The US is also putting pressure on Chinese telecoms giant Huawei by issuing an executive order which bans technology that poses a risk to national security. Pressure is mounting on American allies to stop dealing with Huawei and Google has already revoked its license, blocking new smartphones from accessing any of its services.

Japan’s GDP grew by 2.1% in Q1, beating analyst expectations and this helped to temper losses.

Bond Yields

The 10-Year Gilt yield fell 9.6% across the week, ending Friday on 1.03%. Despite a rise in UK equity markets, a significant weakening in Sterling, coupled with increased pessimism over a Brexit resolution, caused an inflow of capital into Government bonds.

Europe

10-Year German Bund yields ended the week 5 basis points down at -0.1% to reach lows not seen since September 2016. German bond yields followed a similar pattern to UK yields, with fears over a hard Brexit and a general global economic slowdown pushing yields down, despite a rally in equity markets.

US 10-Year Treasury yields ended the week broadly flat, 1 basis point down at 2.39%. US bond yields mirrored equity markets this week, with a sharp drop on Monday as investors allocated capital towards safe haven assets, before falling throughout the week as investor optimism increased and capital was re-allocated back to equities.

Geopolitical risks have pushed yields to around 1 year lows as investors are increasingly wary over the US/China trade war and are concerned about the ability for the two countries to reach an agreement in the short term.

Currency

GBP / USD – Current 1.2724 Previous 1.2998

GBP / EUR – Current 1.1400 Previous 1.1576

It was the worst week for Sterling in over a year as cross-party Brexit talks between Labour and Conservatives broke down. Sterling fell 1.5% against the Euro and 2.1% against the Dollar to reach 4-month lows.

Investor confidence in a smooth Brexit receded as talks broke down. It was hoped that successful talks could lead to a more organised Brexit, maintaining a customs union. However, it is now feared that Theresa May’s replacement could be a more Pro-Brexit PM, which would increase the chances of a no-deal Brexit.

Commodities

Gold

The Gold spot price ended the week 0.7% down at $1,278 per ounce on Friday. With UK and European markets up, and US markets rising towards the end of the week, demand for safe haven assets receded slightly.

Oil

Oil prices rose last week, with Brent Crude ending Friday 2.3% up at $72.21 per barrel. Rising tensions in the Middle East continued as Saudi Arabia claimed two of its tankers were targets of sabotage, coupled with continued US sanctions on Iran.

Rises in oil prices have been tempered slightly by expectations that rising US/China tariffs will result in reduced global demand.