Market Commentary 22nd October 2019 from Charlie Hancock

Posted by melaniebond
Market Commentary 22nd October 2019
Equity Indices
The FTSE 100 index declined by -1.33% last week during a relatively calm period for global equity markets, with sharp rises for the Pound dragging the index down. The more domestically exposed FTSE 250 index rose by 0.93%.

Investors were in an upbeat mood after reports suggested that Boris Johnson was moving closer to securing a new deal with the European Union. The positive sentiment was visible in the more domestically focussed areas of the market, with companies that generate a large proportion of their revenues overseas lagging. Stocks in the housebuilding and banking sectors, who are highly sensitive to the condition of the UK economy, continued their rally from the previous week. Persimmon PLC rose by 4.94% and Barratt Developments PLC gained 3.03%. Royal Bank of Scotland Group (RBS) saw their share price climb by 9.16% across the week, with Barclays also seeing a solid gain of 2.82%.

It was confirmed on Thursday evening that officials from the UK and the EU had reached an agreement, however, as it became clear on Friday that the Prime Minister may struggle to obtain Parliamentary support for his deal, the Pound and UK stock markets paused to remain broadly flat across Thursday and Friday.

European equity markets also saw modest rises across the week. The broad FTSE All World Index – Europe ex UK rose by 1.25%, with Germany’s DAX index rising by 0.97%. For most of the week, investors were in a positive mood as the possibility of the UK and the EU reaching an agreement was touted. News reports regarding the ongoing US-China dispute also suggested that ‘substantial progress’ was being made, which lifted investor sentiment.

European equities did give up some gains towards the end of the week after weak earnings reports provided investors with evidence that the Eurozone economy continues to struggle. French automaker, Renault, announced it was cutting its revenue and profit forecast for the current year, which resulted in a -9.07% decline in the company’s share price across the week. Danone, the world’s biggest yoghurt maker, also posted a downbeat forecast. Consequently, their share price declined by -9.16% across the week, with the gloomy mood spreading to stocks across the food & beverage sector.

US equity markets rose marginally during the week, with the S&P 500 index posting a 0.54% gain. Last week saw positive comments from officials on both sides of the US-China trade dispute, with reports suggesting that the two sides may sign an interim deal next month. Investors did however appear to be unnerved by the uncertainty resulting from the ongoing impeachment inquiry against President Trump.

Despite generally positive earnings reports being released by US companies during the week, gains in US equities were muted as investors chose to focus on wider macro-economic news. Weakening US retail sales data, combined with a downward revision to the global growth forecast from the International Monetary Fund (IMF) and weakening Chinese data, resulted in a cautious approach from equity investors during the week.

Asian markets were mixed last week. The broad FTSE All World Index – Asia Pacific climbed by 1.63%, with Japan’s Nikkei 225 rallying by 3.19% and China’s Shanghai Composite Index declining by -1.19%.

Friday saw the release of data which indicated China’s economy is growing at its slowest pace since 1992. Whilst China’s expanding middle class continues to drive growth in domestic consumption, the global industrial and manufacturing slowdown has contributed to slowing growth for the Chinese economy as a whole, although it should be noted that an annualised growth rate of 6% is strong in global terms. Nevertheless, the release of this data resulted in a sell-off for Chinese equities on Friday.

As sentiment on the US-China dispute improved, Japanese markets were lifted, with hopes that the worst may have passed for the technology sector. In addition, the Japanese government suggested that a new trade deal recently signed between the US and Japan could boost the domestic economy.

Bond Yields
UK government bond yields were flat across the week, with the 10-Year Gilt yield hovering around 0.71%.

Gilt yields have climbed in recent weeks as the possibility of a no-deal Brexit on the 31st October has waned. Whilst Prime Minister Boris Johnson was able to agree a new deal with the EU last week, the next steps remain unclear and as a result bond yields were relatively steady last week.

The 10-Year German Bund yield rose from -0.44% to -0.38% last week.

With investors generally in a risk-on mood for most of the week, yields for German sovereign debt gradually rose as capital flowed away from bonds and into equities.

US government bond yields were largely unchanged across the week. The 10-Year Treasury yield rose slightly from 1.73% to 1.75%.

The muted rise in the US stock market last week coincided with a slight rise in yields for US government debt. With markets currently pricing in a 0.25% cut from the Federal Reserve at their next policy meeting, it is widely expected that 10-Year Treasury yields will remain below 2% in the near term.

GBP / USD – Current 1.2984 Previous 1.2668

GBP / EUR – Current 1.1621 Previous 1.1459

The Pound continued to rise last week as negotiations between officials from the UK and the EU intensified. With currency traders speculating that a no-deal Brexit on the 31st October is less likely, the pound gained strongly, rising against the US Dollar and the Euro by 2.49% and 1.41% respectively.

The gold spot price was broadly flat across the week against a backdrop of broadly positive investor sentiment. Despite the broadly risk-on mood, the release of downbeat economic data appeared to provide support for precious metal prices to remain steady. The gold spot price finished the week at around $1,490, up by 0.07% across the period.
The spot price of Brent crude oil declined by around 1.8% across the week, with the price per barrel at around $59 on Friday. It appears that relatively high inventories, together with downbeat data for the global economy, were responsible for the decline in wholesale oil prices.