Market Commentary 14th October 2019 from Daniel Perkin

Posted by melaniebond
Market Commentary 14th October 2019
Equity Indices
The FTSE 100 and FTSE 250 indices were range-bound for much of last week as uncertainty over Brexit and tensions between the US and China persisted. However, risk appetite returned later in the week following positive talks between the British Prime Minister and the Irish Taoiseach on finding a way towards a Brexit deal, which would satisfactorily deal with the border issue in Ireland. Investor sentiment was further buoyed by constructive comments coming out of Washington as face-to-face talks between US and Chinese officials began, aimed at resolving the current trade dispute.

The FTSE 100 closed the week up by 1.28% whilst the more domestically focussed FTSE 250 ended the week up by 2.88%.

UK housebuilders and banks were the strongest performers on Friday, benefiting from their direct exposure to the UK economy. For example, Persimmon and Barratt Developments were up by 11.84% and 11.07% respectively, whilst Royal Bank of Scotland Group and Lloyds Banking Group were up by 12.65% and 11.50% respectively.

European markets followed a similar trajectory last week, with Germany’s DAX index increasing by 4.15% and the FTSE All World Index – Europe ex UK, increasing by 3.11%.

Monday saw the release of construction data across the Eurozone, which showed modest growth during September; despite the number of new orders decreasing.

Prices found further support toward the end of last week as the chances of a ‘no-deal’ Brexit appeared to diminish following positive talks and a simmering down of trade tensions between the US and China. This helped propel Germany’s export focussed stocks such as Volkswagen and Daimler, for example, which rallied by 9.25% and 7.41% respectively during the week. German banks were also notably higher.

A similar picture was painted in France, which witnessed strong demand for automotive and banking stocks.

US markets were also positive last week, with the S&P 500 index, for example, closing up by 0.62%.

Equity prices came under pressure earlier in the week as the tit-for-tat exchanges between the US and China continued, with the US deciding to blacklist several Chinese firms and restricting visas on Chinese officials for human rights violations.

All of this came ahead of an important face-to-face meeting between top US and Chinese officials in Washington on Thursday, which aimed to address the current standoff, which despite the headline bravado, is hurting both economies.

US equities responded in kind to the positive mood music coming out of the talks toward the end of last week, which in turn, helped to spur risk appetite across global equity markets.

China’s main index, the Shanghai Composite, climbed by 2.36% last week, it too reacting positively to unfolding developments in Washington. More broadly, the FTSE All World Index – Asia Pacific rose by 0.91%, whilst Japan’s Nikkei 225 increased by 1.81%.

According to data released during the week, China’s services sector expanded at its fastest pace in five months during September; despite exchange rate pressures and rising costs. Whilst still a major exporter in the world, China is seeking to become less reliant on its export markets over the coming decades, and this latest data helps to confirm the resilience of its domestic market in achieving this; despite recent headwinds.

Bond Yields
UK government bond yields increased by 61.36% last week, with the 10-year gilt yield ending the week up at 0.71%.

Bond yields move inversely to their price and the return of risk appetite toward the end of last week saw investors selling save haven assets such as gilts in return for riskier assets.

The 10-year German Bund yield bounced back 25.42% to end the week at -0.44%.

Minutes released on Thursday from the European Central Bank’s (ECB) meeting last month, highlighted disagreement between committee members over the direction of the ECB’s monetary policy, which has helped to drive yields into negative territory in a bid to support the Eurozone economy. Last week and for the first time, Greece auctioned 3-month treasury bills at a negative yield. This essentially means investors are paying the Greek government (backed by the ECB) to look after their money if held to maturity. These are odd times; especially considering only a decade ago it was Greece that was at the epicentre of the sovereign debt crisis!

Uncertainty over the longevity of the ECB’s loose monetary policy together with progress with Brexit talks and an improvement in US-China relations, all helped to weigh on bond prices this week, which saw their yields rise.

US government bond yields also followed suit, ending the week up by 13.07% at 1.73%.

Bond prices here also came under pressure following more positive overtures from President Trump surrounding the ongoing US-China trade dispute and signs of progress in working towards a Brexit deal across the Atlantic.

GBP / USD – Current 1.2668 Previous 1.2331

GBP / EUR – Current 1.1459 Previous 1.1234

Sterling was in demand last week, climbing by 2.73% and 2.00% respectively against the US Dollar and Euro. Brexit uncertainties have weighed on Sterling in recent years, so hopes of an orderly exit helped to increase its appeal to foreign investors last week.

The spot price of gold decreased by -1.04% last week, falling below the $1,500 level once again at $1,489.

The improved economic outlook following constructive talks between the US and China, helped to decrease the appeal of the precious metal last week, which is traditionally seen as a safe haven asset in times of economic uncertainty.

The seemingly less gloomy economic environment supported the spot price of Brent crude oil last week, which rose by 3.67% to $60.51 per barrel.

News on Friday that an Iranian oil-tanker had been struck by missiles in the Red Sea also gave support to the price of oil as geopolitical uncertainty in the oil-rich region continues.