Market Commentary 5th August 2019 from Charlie Hancock

Posted by melaniebond
Market Commentary 5th August 2019
Equity Indices
The FTSE 100 index declined by 1.88% during a tough week for markets around the globe. The FTSE 250 index fell by 3.03%, with the larger multi-national constituents of the FTSE 100 index holding up better than more domestically exposed stocks, due to a weakening Pound Sterling. The FTSE 100 had a positive start to the week, rising by around 1.8% on Monday to reach a new year to date high. The remainder of the week saw a sell off in equities as investors reacted to the US Treasury’s policy decision and President Trump’s latest announcement on tariffs for Chinese imports.

In addition to global factors hurting markets, downbeat news from companies during the week also impacted UK equities. The oil producing giant, Royal Dutch Shell, reported that profits fell by 25% in the second quarter of 2019 as a result of weaker margins. The company’s share price declined by 8% across the week. Royal Bank of Scotland (RBS) unveiled a plan to pay significant dividends to shareholders, but commented that weakening economic conditions make their profit targets for next year very unlikely. The bank’s share price declined by 11% across the week.

Equity markets in Europe fared worse than UK markets, with Germany’s export driven DAX index declining by 4.40% across the week. The broader FTSE All World Index – Europe ex UK fell by 3.10%.

European markets initially started to decline as investors reacted to the Federal Reserve’s decision to cut interest rates by 0.25% and the speech delivered by the Fed’s chairman, Jay Powell. European equity indices sharply declined on Friday after President Trump announced the US will implement tariffs on a further $300 billion worth of Chinese imports.

At a sector level in Europe, automakers continued to struggle. Italian tyremaker, Pirelli, added to the list of suppliers in the car industry who appear to be struggling. The company cut its revenue guidance for the second time this year, resulting in a 10.5% fall in their share price across the week.

The S&P 500 index posted daily declines, leaving the index down by 3.10% across the week. Investors were worried by a lack of forward guidance from the Federal Reserve following their decision to cut interest rates, together with heightened tensions in the US-China trade war.

Some investors were disappointed that the Federal Reserve voted to cut rates by 0.25% rather than the 0.50% expected by some market participants. The Fed commented that this was a ‘mid cycle adjustment’ with no indication of further rate cuts on the horizon. The sell-off in US equities intensified on Friday after President Trump complained that China were not following through on their promises to purchase US agricultural products. Mr Trump followed up these remarks with the announcement of new tariffs on Chinese imports from 1st September.

Asian equity markets on the whole fared better than markets in Europe and the US, with the broad FTSE All World Index – Asia Pacific declining by 2.74% across the week. China’s Shanghai Composite Index declined by 2.60%, with Japan’s Nikkei 225 declining by 2.63%.

During the middle of the week, data showing that industrial activity in China continues to slow added to the negative investor sentiment brought about by uncertainty on future Federal Reserve policy. The decline in Asian equity markets worsened on Friday as a result of further issues in the ongoing trade war between the world’s two largest economies.

Bond Yields
UK government bond yields continued to fall, with yields on 10-Year Gilts sitting at around 0.55% by the end of the week.

The Bank of England’s Monetary Policy Committee (MPC) voted to keep interest rates on hold at 0.75%, which was in line with expectations, however, the Bank cut its growth forecast for 2020, which caused Gilt yields to decline. Markets have now priced in an interest cut by the Bank before the end of the year.

German Bund yields reached a new all time low this week. Yields on 30-Year Bunds briefly went into negative territory for the first time ever, which meant that Germany’s entire government bond market was yielding less than 0%. The yield on 10-Year German Bunds was -0.50% at close of play on Friday.

With central bankers and investors becoming increasingly concerned about global growth being disrupted by trade wars, a significant amount of capital flowed into perceived safe haven assets this week.

US Treasury yields declined to the lowest levels seen since Autumn 2016. Yields on 10-Year Treasury stocks fell below the 2% mark to reach 1.85% by close of play on Friday. The 0.25% interest rate cut announced by the Federal Reserve this week was already fully priced in, with some interest rate traders expecting a greater cut. The lack of forward guidance from the Fed regarding the path of interest rates meant that Treasury yields remained stable.

Whilst the Fed’s policy meeting and subsequent press speech didn’t significantly impact yields, President Trump’s announcement that the US will be implementing new tariffs on Chinese goods from 1st September did cause yields to drop sharply. Trump’s announcement lead to speculation that the impact of these tariffs on the US economy may force the Fed to cut rates again this year.

GBP / USD – Current 1.2162 Previous 1.2381

GBP / EUR – Current 1.0950 Previous 1.1100

The Pound continued to weaken against other major currencies this week, posting a 1.77% decline against the Dollar and a 1.36% decline against the Euro. Analysts believe that currency and Gilt markets are now implying a 40% chance of a no-deal Brexit.

Gold prices rose by 1.55% during the week to reach around $1,441 per ounce.

With a sell-off in equity markets around the globe taking place, investors chose to allocate increased amounts of capital towards the precious metal, sending the price upwards.

Brent crude oil prices declined by around 2.5% this week to $62 per barrel.

After a stable start to the week, wholesale prices dropped sharply following the Federal Reserve’s decision to cut interest rates. Whilst an interest rate cut in the US is usually followed by a rise in Oil prices, the downwards movement this week demonstrated that the 0.25% cut was already priced in across commodity markets. The decline in prices also showed that traders were hoping for a larger cut, or at least an indication of further monetary easing from the Fed.