Market Commentary 12th August 2019 from Charlie Hancock

Posted by melaniebond
Market Commentary 12th August 2019
Equity Indices
The FTSE 100 index declined by -2.07% during another difficult week for equity markets around the globe. The FTSE 250 index suffered a smaller loss of -0.84%.

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.

Equity markets in Europe continued to slide this week, with Germany’s DAX index declining by -1.5%. The broader FTSE All World Index – Europe ex UK saw a fall of -0.29%, aided by markets in France and Switzerland holding ground across the week.

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.

The S&P 500 index had a tough start to the week, falling by nearly -3% on Monday, however, the index regained ground to finish the week down by -0.46%.

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.

Asian equities followed global markets downwards during the early part of the week and, despite rising from Wednesday onwards, most indices in the region were still down across the week. The broad FTSE All World Index – Asia Pacific was down by -2.07%, with China’s Shanghai Composite index down by -3.24% and Japan’s Nikkei 225 index down by -1.91%.

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 2nd 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.

Bond Yields
UK government bond yields continued to move lower this week, with yields on 10-Year Gilts declining to 0.48% on Friday.

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 31st October. Figures showing that the UK economy contracted by -0.2% in the 2nd quarter of the year also contributed towards increased demand for the security of government debt, pushing Gilt yields lower.

German Bund yields also continued to decline this week, with 10-Year Bund yields reaching -0.58% on Friday.

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.

US Treasury yields declined to their lowest point for nearly 3 years this week, with 10-Year Treasury notes yielding 1.74% by Friday. The escalating tensions between the US and China have driven investors to seek Treasuries in recent weeks.

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 / USD – Current 1.2033 Previous 1.2162

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 2nd quarter of the year being released on Friday, the Pound moved lower against both the US Dollar and the Euro.

The price of the precious metal continued to rise and, after briefly exceeding the $1,500 mark, finished the week up by 3.9% at $1,496.95 per ounce.

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.

The price of Brent Crude oil fell by around 5.4% this week, reaching $58.53 per barrel on Friday. Whilst OPEC have continued to limit production in an attempt to keep prices stable, increased production outside of the OPEC nations has lead to higher inventories. In addition, fears that a global economic slowdown will reduce the demand for Oil continue to weigh on prices.