Market Commentary 10th June 2019 from Charlie Hancock

Markets were lifted by suggestions that the European Central Bank and the US Federal Reserve may look to cut interest rates in the near future. News that the US would not impose immediate tariffs on Mexican imports also lifted investor spirits, boosting equity markets around the globe.

Hargreaves Lansdown, the UK’s largest investment platform provider, saw their share price decline by nearly 15% across the week after fund manager Neil Woodford suspended trading in his Woodford Equity Income fund. Hargreaves Lansdown had consistently promoted the fund to investors in their top 50 funds list.

The head of the European Central Bank, Mario Draghi, announced on Thursday that the bank is ready to “use all the instruments that are in the toolbox” if the slowdown in the Eurozone’s manufacturing sector starts to impact on other parts of the economy. Mr Draghi hinted at further quantitative easing and interest rate cuts, but added that governments needed to match the bank’s efforts by increasing public spending.

Investors were positive following news reports suggesting that the US and Mexico were making progress on a trade agreement, with the expectation being that tariffs on Mexican goods would not be implemented. Weaker than expected US employment data released on Friday was received by investors as a sign that the Federal Reserve may cut interest rates next month.

Technology stocks suffered on Monday after the US Department of Justice said it was preparing to launch an anti-trust investigation into Google’s affairs. The sector recovered strongly throughout the remainder of the week with the tech dominated Nasdaq Composite index rising by around 5.6% between Monday and Friday.

With investors worrying about the impact of potential further tariffs on Chinese imports to the US, the governor of the People’s Bank of China attempted to reassure investors during an interview for Bloomberg TV. The governor stated that the central bank has plenty of policy tools to use if the economy suffers as a result of further difficulties in the US-China trade war.

Government bonds yields around the globe declined last week as markets moved to price in the possibility of interest rate cuts by central banks in the near future. In addition, continued uncertainty around the UK’s political situation and the possibility of a no deal Brexit increasing lead to gilt yields declining.

Comments from the European Central Bank’s president, Mario Draghi, suggesting that rates may need to be cut further in order to boost the Eurozone’s economy, sent yields on government bonds down. The central bank have pledged to not raise rates until the middle of 2020, which means that European government bond yields are likely to remain suppressed.

Markets are now pricing in an 85% chance of a rate cut by the Federal Reserve next month. Some analysts highlighted that wage growth and inflationary pressures remain subdued, which may influence the central bank’s decision next month.

GBP / EUR – Current 1.1228 Previous 1.1308

Sterling strengthened against the US dollar this week, but weakened against the Euro. There was little to drive the pound in either direction.

The natural reaction to the comments from the European Central Bank this week should’ve been a weaker Euro, however, the Eurozone’s currency surprised by strengthening against other major currencies. The US Dollar weakened as the market moved to increase the probability of the Federal Reserve cutting interest rates next month.