Market Commentary 5th May 2020 from Charlie Hancock

Posted by melaniebond
Market Commentary 5th May 2020
Equity Indices
UK equity indices were in positive territory last week, with the blue chip FTSE 100 index rising by 0.19% across the week. The FTSE 250 index rose by 2.94%. During the first half of the week, the risk on sentiment around the globe drove major equity indices higher. By close of business on Wednesday, the FTSE 100 had risen by over 6% since the start of the week, with the FTSE 250 up by more than 7%.

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.

European equities fared better last week, with lower weightings to oil stocks in the major indices. Most major European markets were closed during Friday for Labour Day, helping indices to hold gains across the week. The broad FTSE All World Index – Europe ex UK rose by 4.59%, with Germany’s DAX index climbing by 5.08%.

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 2nd quarter. Their share price rose by 23% across the week as a result.

US equity indices underperformed their European counterparts last week, with the S&P 500 declining by 0.21% and the Dow Jones Industrial Average falling by 0.22%.

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 2nd 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.

Asian markets also rallied during the first half of the week before giving up some of the gains during Thursday and Friday. The broad FTSE All World Index – Asia Pacific rose by 2.59%. Japan’s Nikkei 225 index posted a 1.85% gain and China’s Shanghai Composite Index rose by 1.84%.

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.

Bond Yields
UK government bond yields declined last week, with the 10-Year Gilt Yield moving from 0.29% to 0.25%.

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

The 10-Year German Bund Yield declined from -0.47% to -0.59%. The European Central Bank (ECB) left key interest rates unchanged during their meeting last week, but took action to boost liquidity in the banking sector. Christine Largarde, president of the ECB, stated that they expect an unprecedented contraction in the Eurozone economy for 2020.

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.

US treasuries bucked the trend last week, with the 10-Year yield rising from 0.60% to 0.64%.

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 / USD – Current 1.2506 Previous 1.2367

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.

With support for risk assets strong throughout most of the week, demand for Gold fell. The spot price declined by 1.7% to $1,700 per ounce as a result.
Oil recovered slightly last week, with the Brent crude spot price rising to $26.44 per barrel. Whilst prices remain near the year to date lows, hopes of lockdown restrictions being loosened and data showing the increase in US inventories to be less than expected helped to lift prices last week.