Market Commentary 20th January 2020 from Daniel Perkin

Posted by melaniebond
Market Commentary 20th January 2020
Equity Indices
The UK’s main equity indices saw strong gains last week, with the FTSE 100 index and FTSE 250 index for example, increasing by 1.1% and 1.5% respectively. The FTSE 100 reached a 6-month high on Friday, although drifted back slightly by the closing of the bell.

The agreement between the US and China surrounding the first phase of trade talks helped to lift sentiment and risk appetite on Wednesday. Valuations were further supported by broadly reassuring Chinese economic data released on Friday, which confirmed the economy expanded as expected during the final quarter of 2019, up by 6%, whilst up by 6.1% overall for the year. This helped the FTSE 100’s China sensitive stocks, particularly miners and pharmaceuticals, with Rio Tinto gaining by 3.2% and GlaxoSmithKline gaining by 2.7% over the week, for example.

Elsewhere, data released by the Office for National Statistics during the week showed that UK retail sales unexpectedly fell during December, with sales also down by 1.0% in the final quarter of 2019. Data also released by Visa during the week confirmed a 1.2% decline in household spending during 2019; although the company said that expenditure on hospitality, eating out, and online spending, all remained strong.

European equities were similarly in demand during the week as measured by the FTSE All World Index – Europe ex UK, which was up by 1.1%.  France’s CAC 40 index, also rose by 1.1%; although Germany’s main index, the DAX, was more subdued with it recording a gain of 0.3%.

Sentiment across the continent was supported by US/ China news flow last week, which seemed to point to a potentially brighter short term outlook for the world economy than had recently been expected. With the US/ China trade talks now making progress, there is concern in some corners of the EU and amongst investors that the US, confident in its recent success, may soon turn its sights on the current EU deal.

US markets remained buoyant during the week; the S&P 500 for example, was up by 2.0%, whilst the more concentrated and price-weighted index, the Dow Jones Industrial Average, rallied by 1.8%. The Dow also reached an all-time high during the week.

Valuations were driven higher following the official agreement between the US and China over the so called ‘Phase One’ trade talks, which will further open up Chinese markets to US companies whilst still keeping in place many of the import tariffs recently imposed on China by the US. Such developments are expected to play to President Trump’s supporters and help Trump secure a second term in office as Americans head to the polls later this year.

A surge in demand for US equities during the week also helped Google’s parent company, Alphabet, reach a milestone, with its market capitalisation hitting the $1 trillion mark for the first time.

In Asia, the FTSE All World Index – Asia Pacific index increased by 0.8%.

Recent efforts by the Chinese central bank to spur economic activity appear to be working, with China releasing a flurry of positive data on Friday, which confirmed an expanding economy, strong production output and strong retail sales. Despite this however, mainland equities were under pressure last week, with investors perhaps more concerned with the deal struck in Phase One of the trade talks between China and the US. This deal keeps in place many of the import tariffs imposed on Chinese goods entering the US economy. The Shanghai Composite index was down by 0.5%. partly as a result.

In Japan, the Nikkei 225 index was up by 1.0% during the week, with Japanese equities benefiting from a weaker Yen, which is traditionally seen as a safe haven currency in times of uncertainty.

Bond Yields
Government bond yields, which move inversely to their prices, came under pressure last week as investors sought exposure to the sector, despite the general return of risk appetite.

In the UK, the yield on the 10-Year Gilt fell by 18.2% to 0.6%.

A similar picture was seen in Europe, with the 10-Year Bund yield for example, falling by 10% to close the week at -0.22%.
The 10-Year US Treasury yield struggled to find direction during the week, buffeted by mixed economic data and positive developments with the US/ China trade deal. It was unchanged overall at the end of the week.
GBP / USD – Current 1.3016 Previous 1.3064

GBP / EUR – Current 1.1732 Previous 1.1748

In the currency markets, Sterling came under pressure as expectations grew that the Bank of England was more likely than not to cut the base interest rate following weaker than expected UK inflation data released during the week. Sterling fell by 0.37% against the US Dollar and 0.14% against the Euro during the week. The Bank of England is due to announce its latest interest rate decision on 30th January 2020.

The spot price of gold slipped by 0.3% during the week as sentiment generally favoured riskier assets. It closed at $1,557.24 per ounce on Friday.
Events in the Middle East took a relatively quieter tone last week as the US and Iran resisted any further provocation. In this environment, the spot price of Brent crude oil slipped slightly by 0.2% during the week, closing at $64.85 per barrel.