Market Commentary 2nd September 2019 from Charlie Hancock

Posted by melaniebond
Market Commentary 2nd September 2019
Equity Indices
The FTSE 100 index rose by 1.58% during a week in which most global equity markets were in positive territory. The FTSE 250 index saw a more subdued gain of 0.82% across the week.

Apart from Monday’s session which saw the index fall slightly, the FTSE 100 posted gains each day of the week as investors focussed their attention on the possibility of positive developments in the US-China trade dispute. Pessimistic results from a UK consumer confidence survey, together with continued weakness for Pound Sterling, held back the domestically exposed FTSE 250 index.

Mining stocks experienced strong gains this week due to rising commodity prices. The price of Nickel climbed to its highest point for nearly 5 years following suggestions that Chinese firm, Ramu Nickel, may have to temporarily close its plant in Papua New Guinea after spilling 200,000 litres of toxic waste into the sea. Rio Tinto PLC saw their share price climb by 5.74% across the week, with Glencore PLC rising 5.08%.

European equity markets experienced reasonable gains this week, with the broad FTSE All World Index – Europe ex UK rising by 1.19%. Germany’s DAX rose by 2.82%, with positive sentiment on the US-China trade dispute boosting the trade sensitive index. In addition, the increased likelihood of Italy forming a coalition government without the need for an election lifted European markets.

Most of the week’s gains came on Thursday and Friday after officials in Beijing said discussions with US negotiators were continuing and that China would not retaliate to the latest tariff increase announced by the US. These comments were received by investors as a sign that a resolution to the trade war may be on the horizon.

Despite recent signs of a slowing German economy, this week saw strong gains for Germany’s property sector after reports suggested that plans for a rent-freeze for Berlin could be weakened. Vonovia SE, Germany’s largest residential property company, saw their share price rise by 4.79% across the week.

US markets were also boosted by hopes of meaningful progress in the US-China trade dispute, with the S&P 500 index rising by 2.79% across the week.

The comments from the Chinese government provided investors with reason to be positive on US equities. One official from Beijing said that the discussions should now be on removing new tariffs to prevent any escalation in the dispute, adding that meaningful discussions should take place during a meeting between both sides later this month.

A revision to 2nd quarter GDP data showed that the US economy expanded by a healthy 2%, with the domestic consumer continuing to drive growth. Investors will be keeping a close eye on US economic indicators over the coming months to assess what impact the trade dispute and tariffs are having on the US economy.

Most US companies reported strong results during the recent earnings season, however, last week saw consumer electronics giant, Best Buy, report lower than expected revenues for the 2nd quarter of the year. The company’s share price declined by 3.82% across the week as a result.

Asian markets were weaker than their global counterparts this week, with the FTSE All World Index – Asia Pacific rising by 0.44%. China’s Shanghai Composite Index declined by -0.39% and Japan’s Nikkei 225 index was broadly flat at -0.04%. India’s stock market performed strongly during the week, which boosted the broader FTSE index.

Whilst last week saw positive comments on the US-China trade dispute from both parties, the ongoing political uncertainty in Hong Kong and Japan’s trade dispute with South Korea appeared to impact investor sentiment in the region.

Bond Yields
UK government bond yields declined during the middle of the week, with the 10-Year Gilt yield dipping below 0.44%, however, across the week the 10-Year yield remained flat at 0.48%.

With the ongoing political uncertainty in the UK, Gilt yields are likely to remain suppressed, however, any Brexit developments in early September could cause yields to climb or fall further. A no deal Brexit has not been fully priced into currency markets yet and yields could therefore fall further if Pound Sterling weakens in the coming weeks. A delay in the UK’s departure from the European Union could lead to expectations of a Theresa May style withdrawal agreement, which would likely result in the Pound and Gilt yields rising.

Government bond yields in Europe were also relatively stable this week. The yield on 10-Year German Bunds moved slightly lower across the week from -0.68% to -0.70%. The yield on 10-Year Italian government bond yields fell below 1% as the likelihood of an election being required to form a new government decreased.

Data released on Friday showed that the headline inflation rate for the Eurozone was 1% in August, which added to expectations of stimulus measures being announced by the European Central Bank (ECB) next month. These expectations were dampened somewhat by Hawkish comments from key ECB members who suggested that further monetary easing is not yet warranted.

US government bond yields moved slightly lower during the week, with the yield for 10-Year Treasuries declining from 1.54% to 1.50%.

There was little to drive movements in treasury yields this week. Investors are however likely to trade Treasury stocks in greater volumes as the Federal Reserve’s next policy meeting draws closer, which could mean yields are exposed to sharper movements in the coming weeks.

GBP / USD – Current 1.2156 Previous 1.2266

GBP / EUR – Current 1.1069 Previous 1.1026

The Pound weakened by 0.9% against the US Dollar this week, whilst strengthening by 0.39% against the Euro. The Eurozone’s currency weakened in its own right against most major currencies. The Pound’s movements were largely driven by Boris Johnson’s move to suspend parliament.

The gold spot price fell by 0.43% to $1,520 per ounce. Investors were broadly in a risk on mood this week, which was reflected in the rise in equity markets. As a result, the demand for the precious metal reduced slightly.
The spot price of Brent Crude oil rose by 1.84% to $60.43 per barrel. Despite estimates showing US inventories have continued to grow beyond expectations, wholesale prices rose. Some analysts speculated that this was due to expectations of increased demand in the event of positive developments between the US-China.