Market Commentary 3rd June 2019 from Charlie Hancock

Posted by melaniebond
Market Commentary 3rd June 2019
Equity Indices
The FTSE 100 index declined by 1.6% last week during a period of negative performance for equity markets around the globe. The more domestically exposed FTSE 250 index declined by 0.8%.

Investors are reacting to reports which suggest that the US and China are drifting further apart on some of the issues which are key to reaching a resolution to the ongoing trade war. In addition, President Trump announcing that the US will impose significant tariffs on Mexico’s exports to the US added to concerns regarding the economic impact of global trade disputes.

Data showing that production volume in the tobacco industry continues to shrink sent British American Tobacco’s share price down by 7.5% across the week, with rival Imperial Brands declining by around 6.5%. Tesco’s share price fell by 2.6% across the week, owing to a report showing that the largest 4 supermarkets in the UK are continuing to lose market share to discounters such as Aldi and Lidl.

European equity markets are sensitive to news regarding trade disputes, with Germany’s stock market in particular bearing the brunt of investor concerns on trade issues. Expectations of further disputes between the EU and the Italian government arose this week, after the country’s Eurosceptic party achieved strong results in the European Parliamentary elections. Across the week, Germany’s DAX index declined by around 2.4%, with the broader FTSE All World Index – Europe ex UK falling by 2%.

The auto-maker sector in Europe has suffered weakness since the US-China trade dispute started. This week’s announcement from President Trump regarding tariffs on Mexican imports added to concerns that the auto sector will struggle as a result of slowing global economic growth. BMW’s share price declined by 2.3% across the week, with Volkswagen Group falling by 2.4%.

US equity markets slid further this week, with the S&P 500 index declining by 2.6% and the Nasdaq Composite index falling by 2.4%. The Dow Jones Industrial Average index dropped by nearly 2.7%.

US stocks had a rough start to the week, owing to tit-for-tat announcements from Beijing and Washington. President Trump’s twitter announcement on Thursday evening regarding tariffs on Mexican imports caused a further decline on Friday. Trump explained that the US will impose a 5% tariff from this month, which will rise gradually to 25% until Mexico stops illegal immigration across the southern border.

The US and Mexico have a close trading relationship, with many US companies relying on imports from Mexico. At a time when US business investment activity is already contracting, higher costs for US companies as a result of the proposed tariffs could harm the domestic economy. The sell-off in equities which took place late last week reflects concerns that these tariffs will dampen US economic growth.

Asian equity markets fared well in comparison to other equity markets around the globe last week, with the broad FTSE All World Index – Asia Pacific declining by around 0.5%. Whilst the recent comments from both sides suggest that the US-China trade war will not be resolved for some time, analysts feel a lot of the negative sentiment is already priced in to Asian markets, which explains the softer falls seen in the region this week.

China’s Shanghai Composite Index rose by 1.6% across the week. Data was released which showed manufacturing activity in China slowed during May as a result of weak export orders, however, other surveys conducted last month showed that domestic economic activity remains strong, with the construction industry in particular gathering pace.

Japan’s Nikkei 225 index declined by around 2.4%. The Japanese Yen is viewed as a safe haven asset, which tends to appreciate in value when sell-offs in equity markets take place, as a result of investors allocating increased amounts to the currency. This has a negative impact on the export heavy Nikkei 225 index. In addition to the impact of a stronger currency, the index suffered as a result of share price declines for Toyota, Honda and Mazda, who all have factories in Mexico.

Bond Yields
UK government bond yields have declined steeply in the last month as a result of the ongoing uncertainty surrounding Parliament and Brexit. This week saw yields fall even further as investors allocated capital into more secure assets, such as Gilts. Yields on 10-Year UK Gilts remained below the 1% mark, declining from 0.96% to 0.89% across the week.
The yield on 10-year German bunds declined to an all-time low on Friday, reaching -0.21% during the day before settling at -0.20% when the market closed. Conversely, yields on Italian government bonds were sent higher this week as a result of renewed concerns regarding the dispute between the EU and the Italian government. Reports circulated suggesting that the European Commission could seek to fine Italy €3.5 billion for breaching EU rules regarding the country’s deficit and national debt.

Data published this week showed that inflation in Germany slowed more than expected in May, down to an annualised rate of 1.3% from 2.1% in the previous month. This, together with increased capital flows into government debt as a result of investors allocating capital away from equities, pushed Bund yields lower.

President Trump’s latest announcement regarding Mexico prompted a sharp decline in US Treasury yields on Friday as a result of negative investor sentiment. Yields on 10-Year Treasury notes declined from 2.32% to 2.12%, the lowest point seen since September 2017.

This latest decline now means that bond markets are pricing in expectations of a 0.25% interest rate cut by the Federal Reserve this year, with rate cuts of 0.50% expected during 2020.

GBP / USD – Current 1.2629 Previous 1.2714

GBP / EUR – Current 1.1308 Previous 1.1347

Sterling remained at a low point this week, owing to uncertainty regarding the Conservative party’s leadership contest and the UK’s future relationship with the EU. Analysts expect the pound to trade close to its current level until there is some clarity regarding Brexit.

The gold spot price rose by around 0.7% this week to reach $1,301 per ounce on Friday. Investors increased their allocation towards the precious metal in their hunt for safe haven assets last week, pushing prices upwards.
The Brent crude oil price continued to decline sharply last week, falling by around 7% to reach $63.25 per barrel. Concerns that the US led trade disputes could slow the global economy have resulted in markets pricing in lower future demand for oil. This continues to outweigh the impact of ongoing supply side issues which are lowering oil output around the globe.