Market Commentary 30th September 2019 from Daniel Perkin

Posted by melaniebond
Market Commentary 30th September 2019
Equity Indices
UK equities saw mixed performance this week with the FTSE 100 index ending up 1.12%. Conversely, the FTSE 250 index closed the week down -0.99%. Such mixed fortunes were driven largely by Brexit dominated news flow and comments from Michael Saunders, member of the Bank of England’s Monetary Policy Committee (MPC). During the week, Saunders hinted that the UK base rate may need to decrease amidst the ongoing Brexit uncertainty; even if the UK exits the EU on amicable terms.

This, together with the political fallout that followed the UK Supreme Court’s verdict on the prorogation of Parliament, did little to support Sterling this week. As a result, the share prices of those FTSE 100 constituents that generate their profits in non-Sterling denominated currency rallied. However, this week’s political paralysis and uncertainty over the direction of the economy weighed on the more domestically focused FTSE 250 index as result.

Elsewhere this week, the demise of Thomas Cook on Monday gave propulsion to airline stocks with TUI, for example, climbing by 12.5% as airlines looked to increase their capacity over the coming months to pick up the slack.

European equity markets ended this week in negative territory with the FTSE All World Index – Europe ex UK declining by -1.15% and Germany’s main index, the DAX, declining by -0.71%. This week investors found little solace in news flow as data showed the Eurozone’s powerhouse economy, Germany, edging ever closer to a recession.

During the week, economic data out of Germany indicated the biggest slowdown in manufacturing activity since the financial crisis, in part due to an uncertain outlook for the car industry, Brexit and the ongoing US-China trade war. There were also signs that the economy as a whole contracted during September as confidence fell.

Unexpectedly, Germany’s representative at the European Central Bank (ECB), Sabine Lautenschläger, resigned from her post this week, citing disagreement with the ECB’s current expansive and highly accommodative monetary policy. Loose monetary policy has supported asset prices across the globe in the past decade and Lautenschläger’s comments run contrary to this narrative, which added uncertainty to the markets.

US equities similarly came under pressure this week with the S&P 500 index closing the week down by -1.04%.

The decision by the Democratic Speaker of the House of Representatives, Nancy Pelosi, to begin impeachment hearings on President Trump has weighed on US equities. Reports too that the White House is considering proposals to curb US portfolio flows into China and restricting Chinese companies trading on US exchanges also soured sentiment.

Shares in US listed Chinese technology companies, Alibaba and Baidu for example, ended the week down by -9.06% and -3.76% respectively amidst the ongoing trade tensions between the world’s two largest economies.

Asian markets continued the broadly negative theme this week with the FTSE All World Index – Asia Pacific declining by -1.60%.

In China, the Shanghai Composite Index fell by -2.47% as data released during the week showed industrial profit declining by -2% on a year-on-year basis during August. Manufacturing demand remains weak in China, which hasn’t been helped by US imposed tariffs and a deterioration in China-US relations under President Xi and President Trump.

Japan’s Nikkei 225 index ended the week down by -1.47%; despite an indicative survey released on Tuesday showing strong growth in the country’s services sector during September.

Bond Yields
UK government bond yields continued their decline this week. The 10-Year Gilt Yield fell from 0.63% to 0.50%, a decline of almost -21%. Comments from the MPC’s Michael Saunders and the latest developments in the Brexit saga have helped to push the 10-Year yield down further.
Weak German data this week saw the 10-Year German Bund yield continue its descent into negative yield territory from -0.52% to -0.57%.
US government bond yields were largely unchanged this week, with the 10-Year US Treasury yield falling from 1.72% to 1.68%.
GBP / USD – Current 1.2292 Previous 1.2433

GBP / EUR – Current 1.1233 Previous 1.1324

Sterling has come under pressure this week against the US Dollar in part due to Michael Saunders’ dovish comments on the likely trajectory of UK interest rates. Against the US Dollar, Sterling was down -1.13% this week.

Against the Euro, Sterling was largely unchanged this week, with the economic outlook on both sides of the English Channel remaining uncertain and giving little impetus for change.

Despite the negative economic news flow this week, the gold spot price ended the week down by -1.3% and below the psychologically important $1,500 level at $1,497 per ounce. The precious metal is traditionally seen as a safe haven asset in times of uncertainty and is generally uncorrelated with other asset classes.
The spot price of Brent Crude oil ended the week down by -3.69% as production continues to recover from the attacks on the two Saudi oil processing facilities, which caused the price of Brent to spike by nearly 20% earlier this month. In general, the ongoing US-China trade war and a temporary hiatus in US-Iran tensions as world leaders met at the United Nations has weighed on the price of Brent this week, which remains sensitive to geopolitical relations in the Middle East.