Market Commentary 15th June 2020 from Charlie Hancock

Posted by melaniebond
Market Commentary 15th June 2020
Equity Indices
UK equities lost ground last week amidst a risk-off environment around the globe. The FTSE 100 declined by 5.85% and the FTSE 250 moved 6.32% lower, with both indices seeing falls during every session except for Friday.

Stock markets declined gradually during the first half of the week, with analysts speculating that some investors were choosing to take profits from the strong rally seen during the previous week. Thursday saw heavy declines, with a fairly bleak outlook from the US Federal Reserve prompting fears of a slow recovery for the global economy. The negative sentiment was also fuelled by a growing rate of coronavirus cases in some US states. On Friday, both UK indices posted marginal gains, with investors appearing to shrug off official data showing that the UK economy contracted by 20% in April.

Stocks in the travel sector continued to be volatile. Cruise operator, Carnival PLC, rose by 10% on Monday before pulling back to end the week 11.35% lower than its starting price. Budget airline easyJet PLC saw a 9.67% decline across the week. Both companies are due to be demoted from the FTSE 100 index next week.

European indices were firmly in the red last week, with the broad FTSE All World Index – Europe ex UK declining by 5.81%. Germany’s DAX index posted a 6.99% loss during a week where data showed that the country’s industrial output and international trade had fallen to levels which were worse than expected.

Germany is Europe’s largest manufacturing economy and so data showing that industrial output during April was 25% lower year-on-year added to the cautious tone amongst investors.  Economists are expecting a significant improvement in May’s data.

Further downbeat news from Europe’s second largest economy added to the pessimistic mood. The Bank of France estimated that the country’s economy would shrink by 10.3% during 2020, but added that they expect the economy to start recovering during the 2nd half of the year.

US equity indices had a positive start to the week, with both the S&P 500 and Dow Jones Industrial Average seeing reasonable gains on Monday, however, both tracked lower throughout the remainder of the week to post losses of 4.78% and 5.55% respectively.

Investors in the US were in a risk on mood on Monday, encouraged by New York City easing lockdown measures and a senior US government advisor suggesting that a further fiscal stimulus package is being drawn up.

The mood soured on Thursday after Federal Reserve Chairman Jerome Powell delivered a speech which casted doubts over a ‘V’ shaped recovery for the US economy. The Fed expects the US economy will not recover from the current contraction until 2022 and the unemployment rate to be above 9% at the end of 2020. The sell-off in equity markets experienced on Thursday was also fuelled by headlines reporting that 20 US states are seeing rising numbers of new coronavirus cases.

Asian equity markets fared better than their global counterparts last week, with the broad FTSE All World Index – Asia Pacific seeing a 1.25% decline. China’s Shanghai Composite Index posted a 0.38% loss and the Nikkei 225 fell by 2.44%.

Inflation data for China was weaker than expected, with slowing food price increases and weak commodity prices being cited as the main drivers. Data released last week also showed that broad money supply in China rose during May, suggesting that the central bank’s attempts to increase liquidity have been successful. In a sign that the Chinese economy is continuing to normalise, authorities allowed street vendors to return to business last week.

Whilst data released last week showed Japan has been unable to escape the economic impact of the coronavirus, sentiment was boosted by reports suggesting that the government is willing to lift all restrictions in place for businesses in Tokyo from the 19th June.

Bond Yields
UK government bond yields moved lower last week as the risk-off environment saw investors seek increased exposure to Gilts.

The 10-Year Gilt yield fell to 0.21% and the 2-Year Gilt yield moved back into negative territory, reaching -0.04% at the end of the week.

German Bund yields declined last week, with the 10-Year Bund reversing the previous week’s movements to reach -0.45%. The spread between Bunds and government debt issued by periphery nations widened last week, with the risk-off mood seeing investors ditch bonds from less creditworthy issuers.
Treasury yields declined throughout most of the week as investors became increasingly cautious. The 10-Year Treasury yield moved from 0.91% to 0.71%.

With the Federal Reserve’s forecasts showing that the US economy will contract by 6.5% this year, it was perhaps unsurprising that the bank’s monetary policy committee indicated they do not see interest rates rising before 2022. This is likely to mean that Treasury yields will not return to pre coronavirus crisis levels in the near future and the downward pressure exerted by lower interest rates on the US Dollar will persist.

GBP / USD – Current 1.2540 Previous 1.2668

GBP / EUR – Current 1.1142 Previous 1.1219

The Pound weakened by 1% against the US Dollar and 0.70% against the Euro last week. The UK and the EU appeared to make some progress after agreeing a new timetable for negotiations in July, however, the positive impact of this on Sterling was offset by poor economic data and forecasts.

The Organisation for Economic Cooperation and Development (OECD) released a report which suggested the UK economy will suffer more from the coronavirus crisis than any other developed nation.

Gold prices reversed the decline seen during the previous week, with investors seeking increased amounts of the precious metal. The spot price rose by 2.7% to reach $1,730.75.
Oil prices failed to continue their recovery last week. The cautious tone of the Federal Reserve chairman and rising coronavirus cases in some regions appeared to dampen hopes of a rapid increase in demand levels. The Brent Crude spot price declined by 8.44% to $38.73 per barrel as a result.