Market Commentary 29th June 2020 from Charlie Hancock

Posted by melaniebond
Market Commentary 29th June 2020
Equity Indices
The FTSE 100 declined by 2.12% last week, with the FTSE 250 index seeing a steeper decline of 3.25%. Most global equity markets were in negative territory across the week as investors weighed improving economic data against a concerning rise in US coronavirus cases.

News in the UK was positive, with Prime Minister Boris Johnson confirming on Tuesday that pubs, restaurants and other leisure venues will be able to reopen from early July. Purchasing Managers Index (PMI) data for the UK was better than expected, with business activity reaching its highest level since late March. The upbeat news was not able to counteract the concerns around US coronavirus cases, with a sharp sell-off in equities occurring on Wednesday.

As has been the case many times during recent months, stocks in the airline and travel sectors were badly impacted by the sell-off. International Consolidated Airlines Group (IAG) saw their share price decline by 18.31%, with budget rival easyJet seeing a 18.35% fall. Intercontinental Hotels Group declined by 9.24%. The coronavirus crisis has amplified the cyclical nature of these businesses and their share prices have become increasingly volatile as a result.

European equity markets had a strong start to the week, however, it was a similar picture to the UK in that improving economic data in Europe was overshadowed by concerns arising from the US. The broad FTSE All World Index – Europe ex UK posted a 1.50% loss and Germany’s DAX index declined by 1.96%.

In the early part of the week, a rise in the coronavirus infection rate in Germany was shrugged off by investors. The focus appeared to be on the improving economic picture, with PMI readings from across Europe showing that business activity is continuing to accelerate.

The positive sentiment deteriorated on Tuesday as investors reacted to a sharp rise in coronavirus cases in some US states. News that the US is considering introducing tariffs on goods imported from the EU and UK also added to the pessimistic mood amongst investors.

German payments processing company, Wirecard, continued to make headlines last week. Questions are being asked of the company’s auditors and the German financial regulator, given the scale of the accounting irregularities. Wirecard, which was once valued at almost €25 billion, have now filed for insolvency proceedings.

US equity indices suffered steeper declines than many of their global counterparts last week. The S&P 500 index saw a 2.86% loss and the Dow Jones Industrial Average index fell by 3.31%. After seeing gains on Monday and Tuesday, both indices tracked lower throughout the remainder of the week.

Economic indicators in the US from PMI surveys, property transactions and unemployment figures were encouraging. In addition, President Trump and his chief economic adviser both hinted at further stimulus measures, which may include another round of direct payments to US citizens. Despite the positive news, investors became increasingly risk averse as the week progressed, with a sharp rise in coronavirus cases in Texas, Florida and Arizona proving to be a concern.

The governor of Texas was forced to close some businesses and reconsider the easing of lockdown measures. Dr Anthony Fauci, the US infectious disease expert, stated during a White House press briefing on Friday that the nation has a serious problem and is seeing a ‘disturbing surge of infections’.

Equity markets in Asia outperformed last week. The broad FTSE All World Index – Asia Pacific was broadly flat at -0.09%, with China’s Shanghai Composite Index posting a gain of 0.40% and Japan’s Nikkei 225 index rising by 0.15%.

Authorities in China announced further measures to open up the domestic market to foreign investors last week. Officials in Beijing reduced the number of sectors which are largely closed to foreign investors from 40 to 33, in what is seemingly an attempt to increase the amount of overseas capital available to help stimulate economic growth in China.

Data on the Chinese property sector for May was strong, indicating that the housing market has seen a ‘V’ shaped recovery, with activity returning to pre coronavirus crisis levels. Economic data from Japan was mixed last week. PMI surveys showed that the services sector rebounded strongly in May, but the manufacturing sector saw little change in activity levels and remains in recessionary territory.

Bond Yields
UK government bond yields retreated last week, resulting in the 10-Year Gilt yield falling from 0.24% to 0.17%. With investors displaying risk-averse behaviour, sovereign debt was in demand globally.

Despite the UK’s national debt rising beyond 100% of GDP in recent months, the UK government is seemingly considering borrowing significant amounts in order to finance more fiscal stimulus. The Chancellor of the Exchequer, Rishi Sunak, hinted on Friday that the government would be outlining plans for increased government spending in the coming weeks.

Bond yields in Europe generally declined last week. The 10-Year German Bund yield moved from -0.42% to -0.48% as investors sought the security of German government debt. Yields on government debt from less financially secure nations, such as Italy, increased as investors sold riskier assets in favour of traditional ‘safe haven’ holdings.
The 10-Year Treasury yield declined from 0.70% to 0.64%, with US government bonds of all maturities seeing falling yields last week. With headlines suggesting that the US is struggling to control the spread of coronavirus, investors were in a cautious mood and as a result demand for US Treasuries increased.
GBP / USD – Current 1.2336 Previous 1.2350

GBP / EUR – Current 1.0996 Previous 1.1047

The Pound saw slight declines against other major currencies across the week. Sterling declined by 0.11% against the US Dollar and 0.46% against the Euro.

The Pound is expected to remain under pressure in the coming months as UK-EU trade negotiations progress.

Gold prices saw further rises last week as investors sought the ‘safe haven’ status of the precious metal. The spot price reached $1,771.29 on Friday, representing a gain of 1.57% across the week.
Concerns around a 2nd wave of coronavirus infections resulted in oil prices giving up some of the previous week’s gains. The Brent crude spot price fell by 2.77% to $41.02 per barrel as oil traders turned bearish on expected demand levels.