Market Commentary 7th October 2019 from Charlie Hancock

Posted by melaniebond
Market Commentary 7th October 2019
Equity Indices
The FTSE 100 declined by -3.65% during a gloomy week for stock markets globally. The more domestically exposed FTSE 250 index declined by -2.45%, with a strengthening pound vs the US Dollar weighing on the larger cap FTSE 100 index.

Investors were in a downbeat mood for most of the week after the release of weaker than expected data on US jobs and wages. Sentiment did improve slightly on Friday after commentators highlighted that US unemployment is still near a 50-year low. News that the US will introduce new tariffs on goods imported from the EU also spooked investors.

Data on the UK economy released during the week painted a slightly gloomy picture, with purchasing managers index (PMI) data for the construction industry showing worsening conditions. Manufacturing PMI rose to a four month high during September, with Brexit stockpiling appearing to have an impact, however, the data was still at a level which indicates contracting rather than expanding activity.

European markets were also in negative territory, with the German DAX index declining by -2.97% and the broader FTSE All World Index – Europe ex UK falling by -2.45%.

Concerns regarding the health of the US economy, together with poor forecasts for Germany’s economy, left investors feeling nervous. Consequently, equity markets across Europe were affected by the sell-off, with Germany’s stock market bearing the brunt. With an economy highly reliant on trade with the rest of the world, worsening economic conditions in the US and beyond will have clear ramifications for German businesses. As a result, investors usually take a bearish view on German equities whenever weak data surfaces for its key trading partners, such as the US and China.

Sentiment for the European economy was also knocked by a ruling from the World Trade Organization (WTO). The WTO sided with the US in a dispute regarding subsidies for Airbus and Boeing and gave the US permission to impose tariffs on $7.5billion worth of goods imported from the EU.

US equities saw mixed performance during the week, with an aggressive sell off occurring on Tuesday and Wednesday, followed by a recovery on Thursday and Friday. The S&P 500 index finished the week down by -0.33%.

Investors chose to ditch US stocks after data showed that jobs in the US expanded by less than expected during September. The data showed that employment gains were driven by the service sector, with employment in the retail and construction sectors remaining weak. The data also suggested that the manufacturing sector saw job losses during September, which added to concerns that global manufacturing is heading deeper into recessionary territory.

The consumer is continuing to drive growth in the US economy, however, data released last week showing that wage growth is slowing sparked fears that consumption in the US may weaken in the near future.

Asian markets were broadly negative last week, with the FTSE All World Index – Asia Pacific declining by -0.87%. China’s Shanghai Composite Index fell by -0.92%. Japan, who are exposed to the global economy in a similar way to Germany, saw their stock market suffer from the negative investor sentiment on display across the globe. The Nikkei 225 index declined by -2.14% across the week.

The Bank of Japan’s quarterly survey for the July to September period showed that sentiment amongst the nation’s manufacturers deteriorated to its weakest level since June 2013. Whilst some PMI data for smaller Asian nations painted a more positive picture last week, the downbeat US data was the overriding consideration for investors and as a result, most stock markets in Asia were left in negative territory.

Bond Yields
UK government bond yields fell last week, with the 10-Year Gilt yield moving from 0.50% to 0.44%.

With investor nerves showing last week, the safety of government debt was in demand across the globe. In addition, the uncertainty regarding Brexit and the UK’s political landscape contributed to yields moving south.

The 10-Year German Bund yield declined further last week, from -0.57% to -0.59%. Investors are becoming increasingly nervous about the future direction of the global economy, with Germany in particular being closely watched to assess the shorter term outlook.

With recent data pointing to a slowdown in most economies, German government debt has been in high demand. Consequently, German Bund yields have remained in negative territory, with even a 30-Year Bund yielding less than zero at present.

US government bond yields also moved lower last week, with the 10-Year Treasury yield declining from 1.68% to 1.53%.

With the US job market seemingly cooling and wage growth slowing, some commentators believe there will be greater pressure on the Federal Reserve to cut rates again before the end of the year. Consequently, markets are moving to price in further rate cuts, with the 10-Year Treasury yield moving closer to the 1.50% mark, a significant movement away from the 1.90% seen in early September.

GBP / USD – Current 1.2331 Previous 1.2292

GBP / EUR – Current 1.1234 Previous 1.1233

The Pound strengthened against the US Dollar by 0.32% and was broadly flat against the Eurozone currency during the week. The GBP to USD rate creeped up as the Dollar declined against most major currencies following the release of downbeat data for the US economy.

The gold spot price climbed by 0.51% across the week, pushing through the $1,500 per ounce level to finish the week at $1,504.66.

Gold continues to be sought as a safe haven asset during periods of negative sentiment amongst investors. The sell-off experienced in equity markets last week therefore resulted in increased demand for the precious metal.

The spot price of Brent crude oil fell from $61.91 to $58.37 last week, a movement of -5.72%. Oil traders appeared to be focussing on the likelihood of falling demand if the global economy continues to slow. In addition, suggestions that excess supply may be forming in some inventories provided downward pressure for oil prices.