Market Commentary 3rd February 2020 from Charlie Hancock

Posted by melaniebond
Market Commentary 3rd February 2020
Equity Indices
UK stocks fell last week as investors around the globe became increasingly risk averse. The FTSE 100 index declined by 3.95% across the week and the FTSE 250 index lost 2.85%.

As the number of confirmed cases of coronavirus rose, investor nerves continued to fuel a sell-off in equities around the globe. The more internationally exposed FTSE 100 was also hampered by a strengthening Pound Sterling and a heavy weighting towards oil and mining stocks, which performed poorly during the week.

With China accounting for around 14% of global oil consumption and nearly 50% for steel and copper, oil and mining stocks suffered as it became clear that the coronavirus would impact the short-term demand for these resources. In the mining sector, Rio Tinto PLC fell by 7.99% across the week, Anglo American PLC by 6.87% and BHP Group PLC by 6.14%. Royal Dutch Shell PLC saw their share price fall by 9.09%, with rival BP PLC experiencing a 6.05% decline.

European equity markets also struggled last week. The broad FTSE All World Index – Europe ex UK lost 2.40%, with Germany’s DAX index declining by 4.38%.

Results published by European companies during the week, which were broadly positive, as well as improved economic data points were overshadowed by concerns regarding the impact of the coronavirus. With China being Germany’s biggest trading partner, concerns of a slowdown in exports to the Chinese market weighed heavily on the DAX index.

German consumer confidence rose unexpectedly in January, with the same data for France also showing a surprise uptick.

US equities did not escape the sell off which ensued last week, with the S&P 500 index posting a 2.12% loss for the week. The Dow Jones Industrial Average Index declined by 2.53%.

With sentiment around the globe remaining negative, US stocks were sold off throughout the week as investors focussed on the news flow relating to coronavirus rather than company results or economic data.

On Wednesday, Facebook Inc reported an increase in revenue and profits for the 4th quarter of 2019, however, investors were disappointed with the rate of growth and as a result the company’s share price declined on Thursday and Friday to finish the week down by 7.36%.

With China’s main market closed throughout the week for the Lunar New Year holiday, there was no movement in the Shanghai Composite Index. The broad FTSE All World Index – Asia Pacific declined by 3.72%. Japan’s Nikkei 225 index declined by 2.61%.

In a similar fashion to other regions, the economic data released during the week was broadly positive and in contrast to the sentiment being displayed by investors. Purchasing Managers Index (PMI) data for manufacturing in China was 50 in January, whilst non-manufacturing PMI rose to 54.1. A level greater than 50 indicates that activity is expanding, with a reading below 50 indicating contraction. Analysts pointed to an improvement in business sentiment following the Phase One trade deal agreed between the US and China.

Bond Yields
UK government bond yields declined, with the 10-Year Gilt yield moving from 0.56% to 0.52% across the week.

Whilst some market participants were anticipating a cut to 0.50%, last week saw the Bank of England Monetary Policy Committee (MPC) vote to hold the base rate at 0.75%. In addition, the Pound strengthened. These factors would ordinarily support a rise in yields, however, with demand for UK Gilts increasing throughout the week as investors sought safe haven assets, Gilt yields came under pressure.

The 10-Year German Bund yield also declined last week, moving from -0.34% to -0.43%.

Bunds continue to be one of the most demanded assets during times of market stress, due to the strength of Germany’s public finances.

US government bond yields moved lower last week across the yield curve, with the 10-Year Treasury yield moving from 1.68% to 1.51%. Investor demand for US treasuries strengthened as the sell off in equities intensified.

Whilst the Federal Reserve have signalled that no further rate cuts are on the horizon, the market is anticipating at least one further 0.25% cut before the end of the year.

GBP / USD – Current 1.3206 Previous 1.3073

GBP / EUR – Current 1.1903 Previous 1.1857

The Pound strengthened against most major currencies last week. Against the US Dollar it rose by 1.02% whilst gaining 0.39% against the Eurozone currency.

A prominent consumer confidence survey for the UK showed a pick up during January and pointed to an improving picture for the UK economy. The Bank of England’s MPC voting to hold interest rates reflected this view and contributed towards a rise in the Pound.

The gold spot price rose by 1.12% last week to reach $1,589 per ounce. Demand for the precious metal has remained buoyant during recent months and last week’s risk-off environment contributed to investors purchasing gold in increased amounts, fuelling a further rise in the price.
With concerns around the impact of the coronavirus taking centre stage last week, oil traders were reacting to the expectation of reduced demand in the near future. The spot price for Brent Crude dropped by 4.17% to reach $58.16 per barrel.