Market Commentary 24th March 2020 from Charlie Hancock

Posted by melaniebond
Market Commentary 24th March 2020
Equity Indices
During a volatile week, UK equity indices lost further ground. The FTSE 100 rallied on both Tuesday and Friday, but failed to recover the losses experienced during the rest of the week. The index was down by 3.27% across the week, with the FTSE 250 index suffering a heavier loss of 12.65%. A weakening Pound Sterling helped to limit losses for the more internationally exposed FTSE 100.

With the number of confirmed coronavirus cases increasing throughout the week, the UK government instructed people to follow strict social distancing guidelines and advised against all but essential travel. These restrictions are likely to have a severe impact on economic activity and the Bank of England (BoE) responded by announcing further measures to try and counter the impact. Nonetheless, investor sentiment continued to deteriorate, with equities being sold off as a result.

With the BoE cutting interest rates again to historic lows, the banking sector struggled. Barclays PLC saw their share price decline by 13.05% across the week, with Lloyds Banking Group PLC falling by 15.28%.

European equity markets continued to slide last week, with the broad FTSE All World Index – Europe ex UK declining by 4.38%. Germany’s DAX index ended the week down by 3.28% after staging a late rally to recover some of the losses experienced earlier in the week.

Most of mainland Europe saw increased numbers of cases last week, with the death toll in Italy increasing rapidly. On Monday, the French President, Emmanuel Macron, announced a national lockdown for a period of 15 days. The risk off mood amongst investors therefore persisted for most of the week, until the announcement of a significant stimulus package from the European Central Bank (ECB) helped most European markets to stage a late week rally.

LVMH, the luxury goods giant who are known for burning unsold stock rather than offering the items at a discount, announced last week that they would start producing hand sanitizer for French hospitals free of charge.

US equity indices suffered heavy losses last week. The S&P 500 index declined by 14.98% and the Dow Jones Industrial Average index posted a loss of 17.30%.

US markets were spooked early in the week after the Federal Reserve announced on Sunday that they were cutting interest rates to zero. The Fed also announced they would begin purchasing $700bn of treasury stocks and mortgage backed securities, in an attempt to calm some of the market turmoil experienced in recent weeks.

Investors appeared to be alarmed by the Fed making this emergency announcement, with slow progress on a fiscal stimulus package from the US administration adding to concerns that the US economy is set to contract sharply.

Asian markets were mostly in the red last week, with the broad FTSE All World Index – Asia Pacific declining by 7.48%. China’s Shanghai Composite Index lost 4.91% and Japan’s Nikkei 225 slid by 5.04%.

Last week saw further signs of normalisation in China, with nearly 75% of the workforce having resumed their normal activities. The International Monetary Fund (IMF) said that measures taken by Chinese policymakers to protect vulnerable households and small businesses were effective. Chinese officials are reported to be working on further stimulus measures, with an increase in public infrastructure investment and reduced reserve requirements for Chinese banks expected.

Bond Yields
UK government bond yields climbed last week, with the 10-Year Gilt yield reaching 0.56% on Friday.

Despite the BoE cutting the base rate to an all time low of 0.10%, yields ticked upwards as the previous week’s trend of investors selling easily realisable assets continued.

German government bond yields experienced similar moves, with the 10-Year Bund yield rising from -0.58% to -0.34% across the week.

The ECB announced a ‘Pandemic Emergency Purchase Programme’, which will involve the purchase of up to €750 billion worth of both government and corporate bonds. The bank stated that the aim of the programme would be to keep borrowing costs low for businesses and consumers across the Eurozone. Some of the lower rated government debt rallied as a result, with the spread between 10-Year Bunds and 10-Year Italian government bonds narrowing from 2.37% to 1.97%.

US government bond yields spiked during the week as investors sold treasuries in vast amounts. The 10-Year Treasury yield rose marginally above 1.20% before ending the week at 0.92%.

With liquidity in the US treasury market tightening during recent weeks, the Fed have announced a number of measures designed to support market liquidity in an attempt to avoid any major financial shocks.

GBP / USD – Current 1.1629 Previous 1.2278

GBP / EUR – Current 1.0883 Previous 1.1057

The Pound lost ground against both the US Dollar and the Euro last week. Sterling fell by 5.29% against the Dollar and 1.57% against the Eurozone currency.

The Pound is hovering around 1985 levels against the US dollar as a result of demand for Dollars soaring. In addition, the UK’s reliance on the financial sector may have made the Pound less attractive, with margins being squeezed as central banks around the globe cut interest rates.

The gold spot price fell by around 2% last week to reach $1,499 per ounce. The traditional safe haven asset remained under pressure as investors ditched the precious metal to raise cash.
With expectations of short term demand declining rapidly and no significant progress in discussions between Saudi Arabia and Russia, wholesale oil prices remained under pressure last week. The Brent crude spot price slid by a further 20% to reach $27 per barrel.

Oil prices staged a rally on Thursday after the US government indicated that it was considering intervening in the ongoing price war, however, this was short lived.