Market Commentary 28th May 2020 from Charlie Hancock

Posted by melaniebond
Market Commentary 28th May 2020
Equity Indices
UK equities bounced back from the previous week’s decline, with the FTSE 100 index climbing by 3.34% and the FTSE 250 rising by 4.71%. Equity markets around the globe were on an upward trajectory for most of the week, with investors encouraged by positive news flow regarding trials for a coronavirus vaccine.

Suggestions of further fiscal stimulus measures around the globe also lifted sentiment during the week. Investors are hopeful that the programmes being implemented by governments will boost economic activity to ensure any recession is short lived. Any hint of further stimulus has therefore been positive for market sentiment in recent weeks.

The travel sector continues to face huge challenges over the coming months, with significant uncertainty around revenue generation. As a result, stocks in this area have been more volatile than the wider market, selling off sharply in times of negative sentiment and rallying as the mood amongst investors turns positive. IAG PLC, the owner of British Airways, saw their share price rally by 12.60% last week, with Intercontinental Hotels Group PLC posting a 12.67% gain.

European equity markets also benefitted from the mood amongst investors last week and consequently the broad FTSE All World Index – Europe ex UK gained 4.43%, with Germany’s DAX index climbing by 5.82%. Indices across Europe rallied from Monday to Thursday, before pulling back on Friday as concerns around US-China relations and Hong Kong’s autonomy unsettled investors.

A Purchasing Managers Index (PMI) reading for the service and manufacturing sectors combined indicated that activity in the Eurozone rose strongly in May. The index reading of 30.5 was still firmly in recessionary territory (i.e. below a reading of 50), however, it was a strong improvement on the reading of 13.6 from April.

Tourism officials from the EU agreed to take whatever action is necessary to ensure a full recovery of European Tourism last week. This announcement came as Italy, Spain and Greece revealed plans to restart tourism in June in an effort to revive this crucial element of their economies.

US equities also rose last week, with the S&P 500 index gaining 3.20% and the Dow Jones Industrial Average rising by 3.29%.

Jerome Powell, the chairman of the Federal Reserve, indicated last week that the central bank still has tools at its disposal to help combat the economic impact of the coronavirus. Markets reacted positively to this in the early part of last week and the sentiment was boosted further by suggestions that the US government is considering more fiscal stimulus measures.

Efforts to find a coronavirus vaccine as fast as possible also had a positive impact on US equity markets last week. Investors were encouraged by the US government’s pledge of $1.2 billion to begin production of a vaccine being developed by Oxford University and AstraZeneca.

Asian markets were on course to post reasonable gains last week, however, on Friday stocks in the region were sold off sharply amidst rising US-China tensions. The broad FTSE All World Index – Asia Pacific was broadly flat across the week, with a gain of 0.09%. China’s Shanghai Composite Index posted a decline of 1.91% and Japan’s Nikkei 225 gained 1.75%.

The optimism on display last week was dented by concerns around another significant trade dispute between the US and China. President Trump criticized China’s handling of the Covid-19 pandemic and accused Chinese officials of “spreading pain and carnage around the world”. In an apparent swipe at President Xi, Trump tweeted that “it all comes from the top”.

Hong Kong’s Hang Seng index suffered its worst one-day performance for nearly 5 years on Friday, after the Chinese government announced plans to bring the region’s security under control of the government in Beijing. This decision is expected to lead to further unrest in Hong Kong.

Bond Yields
UK government bond yields declined last week. The 10-year Gilt yield moved from 0.235 to 0.17%.  The 2-year Gilt yield moved into negative territory by the end of the week at -0.06%.

With government bond yields elsewhere around the globe rising, the decline in Gilt yields appeared to be driven by the UK government issuing bonds which were accepted by the market at negative yields for the first time in history. £3.8bn of 3-year Gilts yielding an average -0.003% were sold on Wednesday. On the same day, The Bank of England governor, Andrew Bailey, suggested that negative interest rates were under review and acknowledged that the bank may need to take further action to see inflation rise closer to their 2% target.

German government bond yield rose last week, with the 10-Year Bund yield moving from -0.53% to -0.49%. With risk assets performing strongly amidst positive investor sentiment, demand for safe haven assets such as Bunds reduced. Italian government debt saw increased demand, resulting in the spread between German and Italian government bonds tightening.

The European Central Bank (ECB) President, Christine Lagarde, acknowledged the difficulties Europe is facing during an interview last week. Lagarde said inflation was projected to remain below target in the coming years and that the ECB must be as accommodative as possible in order to stabilise the economy and inflation.

In the US, Treasury yields rose as investors sought less government debt and increased amounts of equity exposure. The 10-Year Treasury yield gained 2 basis points to rise to 0.66%.

Economic indicators were mixed in the US last week, with an additional 2.4 million unemployment benefit claims bringing the total for the last 9 weeks to nearly 39 million. In contrast, May’s PMI data for the services sector was encouraging, jumping to 36.9 from 26.7 in April.

GBP / USD – Current 1.2173 Previous 1.2116

GBP / EUR – Current 1.1159 Previous 1.1190

The Pound rose by 0.47% against the US Dollar and declined by 0.28% against the Euro. Currency markets were relatively stable last week with little to drive significant moves in the Pound.

The Gold spot price slipped last week, with risk assets being favoured over the precious metal and other ‘safe haven’ assets. The spot price declined by 0.51% to $1,734.68 per ounce.
Oil prices saw further gains last week as the mood amongst oil traders remained calm. The Brent Crude spot price rose to $35.13 per barrel as the easing of lockdowns around the globe pointed to demand increasing in the coming months.