Market Commentary 8th June 2020 from Charlie Hancock

Posted by melaniebond
Market Commentary 8th June 2020
Equity Indices
The FTSE 100 index gained 6.71% last week, with the FTSE 250 rising by 6.96%. The Pound strengthened during the week, helping to boost the mid cap FTSE 250 index. Whilst the rise in Sterling was a detractor for the more internationally exposed FTSE 100, strong gains in the energy sector helped to counteract the currency impact.

Market sentiment was positive throughout most of the week, with investors focusing on the easing of lockdown restrictions. Improvements in economic indicators also helped to drive markets higher during the week.

Investors are hopeful that synchronised fiscal stimulus around the globe will help economies to recover from the current crisis. Sentiment was therefore boosted last week by news reports which suggested that the UK Chancellor, Rishi Sunak, is working on an economic stimulus package ahead of the Autumn budget. Reports suggest that Mr Sunak is hoping to provide funding for training schemes, infrastructure projects and technology companies.

European equity indices also posted strong gains last week. The broad FTSE All World Index – Europe ex UK climbed 8.57% and Germany’s DAX index rose by 10.88%. Economic data from across the region was mixed, however, an announcement from the European Central Bank (ECB) regarding further monetary stimulus measures contributed to the positive sentiment amongst investors.

The ECB confirmed on Thursday that it will extend its ‘pandemic emergency purchase programme’ by €600bn, taking the total purchases planned under the Quantitative Easing arrangement to €1.35 trillion. This will result in in the ECB’s bond portfolio reaching €4 trillion, which is around 30% of Eurozone GDP. The measures aim to keep borrowing costs low across the region in order to encourage lending and keep government finances under control.

The German government also reached agreement on a fiscal stimulus package which will see value added tax cut until 2021 and increased spending on 5G infrastructure, railways and electric vehicles. The announcement came a day ahead of data which showed that German factory orders during April were worse than expected.

US equity indices rallied last week, aided by economic indicators from the US being better than expected. The S&P 500 climbed 4.91% and the Dow Jones Industrial Average gained 6.81%. Investors appeared to focus on the bright spots in economic data and easing US-China tensions, with civil unrest across the nation seemingly having no impact on investor confidence.

Survey data for May showed that the services sector saw an increase in activity from the previous month, with a similar pattern in construction. The main focus of the week however was the release of Friday’s official employment figures, which showed that the US economy added 2.5 million jobs during May.

Economists were expecting the data to show around 9 million job losses, with the unemployment rate expected to climb to nearly 20%. The surprise increase in jobs resulted in the rate declining to 13.3% and was viewed as a sign that the easing of lockdown measures is helping US economic activity to recover strongly.

Most stock markets in Asia saw positive performance last week. The broad FTSE All World Index – Asia Pacific rose by 5.52%. China’s Shanghai Composite Index saw an increase of 2.75% and Japan’s Nikkei 225 gained 4.51%, with a weakening Yen benefitting the export heavy index.

Last week saw US-China headlines improve as officials from both sides expressed a desire to honour the agreements reached in the ‘Phase One’ trade deal. The Chinese central bank also announced further liquidity inducing measures last week which include setting up a facility to purchase loans made by local banks to small and medium enterprises. May’s official PMI data from China was mixed, with some readings declining from April, however, both official and non-official surveys signalled that activity is in expansionary territory.

Bond Yields
UK government bond yields moved higher last week. The 10-Year Gilt yield reached 0.36% on Friday, up from 0.18% a week earlier. The 2-Year Gilt moved into positive territory, with the yield at 0.01% by the end of the week.

The rising Gilt yields were caused by weaker demand for highly rated government debt, with investors across the globe happy to direct capital towards risk assets instead.

The 10-Year German Bund yield increased to -0.27% from -0.45% a week earlier.

Whilst more financially secure nations such as Germany saw yields rise, the ECB’s decision to increase an already monumental bond purchasing programme saw yields decline for Government debt issued by periphery nations. This is a sign that investors believe the ECB’s actions will limit damage to the already fragile public finances of periphery nations such as Italy.

The improvement in economic indicators in the US saw investors ditching Treasury stock in favour of equities. Consequently, the 10-Year Treasury yield rose to 0.91% from 0.65% at the beginning of the week.

At the beginning of the year, there was significant disparity between US interest rates and those in other developed nations. With the Federal Reserve having since cut interest rates from 1.75% to 0.25%, there has been a significant compression in the spread between Treasuries and the likes of UK Gilts and German Bunds, which has in turn contributed to weakness in the US Dollar.

GBP / USD – Current 1.2668 Previous 1.2343

GBP / EUR – Current 1.1219 Previous 1.1121

The Pound gained 2.63% against the US Dollar and 0.88% against the Euro. Currency traders were positive on Sterling, with hopes that the imminent Brexit negotiations with the EU will run smoothly.

Gold prices continued to slide last week as investors reduced exposure to the precious metal. The spot price declined by 2.61% to reach $1,685.06 per ounce.
Oil prices continued their recovery last week, aided by speculation of further production cuts by OPEC and other key oil producing nations. The Brent Crude spot price rallied by 19.73% to reach $42.30 per ounce.