Market Commentary 1st June 2020 from Charlie Hancock

Posted by melaniebond
Market Commentary 1st June 2020
Equity Indices
UK equity indices were in positive territory last week during a strong period for equity markets around the globe. The FTSE 100 index rose by 1.39%, with the FTSE 250 rising by 3.93%. The pound strengthening against the US Dollar and declines in several heavyweight stocks, such as BP and Royal Dutch Shell, weighed on performance for the larger cap FTSE 100.

With further measures announced to ease lockdown restrictions in the UK and elsewhere, sentiment remained positive for most of last week as investors focused on the potential for economies to recover during the 2nd half of the year.

Budget airline easyJet PLC saw their share price climb by 21.99% last week after announcing that bookings for winter 2020 are in excess of those for the same period in 2019. Despite this rally, their share price is still down by more than 50% in the year to date. Travel operator Tui, a member of the FTSE 250 index, saw their share price rise by 44.50%.

European equity markets experienced strong gains last week, resulting in the broad FTSE All World Index – Europe ex UK posting a 5.70% gain. Germany’s DAX index rose by 4.63%. Equity indices in Europe were boosted by plans for a larger than expected stimulus package from the European Union (EU). Indices in the region did give up some of the week’s gains on Friday, after sentiment was knocked by rising US-China tensions.

The stimulus proposals involve the EU borrowing €750 billion via long term government bonds in order to distribute €500 billion in grants to member states, with a further €250 billion available for loans. It is widely expected that negotiations will see the terms of the package altered, however, investors were encouraged by reports that Germany and France are in favour of the proposals. The announcement came on the same day that European Central Bank (ECB) President, Christine Lagarde, said the Eurozone economy is expected to shrink by 8% to 12% this year.

US equities rose last week, with investors shrugging off concerns of a deteriorating relationship between the US and China. The S&P 500 index gained 3.01% and the Dow Jones Industrial Average rose by 3.75%.

With further states lifting restrictions last week, investors were encouraged by the lack of a corresponding spike in coronavirus cases. The closely watched figure for unemployment benefit claims was 2.12 million for the week. Whilst still a staggering amount, it was better than expected and coincided with a significant reduction in the number of continuing claims.

Sentiment waned late in the week after reports suggested that the US is considering imposing sanctions on China. The US Secretary of State, Mike Pompeo, stated that the US would no longer treat Hong Kong as being autonomous from Beijing.

Asian markets rose last week, with the broad FTSE All World Index – Asia Pacific climbing by 3.94%. China’s Shanghai Composite Index gained 1.37% and Japan’s Nikkei 225 rallied by 7.31%.

Positive news from Japan resulted in strong stock market performance last week. Prime Minister Abe announced on Monday that the state of emergency in place for several regions, including Tokyo, would be lifted. This was followed by the government unveiling a significant stimulus package on Wednesday, with reports suggesting this would be in the region of 40% of GDP or 1.1 trillion US Dollars.

Whilst investor sentiment was impacted by unrest in Hong Kong and deteriorating US-China relations, economic data from China last week was positive. The official manufacturing Purchasing Managers Index (PMI) reading was 50.6 for May, indicating expansionary conditions. The non-manufacturing PMI saw an improved reading of 53.6, suggesting that the broader Chinese economy remains on the path to recovery.

Bond Yields
UK government bond yields were stable across the week, with the 10-Year Gilt yield rising 1 basis point to 0.18%. Following the unprecedented issuance of negative yielding shorter-term Gilts last week, the 2-Year Gilt yield remained in negative territory at -0.05%.
The 10-Year German Bund yield rose to -0.45% amidst mixed movements in the region.

With reports suggesting that the main benefactors of the €750 billion EU stimulus package will be Italy and Spain, yields for Italian government bonds rose, reducing the spread against German government debt.

In the US, the 10-Year Treasury yield declined by 1 basis point to 0.65%. The 10-Year yield had reached 0.70% by the middle of the week as investors sold off Treasury stock in favour of riskier assets, however, this was reversed late in the 2nd half of the week as sentiment turned negative.
GBP / USD – Current 1.2343 Previous 1.2173

GBP / EUR – Current 1.1121 Previous 1.1159

The Pound gained 1.40% against the US Dollar, with the greenback losing value against most major currencies last week. The Pound slipped by 0.34% against the Euro.

Gold prices declined during the first half of the week as the appetite amongst investors for riskier assets intensified. On Thursday and Friday, the reversal in sentiment saw the spot price recover to $1,730.27 per ounce, ending the week down by 0.25%.
Oil prices were broadly flat last week, with an improvement in demand counteracted by an increase in US inventories. The Brent Crude spot price finished the week 0.57% higher at $35.33 per ounce.