Market Commentary 27th July 2020 from Charlie Hancock

Posted by melaniebond
Market Commentary 27th July 2020
Equity Indices
The FTSE 100 declined by 2.65% across the week, with a strengthening Pound Sterling hampering the index. The FTSE 250 index saw reasonable performance up until Friday’s session, where it declined to finish the week down by 0.48%.

Positive news regarding a coronavirus vaccine, together with the European Union (EU) reaching an agreement on a recovery fund were the main drivers behind the positive sentiment in the first half of the week. The mood amongst investors soured in the latter half, with concerns around US-China tensions resurfacing.

International Consolidated Airlines Group PLC, the owner of British Airways, saw its share price slide by 9.27% last week. The company announced on Friday that they are seeking to raise €2.8 billion from equity investors in order to strengthen their balance sheet. The reduction in global travel has had a severe financial impact on airlines and the timeframe for a recovery in passenger numbers remains unclear.

European equity markets fared slightly better than the UK last week, with the broad FTSE All World Index – Europe ex UK gaining 0.59%. Germany’s DAX index was on course for a reasonable gain, before a sharp decline on Friday saw the index post a 0.63% loss. Germany’s export driven DAX remains sensitive to trade tensions and a flare up in US-China disputes last week weighed on the index.

After an extended period of negotiations, last week saw EU leaders reach agreement on a coronavirus recovery fund. At €750 billion, the stimulus plan is a sizeable package and the EU intends to borrow collectively as a single entity for the first time in history. Many believing this will set a precedent for cohesion on future fiscal projects and investors appeared to be pleased with the outcome.

Economic indicators in Europe were encouraging last week, with a Purchasing Managers Index (PMI) reading for both the manufacturing and service sectors indicating that activity is expanding. PMI readings in Europe have improved in recent months, but up until last week were still at a level which indicated economic activity was contracting rather than expanding.

US equity indices followed a similar pattern to the UK and Europe, with gains from the first half of the week eroded during Thursday and Friday. The S&P 500 index declined by 0.28% across the week and the Dow Jones Industrial Average index posted a loss of 0.76%.

At the start of the week, investors were encouraged by positive news regarding a coronavirus vaccine being developed by Oxford University and AstraZeneca. In the US, similar vaccine trials also showed signs of progress.

Sentiment deteriorated as the week progressed, with investors concerned about rising political tensions between the US and China. The US government ordered China to close its consulate in Texas, with secretary of state Mike Pompeo stating the decision was taken in response to China stealing intellectual property. Beijing retaliated by ordering the US to close its embassy in Chengdu.

Markets in Asia saw mixed performance last week. The broad FTSE All World Index – Asia Pacific rose by 0.46% and China’s Shanghai Composite Index posted a loss of 0.54%. Japan’s Nikkei 225 gained 0.24%, with a national holiday on Thursday and Friday making it a shorter week for the Japanese stock market.

The President of China delivered a speech at a business forum in Beijing last week, where he suggested that further support would be provided for businesses to recover from the coronavirus pandemic. The speech appeared to be centred around improving employment, with President Xi calling on firms to help provide stability in the Chinese labour market.

Bond Yields
The 10-Year Gilt yield moved slightly lower across the week to reach 0.15%, after falling to an all-time low of 0.12% on Wednesday. With the positive sentiment amongst investors fading during Wednesday’s session, demand for government bonds appeared to pick up.
The 10-Year German Bund yield increased from -0.45% to -0.44%. The yield declined to -0.50% on Wednesday, before climbing again to finish the week broadly unchanged.
The 10-Year Treasury yield fell from 0.64% to 0.59% last week. US government debt was in demand, with investors concerned about rising US-China tensions. A rise in initial jobless claims in the US also appeared to drive up demand for Treasury stock, with investors concerned that the recovery in US employment may have stalled.
GBP / USD – Current 1.2794 Previous 1.2553

GBP / EUR – Current 1.0982 Previous 1.0990

The Pound strengthened by 1.92% against the US Dollar last week, with the greenback continuing the recent trend of weakening against most major currencies. With the Euro seeing gains as a result of the EU reaching agreement on a fiscal package, the Pound saw a slight decline of 0.07% against the Euro.

The Gold spot price climbed by 5.06% last week to reach $1,902.02 per ounce. The precious metal surpassed the $1,900 mark for the first time since 2011, with a weaker US Dollar contributing to demand increasing. The majority of Gold trades are priced in US Dollars and as a result the precious metal becomes more attractive to global investors when the US Dollar weakens.
Oil prices were relatively stable last week, with traders appearing to be relaxed about the prospect of increased output from OPEC nations in the coming months. The Brent crude spot price climbed above $44 during the middle of the week, before settling at $43.34 per barrel. This was 0.46% higher than the previous week’s closing price.