Market Commentary 24th June 2019 from Charlie Hancock

Posted by melaniebond
Market Commentary 24th June 2019
Equity Indices
The FTSE 100 index rose by 0.84% across the week. The index rallied in the early part of the week, rising 1.3% by Tuesday, however, a rise in the Pound to US Dollar exchange rate saw some of these gains erased during the second half of the week. The more domestically focused FTSE 250 index rose by 1.1% across the week.

With wholesale oil prices climbing this week as a result of increased tensions in the Middle East, companies in the oil sector performed well. BP’s share price rose by 3.8%, with Royal Dutch Shell seeing a 3% rise. Dixons Carphone PLC, the company formed as a result of Dixons and Carphone Warehouse merging, fell by 9.1% across the week. The company released their annual results on Thursday, which showed a loss of £259 million, compared with a profit of £289 million in the previous year. The company’s share price has fallen by 65.4% since formation in August 2014.

Equity markets in Europe experienced a strong week, with Germany’s DAX index rising by 2% and the broader FTSE All World Index – Europe ex UK rising by 2.8%. Markets were buoyed by further dovish comments from the European Central Bank (ECB) and the Federal Reserve.

ECB president, Mario Draghi, delivered a speech in Portugal on Tuesday which suggested that the bank may return to bond buying via another quantitative easing programme if economic conditions across the continent do not improve. This caused a fall in the Euro and eurozone bond yields, but improved investor sentiment, driving equity markets upwards. Further dovish comments from the US central bank on Wednesday provided a further boost to European equities.

US equities rallied this week, with both the S&P 500 and Dow Jones Industrial Average indices reaching all time highs on Thursday. Across the week, the indices rose 2.2% and 2.4% respectively. As is often the case, markets were driven by activities from the Federal Reserve this week. Increased tensions in the Gulf region, with the US calling off an airstrike on Iran at the last minute, did not deter markets from rising.

The Fed decided to keep interest rates on hold at their policy meeting, however, comments made by officials from the Central Bank resulted in markets pricing in an increased probability of a rate cut next month. The official statement stated that US economic activity was rising at a moderate rate, but cited uncertainties about the future as a result of trade issues and weakening economic fundamentals. The Fed chairman, Jerome Powell, commented that “an ounce of prevention is worth more than a pound of cure”.

Boeing Co saw their share price rise by 7.1% after signing a new contract with the US Air Force worth a reported $6.5 billion.

Asian equity markets were broadly positive this week, with the FTSE All World Index – Asia Pacific rising by 2.5%. China’s Shanghai Composite Index rose by around 4.2% on renewed hopes that some progress will be made between President Trump and President Xi at the upcoming G20 summit this week.

Japan’s Nikkei 225 index saw a much more subdued rise of 0.6% across the week. Data released on Tuesday showed that the country’s exports declined for the sixth month in a row in May, driven by reduced demand for chipmaking equipment and automobile parts.

Bond Yields
UK government bond yields were volatile during the week as markets reacted to comments from Central Banks around the globe. The Bank of England voted to keep interest rates on hold at their meeting on Thursday. Gilt yields subsequently stabilised on Friday, finishing the week unchanged at 0.85% for 10-Year Gilts.

The Bank of England’s 9 committee members voted unanimously to keep interest rates unchanged, however, the Central Bank officials expressed concerns about increasing trade tensions and the outlook for the UK economy.

Government bond yields in Europe declined further this week, with yields on 10-Year German Bunds reaching -0.29% on Friday, after previously falling to a record low of -0.32% on Tuesday. Yields on the 10-year French government bonds also turned negative this week, with commentators highlighting that the global universe of negative yielding bonds has now reached a new record of $12.5 trillion.

Comments made by Mario Draghi suggested that the ECB will inevitably introduce further monetary stimulus in order to assist the Eurozone economy, which sent yields across the region downwards.

Yields on 10-Year US Treasury stocks declined further this week, reaching 2.05% on Friday. Yields did dip below 2% momentarily during the week, after the market digested comments from Federal Reserve officials.

The chair of the Federal Reserve loosely hinted at action being required sooner rather than later, however, he emphasised that economic data released between now and the next Fed meeting at the end of July, would be crucial to any policy decisions. There is some speculation that bond markets have overreacted to comments from the Fed in recent months, with markets now implying a 76% probability of a 0.25% cut in the base rate range next month.

GBP / USD – Current 1.2737 Previous 1.2589

GBP / EUR – Current 1.1210 Previous 1.1232

This week saw the Pound strengthen slightly against the dollar, but weaken against the Euro. The US dollar weakened against most major currencies this week as US Treasury yields moved downwards.  Currency traders have been negative on Sterling in recent weeks as the probability of Boris Johnson becoming the UK’s next Prime Minister has increased.

The gold price rallied this week, rising by around 4% to $1,396 per ounce. Commodity investors tend to view dovish comments from central banks as a sign that economic growth is on a downward trajectory, which pushes the price of precious metals up. In addition, a weaker US dollar tends to lead to an increase in demand for Gold, which inflates the price.
Wholesale oil prices continued to climb this week amidst heightened tension between the US and Iran. Brent crude prices rose by around 5% to $65.20 per barrel. Despite increases in recent weeks, the price is still around 12.5% lower than the 2019 high seen in April, with analysts expecting prices to remain subdued over the coming months.