Market Commentary 3rd August 2020 from Charlie Hancock

Posted by melaniebond
Market Commentary 3rd August 2020
Equity Indices
UK equity indices declined last week during a period of risk averse behaviour amongst investors around the globe. The FTSE 100 fell by 3.69% and the FTSE 250 index declined by 1.92%. The larger cap FTSE 100 was dragged down by heavy losses in the travel, oil and banking sectors, with a strengthening Pound also weighing on the index.

Travel related stocks were impacted by headlines regarding rising numbers of coronavirus cases and the UK imposing a 14-day quarantine on travellers returning from Spain. British Airways owner, IAG, saw their share price decline by 17.04% across the week, with plans for a €2.75 billion rights issue seemingly making matters worse. InterContinental Hotels Group suffered a 6.69% decline across the week.

Whilst the oil price was relatively stable, stocks in the sector were sold off heavily across the week, with Royal Dutch Shell and BP declining by 9.42% and 7.70% respectively. Royal Dutch Shell reported a heavy decline in profits for the 2nd quarter, but avoided a loss.

Equity indices in Europe were also down last week, with the broad FTSE All World Index – Europe ex UK seeing a 1.33% decline. Germany’s DAX index fell by 4.09%.

Rising coronavirus infections across Europe were a driver behind the risk-off mood last week. Most European nations have significantly eased lockdown restrictions over the last couple of months, however, concerns that this is resulting in rising case numbers could prompt governments to tighten restrictions again.

Although it was largely expected, a raft of negative economic data for the 2nd quarter added to the cautious sentiment amongst investors last week. Gross Domestic Product (GDP) data showed that economies across the Eurozone contracted sharply in the 2nd quarter of 2020, with household spending, business investment and exports all significantly below historical averages.

In the US, the S&P 500 index gained 1.73% across the week, with strong performance in the technology sector boosting the index. The Dow Jones Industrial Average index, which has a lower weighting to Technology companies, saw a 0.16% decline across the week.

Sentiment in the US was mixed. On the positive side, earnings reports from Facebook, Amazon, Alphabet (Google) and Apple were strong. Excluding Alphabet, which showed a slight decline, the Technology giants saw revenues increase during the 2nd quarter of 2020.

Negotiations in Congress for a new fiscal stimulus package appeared to stall, with Republicans and Democrats divided on issues such as unemployment benefits. Sentiment appeared to be negatively impacted by President Trump on Thursday, after he tweeted to suggest that the November elections should be delayed.

US economic data for the 2nd quarter was poor, with the contraction wiping out all GDP growth experienced during the previous 5 years. Federal Reserve chairman, Jerome Powell, delivered a downbeat message last week, stating that a ‘V’ shaped economic recovery is highly unlikely.

It was a mixed picture in Asia last week, resulting in the broad FTSE All World Index – Asia Pacific falling by 0.69%. Japan’s Nikkei 225 declined by 4.43%, whilst China’s Shanghai Composite Index saw a 3.54% gain.

Tokyo saw rising numbers of coronavirus infections last week, prompting the city’s governor to indicate that a state of emergency may be imposed if the situation worsens. Official forecasts for economic growth drawn up by the Japanese government were revised lower last week, with some commentators speculating that further fiscal stimulus will be needed to aid an economic recovery.

China battled with some severe floods last week, however, analysts believe the economic impact will be minimal. A Purchasing Managers Index for the Chinese manufacturing sector indicated increased activity during July. The service sector PMI showed a slight reduction in comparison to June, but the index reading was still at a level which indicates expansion, rather than recessionary conditions.

Bond Yields
The 10 Year Gilt yield declined across the week from 0.15% to 0.11%, reaching a new all-time low.

Whilst nominal yields have declined significantly in recent months, resulting in real yields moving further into negative territory, demand for Gilts still picked up as investors sold off equities.

German government bond yields declined last week, with investors continuing to seek the perceived safe-haven of German government debt when equity markets decline. The 10 Year German Bund yield reached -0.53%.
Treasury yields also declined last week, with the 10-Year stock moving from 0.59% to 0.55%.

The negative sentiment brought about by rising coronavirus cases and political uncertainty appeared to contribute to investors seeking increased exposure to Treasuries.

GBP / USD – Current 1.3085 Previous 1.2794

GBP / EUR – Current 1.1109 Previous 1.0982

The Pound strengthened against both the US Dollar and the Euro last week, rising by 2.27% and 1.16% respectively.  There was some speculation that the poor Q2 economic data for Europe and the US contributed to Sterling’s rise, with comparable data for the UK yet to be released.

Gold continued to find support last week, with the sell off in equity markets prompting further interest in the precious metal. The spot price rose by 3.88% to $1,975.86 per ounce.
Oil prices were relatively stable across the week. The Brent crude spot price declined by 0.1% to $43.30 per barrel.