Market Commentary 28th January 2020 from Charlie Hancock

Posted by melaniebond
Market Commentary 28th January 2020
Equity Indices
UK equity indices moved lower last week, with the FTSE 100 declining by 0.11% and the FTSE 250 falling by 0.53%. The coronavirus, originating from Wuhan in China, dominated headlines throughout the week and impacted market sentiment around the globe. Both indices did recover some of the week’s losses on Friday, with positive data for the UK economy boosting appetite for UK assets.

Companies with significant exposure to the Chinese market struggled as investors sold stocks which are likely to be affected by a slowdown in activity in China. Despite raising their revenue outlook on Wednesday, luxury goods maker Burberry Group PLC saw their share price decline by 9.88% across the week. Travel companies also struggled as news reports suggested that international travel is likely to slow, particularly in and out of China. The British Airways owner, International Consolidated Airlines Group, saw their share price fall by 7.45% across the week.

European equity markets were mixed last week, with the broad FTSE All World Index – Europe ex UK declining by 0.71% and Germany’s DAX index rising by 0.48%.

As well as the impact of the general risk off mood evident amongst investors around the globe, European markets had to contend with President Trump threatening the European Union with ‘very high tariffs’ should they fail to agree on a trade deal. The European Central Bank (ECB) voting to leave monetary policy unchanged also unnerved some investors, fuelling the sell off in equities. French luxury goods company Kering, which has significant exposure to China, saw their share price fall by 6.05% across the week.

Purchasing Managers Index (PMI) data showed improvements for both the manufacturing and services sectors in Germany, which helped the DAX index to recover the week’s losses and head into positive territory during Friday’s trading session.

US equity indices pulled back from the previous week’s record highs, with the S&P 500 falling by 0.13% and the Dow Jones Industrial Average Index registering a 1.22% fall.

Both indices posted daily declines as concerns around the coronavirus outweighed further positive earnings results released by US corporations during the week. The majority of US corporations to report on 4th quarter earnings for 2019 so far have beaten analyst expectations.

Inovio Pharmaceuticals Inc saw their share price rise by 28.88% across the week after receiving a grant from the US government to develop a vaccine for the coronavirus.

Asian markets struggled last week, with China’s stock market in particular bearing the brunt of concerns about the economic impact of the coronavirus. The broad FTSE All World Index – Asia Pacific declined by 1.22%. Japan’s Nikkei 225 index fell by 0.89% and China’s Shanghai Composite Index posted a loss of 3.22% for the week.

As the number of reported coronavirus cases began to rise, investors became nervous about the ramifications for the Chinese economy, resulting in a particularly aggressive sell off for Chinese equities. With Chinese New Year celebrations underway, it is an important period for the domestic economy, however, authorities were forced to restrict travel in and out of major cities in an attempt to slow the spread of the virus. Officials from Beijing suggested that businesses operating in the Tourism sector may require financial support if the lockdown of major cities remains in place for an extended period of time.

Bond Yields
UK government bond yields declined last week as investors ditched equities in favour of safer assets, such as government bonds. The 10-Year Gilt yield moved from 0.63% to 0.56%.

Last week saw several positive pieces of data for the UK economy, weakening the case for the Bank of England to cut interest rates before the end of the month. The number of people in employment grew, with the overall unemployment rate holding at 3.8% and average weekly earnings growth remaining at a healthy 3.2%. In addition, January’s PMI data for the manufacturing and services sectors moved into expansionary territory. Despite this data casting doubt on an imminent rate cut, gilt yields came under pressure as a result of investors seeking increased exposure to the asset class.

The 10-Year German Bund yield also declined last week from -0.22% to -0.34%.

Despite the German stock market performing well last week in comparison to its global counterparts, investors sought increased amounts of German government debt, pushing yields further into negative territory.

US government bond yields also declined last week as the negative sentiment amongst investors took hold. The 10-Year Treasury yield declined from 1.82% to 1.68% across the week.
GBP / USD – Current 1.3073 Previous 1.3016

GBP / EUR – Current 1.1857 Previous 1.1732

The Pound strengthened last week as commentators began to doubt whether the Bank of England would cut interest rates at their upcoming policy meeting. The Pound was broadly flat against the US Dollar, which strengthened in its own right, but climbed by 1% against the Euro.

The gold spot price rose by 0.93% across the week to reach $1,571 per ounce. With investors around the globe seeking safe haven assets, prices for the precious metal climbed.
Oil prices slipped further last week, with the Brent Crude oil spot price falling by 6% to reach around $60 per barrel.

China is one of the largest consumers of oil and so concerns that domestic travel and manufacturing activity may slow considerably resulted in oil traders anticipating a fall in demand.