Market Commentary 22nd June 2020 from Charlie Hancock

Posted by melaniebond
Market Commentary 22nd June 2020
Equity Indices
The FTSE 100 and FTSE 250 were on an upward trajectory for most of the week, with the indices posting gains of 3.07% and 3.57% respectively.

Investors started the week in a cautious mood, with rising numbers of coronavirus infections in some US states and Beijing prompting a risk-off environment. Sentiment had turned positive by Tuesday as investors reacted to news of further liquidity boosting measures from the Federal Reserve and plans for infrastructure investments by the US government.

Friday saw a flurry of headlines regarding the UK national debt, which has risen to 100% of GDP in the wake of the coronavirus crisis. Investors appeared to be unphased by the news, with sentiment boosted by the release of May’s data for UK retail sales and consumer confidence. Both sets of data were encouraging and pointed to a swift rebound in economic activity.

Energy supplier, SSE PLC, provided a boost to the FTSE 100 index last week, with their share price rallying by 12.03%. The company announced a rise in operating profit and declared a healthy final year dividend.

European equity markets also recovered some of the previous week’s losses. The broad FTSE All World Index – Europe ex UK rose by 3.16% and Germany’s DAX index posted a gain of 3.19%.

A number of European countries began to ease border controls, with the tourism industry hoping this will help the sector to recover. Last week also saw France lift most of their remaining lockdown restrictions.

It appeared that EU leaders remained divided on the details of a €750 billion recovery fund, with negotiations due to recommence at the end of the week. Leaders from countries such as Spain and Italy are pushing to receive a significant share of the fund, with Austria and the Netherlands, amongst others, appearing to be disgruntled that much of the fund will be distributed as grants rather than loans.

German payments processer, Wirecard, made the headlines last week after it emerged that the company’s auditors could not find €1.9bn of cash which the company had reported on its balance sheet. Their share price declined by 71.97% across the week.

US equity indices saw mixed performance, with most of the week’s gains coming from a rally on Tuesday. The S&P 500 index was up by 1.86% across the week, with the Dow Jones Industrial Average climbing by 1.04%.

US markets rallied on Tuesday after the Federal Reserve announced they would begin the direct purchase of corporate bonds. This coincided with reports which suggested that the Trump administration are working on an infrastructure spending plan in the region of $1 trillion and the release of better than expected US retail sales data. The mix of good news lifted investor sentiment, with the S&P 500 rising by nearly 2% during Tuesday’s session.

The risk on sentiment faded as the week progressed, with US equity indices giving up some gains as a result. Concerns around increasing numbers of coronavirus infections began to surface again, with worse than expected US jobless claims data also dampening spirits.

Asian markets were in positive territory, with the broad FTSE All World Index – Asia Pacific climbing by 1.49%. Japan’s Nikkei 225 index rose by 0.78% and China’s Shanghai Composite Index posted a 1.64% gain.

Last week saw an improvement in US-China relations, with the US relaxing some of the sanctions previously imposed on Chinese technology provider, Huawei. The US commerce department confirmed on Monday that they would allow US companies to work with Huawei on 5G and other technologies. The news provided a boost for the Chinese telecoms sector, which fed through to companies that are key suppliers to Huawei.

Investors appeared to be relatively unphased by a rise in coronavirus infections in Beijing. Authorities in the region have reacted quickly and imposed restrictions to slow the transmission.

Bond Yields
UK government bond yields were relatively stable across the week. The 10-Year Gilt yield rose from 0.21% to 0.24%.

The Bank of England announced a £100 billion expansion of its quantitative easing programme, which is designed to provide liquidity to the UK’s financial system. The bank’s monetary policy committee also voted to keep interest rates unchanged.

German Bund yields rose last week, with the 10-Year Bund Yield moving from -0.45% to -0.42%.

The positive sentiment amongst investors resulted in capital flowing away from German government debt, which is typically sought as a ‘safe haven’ asset. The yield on Italian government bonds, which are considered to be much more risky and therefore command a higher yield, declined. This reflected the increased investor confidence on display last week.

The 10-Year Treasury yield was broadly unchanged, declining by 1 basis point to 0.70%. Yields rose during the early part of the week as investors rotated capital away from government bonds and into equities, however, this was reversed in the 2nd half of the week as sentiment amongst US investors deteriorated.

The Federal Reserve announcing they would begin purchasing corporate bonds directly had the desired effect of promoting confidence in US fixed income markets. Yields on ‘junk bonds’ from companies with poor debt ratings declined as a result of the announcement.

GBP / USD – Current 1.2350 Previous 1.2540

GBP / EUR – Current 1.1047 Previous 1.1142

The Pound lost ground against both the US Dollar and the Euro last week. Sterling declined by 1.52% against the greenback and 0.85% against the Eurozone currency.

The combination of further quantitative easing from the Bank of England together with concerns around upcoming Brexit negotiations appeared to dent confidence in the Pound last week.

Gold prices declined throughout most of the week before rallying on Friday as investor sentiment in the US turned negative. The spot price rose to $1,743.87, resulting in a gain of 0.76% across the week.
Oil prices reversed the previous week’s losses as traders signalled that they are seeing signs of demand recovering strongly.  The Brent crude spot price rose by 8.93% to $42.19 per barrel.