Market Commentary 5th May 2020 from Charlie Hancock

In the latter half of the week, poor performance in heavyweight stocks Royal Dutch Shell and BP weighed on the wider market. Investors also chose to ditch financial stocks amidst announcements from Lloyds and Barclays which stated that they had significantly increased bad loan provisions.

Royal Dutch Shell PLC announced they would be cutting their first quarter dividend by two-thirds, with headlines highlighting this is the first time the oil giant has taken such action since WW2.  The company’s share price declined by 11% across the week. British Airways owner, IAG, also sold off heavily on Thursday and Friday after announcing 12,000 job cuts amidst a struggling travel industry.

Data showing that the Eurozone economy contracted by an annualised 14.4% during the first quarter was seemingly overlooked by investors, with hopes pinned on a fast recovery. Italy, Spain and France all announced further details with regard to lifting restrictions, helping to maintain the positive sentiment on display last week.

Austrian technology company, AMS AG, who are a key supplier for smart phone components, reported a surge in revenue for the first quarter and stated that they expect solid performance during the 2^nd quarter. Their share price rose by 23% across the week as a result.

Both indices had risen by around 3.6% at close of play on Wednesday, but gave up all of these gains as investors reacted to mixed corporate earnings results and news reports suggesting that US-China tensions may flare up again in the near future. Investors were also digesting data showing the US economy shrank by an annualised 4.8% in Q1.

Corporate results released during the week were mixed, but forecasts were broadly negative. In a sign of the uncertainty hanging over businesses, Apple did not provide a forecast for the 2^nd quarter.

Sentiment was also knocked by reports suggesting that the US may look to impose further import tariffs on China, together with claims from President Trump that he has seen evidence to suggest the virus originated from a laboratory in Wuhan.

Official Purchasing Managers Index (PMI) data from China showed that both the manufacturing and non-manufacturing sectors are back into expansionary territory, providing further evidence that the Chinese economy is recovering.

The Bank of Japan lifted their cap on the purchase of Japanese government bonds and ramped up the purchase of commercial bank debt, signalling that the central bank is concerned about liquidity.

After a stable period, Gilt yields declined last week. Investors sought increased exposure to government debt on Thursday and Friday as equities sold off.

Spreads between German and Italian government debt narrowed slightly last week, with investors not reacting significantly to ratings agency Fitch downgrading Italy’s credit rating. With a rating of BBB-, the country’s sovereign debt is now just one grade above ‘junk bond’ status.

Analysts pointed to investors in US fixed interest seeking increased amounts of corporate debt, with demand for government paper reducing as a result. Following the decision of the Federal Reserve to open a facility to purchase corporate bonds, investors have felt reassured enough to continue purchasing increased amounts of corporate credit.

GBP / EUR – Current 1.1378 Previous 1.1423

The US Dollar weakened against most major currencies last week, resulting in the GBP to USD rate rising by 1.1%. Sterling weakened by 0.40% against the Euro.