Market Commentary 10th August 2020 from Charlie Hancock

Posted by melaniebond
Market Commentary 10th August 2020
Equity Indices
The FTSE 100 index rose by 2.28% last week, with the FTSE 250 index gaining 4.08%. Investors were in a positive mood last week, with encouraging economic data outweighing tensions between the US and China.

A Purchasing Managers Index (PMI) survey for the UK manufacturing sector indicated that activity bounced back sharply in July. The survey showed that output from UK factories increased at its fastest rate since November 2017.

Last week saw mixed results from UK listed companies. HSBC reported a 96% fall in net profits during the 2nd quarter of 2020, with a £3.8bn provision for bad loans being around £1bn more than expected by analysts. The banking giant’s share price declined by 5.81% across the week. In contrast, investment platform provider, Hargreaves Lansdown, reported a “surge” in new clients during the coronavirus crisis, raising their dividend payment by a third. Their share price gained 6.63% across the week.

EasyJet PLC, which was recently relegated from the FTSE 100 index, saw their share price rise by 16.59% across the week after reporting that costs during the 2nd quarter were lower than expected.

European equity indices also saw gains last week. Germany’s DAX index rose by 2.94% and the FTSE All World Index – Europe ex UK climbed by 1.61%.

Manufacturing PMI data for the Eurozone indicated that activity expanded sharply in July. The surveys for Spain and Italy registered their highest readings for over two years, with Germany’s seeing a 19-month high.

Germany reported that trade volumes in June saw the sharpest monthly increase since records began. Whilst trade with the US and UK declined, exports to China increased by 15%. Overall, trade volumes were around 10% lower than the same period in 2019.

The S&P 500 index rose by 2.45% and the Dow Jones Industrial Average saw a gain of 3.80%. Investors in the US looked beyond rising tensions with China and Congress failing to agree on an economic stimulus bill, focusing on improving unemployment figures instead.

Data released last week showed that the unemployment rate fell to 10.2% in July, which was better than expected. The data showed that 1.8m jobs were added last month, with the pace of job gains slowing from the 4.8m recorded in June.

US-China tensions rose last week after President Trump issued an executive order which will ban the Chinese video app, TikTok, if it is not sold to a US company within 45 days. The owner of TikTok, Bytedance, have already been in discussions with Microsoft. The US administration have raised concerns that TikTok may be used to pass data to the Chinese government.

Asian markets were in positive territory across the week, despite sentiment turning negative on Friday after President Trump issued an executive order targeting Chinese mobile applications. The Trump administration also announced sanctions on 11 officials from China and Hong Kong.

The broad FTSE All World Index – Asia Pacific rose by 2.06%. Japan’s Nikkei 225 index climbed by 2.86% and China’s Shanghai Composite Index gained 1.33%.

July’s PMI data for China was encouraging, with the reading for the manufacturing sector improving from the previous month. The reading for the services sector declined, although this was expected given the extremely strong reading from June’s survey.

Bond Yields
With sentiment positive for most of last week, investors retreated from UK government debt and allocated increased amounts to equities. As a result, the 10-Year Gilt yield almost reversed the previous week’s decline, rising from 0.11% to 0.14%.
The 10-Year German bund yield rose from -0.53% to -0.51% last week. With investors in a risk-on mood, demand for riskier government bonds from periphery nations increased, resulting in the 10-Year Italian bond yield moving from 1.01% to 0.93%.
US treasury yields increased slightly last week, with the 10-Year stock moving from 0.55% to 0.57%.

The improvement in US unemployment figures contributed to demand for US government debt reducing, with investors happy to allocate capital to riskier assets instead.

GBP / USD – Current 1.3052 Previous 1.3085

GBP / EUR – Current 1.1077 Previous 1.1109

The Pound weakened slightly across the week, declining by 0.25% against the US Dollar and 0.29% against the Euro.

The Pound was supported by comments from the Bank of England last week. The bank stated that the recession in 2020 will be softer than previously expected, with a contraction of 9.5% rather than the 14% they estimated previously.

Gold continued to rally last week, with the spot price for the precious metal rising by 3.02% to reach $2,035.55 per ounce.

Expectations for a significant stimulus package from the US government helped to drive the gold price higher. Gold is typically viewed as a protection against inflation and some investors anticipate that current fiscal stimulus efforts will cause inflation to rise in the coming years.

Oil prices rose across the week, with the spot price of Brent crude 2.54% higher at $44.40 per barrel. The spot price rose beyond $45 earlier in the week, but concerns around US-China tensions caused the price to fall again on Friday.