Market Commentary 12th August 2019 from Charlie Hancock

The FTSE 100 fell by 2.5% on Monday as the markets continued to react to increased tensions between the US and China, in particular President Trump labelling China a currency manipulator. Investors became worried about the prospect of a currency war, with equities bearing the brunt of this nervousness. The FTSE 100 regained some ground throughout the rest of the week, aided by the Pound declining against other major currencies.

Investors were also digesting company results released during the week. Standard Life Aberdeen reported that profits for the first half of 2019 had fallen by 10% in comparison to the previous year. The financial services giant saw their share price decline by 14% across the week as a result.

European equities experienced selling pressure throughout the week as investors reacted to the latest developments in the US-China trade war and further bad news on the German economy, with exports declining by 8% in June in comparison to the previous year. Political tensions in Italy caused further volatility on Friday after the Deputy Prime Minister called for a snap election, insisting that the current coalition government no longer has a majority.

Italy’s largest bank, UniCredit, saw their share price decline by around 10% across the week as investors reacted to the uncertainty regarding Italy’s government. Bayer, the German pharmaceutical and chemical company, proposed an $8 billion settlement for the growing number of lawsuits which claim that its weed killer, Roundup, causes cancer. Investors saw this as a positive development, with the company’s share price rising by 11% across the week as a result.

Investors became increasingly nervous on Monday after the Chinese Yuan fell to its lowest level against the US Dollar for 11 years as a result of China’s central bank taking a ‘hands off’ approach. This was viewed by some as a direct response to the new tariffs announced by President Trump. Companies with significant exposure to the Chinese market, such as Apple and others in the Technology sector, saw their share price plummet.

The majority of sectors rebounded by the end of the week, with positive data on US unemployment claims and Chinese exports lifting investor sentiment.

The Chinese Yuan breached the 7 Yuan per US Dollar level on Monday, after China’s central bank allowed the currency to move freely in line with market forces. This lead to the US Treasury Department labelling China a currency manipulator for the first time in 25 years. The Chinese central bank reverted to setting the Yuan at a reference point of 7.0039 per US Dollar on Thursday, which calmed fears that they were trying to start a currency war.

Data released during the week showed that Japan’s economy expanded faster than expected for the 2^nd quarter of the year, at an annualised rate of 1.8%. Despite the positive news from Japan and China, investors remained nervous, with interest rate cuts by central banks in India, Thailand and New Zealand adding to the negative sentiment.

Cabinet minister Michael Gove reported this week that the EU are refusing to negotiate with the UK over a new Brexit deal, which added to the likelihood of the UK leaving the EU with no deal on the 31^st October. Figures showing that the UK economy contracted by -0.2% in the 2^nd quarter of the year also contributed towards increased demand for the security of government debt, pushing Gilt yields lower.

News that industrial production in Germany declined by more than expected in June, with exports also sharply declining, fuelled fears that Europe’s largest economy could be heading for a recession. Uncertainty around the future of the Italian government also caused investors to seek the security of German government debt.

Data was released on Thursday showing that the number of applications for unemployment benefit in the US fell unexpectedly, suggesting that the US labour market remains strong. This was not able to lift investor sentiment however and treasury yields continued to fall throughout the remainder of the week.

GBP / EUR – Current 1.0742 Previous 1.0950

The prospect of a no-deal Brexit continues to influence currency traders and with GDP data showing that the UK economy contracted in the 2^nd quarter of the year being released on Friday, the Pound moved lower against both the US Dollar and the Euro.

With investors concerned the US-China trade war is set to continue for some time and government bond yields hovering at low levels, the demand for Gold remains strong.