Market Commentary 7th September 2020 from Charlie Hancock

Posted by melaniebond
Market Commentary 7th September 2020
Equity Indices
Both the FTSE 100 and FTSE 250 lost ground last week, with the indices declining by 2.76% and 2.44% respectively. After re-opening from the August bank holiday, UK indices were dragged down by losses for Rolls Royce, Lloyds and travel related stocks. As the week progressed, investor sentiment deteriorated globally, with declines in the US stock market feeding through to other regions.

In the previous week, Rolls Royce reported a loss of £5.4 billion for the first half of 2020 and confirmed further job cuts as part of their restructuring programme. The engineering company expects 9,000 total job losses this year and plans to dispose of assets valued at around £2 billion to improve their balance sheet. Analysts downgraded Rolls Royce following the announcements and the share price fell by 9.79% across the week. The shares are now down by 68% in the year to date.

Most European indices were in positive territory by the middle of week, but these gains were erased on Thursday and Friday as sentiment turned negative. The broad FTSE All World Index – Europe ex UK was down by 2.63% across the week and Germany’s DAX index saw a loss of 1.46%.

The German government published economic predictions on Tuesday, which saw the expected decline in GDP for 2020 revised to 5.8% from the previous forecast of 6.3%. On the same day, Eurozone inflation data showed that the rate of inflation during August was negative in comparison to the previous year. The period of deflation was attributed to declining energy/fuel costs and a cut in German VAT.

With the European Central Bank (ECB) targeting inflation of 2%, some speculated that the data will prompt the central bank to carry out further monetary stimulus, causing equity markets to rise in anticipation.

All of the major US equity indices fell last week. The S&P 500 saw a decline of 2.31%, the Dow Jones Industrial Average lost 1.82% and the technology heavy Nasdaq 100 index fell by 3.12%. All three indices were on course for reasonable gains, before ending up in the red after parts of the market were sold off on Thursday and Friday.

The late week sell-off was driven by declines in the Technology sector. Stocks in this sector have performed strongly during recent months and it appeared that some investors decided to take profits last week. Tesla saw their share price decline by 5.50%, Microsoft registered a 6.40% fall and Apple’s share price moved 3.08% lower. Despite these falls, the technology dominated Nasdaq 100 index is up by 31% in the year to date.

The risk-off mood had largely dissipated by close of play on Friday, with investors encouraged by unemployment in the US declining. Official payroll reports showed that the US added 1.4 million jobs during August, which was in line with expectations. The rate of unemployment declined by more than expected, falling from 10.2% in July to 8.4% during August.

Apart from the Japanese Nikkei 225 index, which saw a gain of 1.41%, most Asian equity indices were in negative territory across the week. The FTSE All World Index  – Asia Pacific fell by 1.64% and China’s Shanghai Composite Index moved 1.42% lower.

Japanese stocks rose as the initial nervousness caused by Prime Minister Abe’s resignation faded. Sentiment was supported by comments from members of the monetary policy committee at the Bank of Japan, which suggested that further stimulus measures are being considered. In addition, headlines relating to Warren Buffett’s investment company, Berkshire Hathaway, appeared to spark interest in Japanese equities. Mr Buffett announced on Sunday that his company now holds more than 5% in five leading Japanese companies; Itochu, Marubeni, Mitsubishi, Mitsui Co and Sumitomo.

August purchasing managers’ index (PMI) data for China was encouraging, with both the official and private surveys showing improvements in the manufacturing and service sectors. It appears that coronavirus remains under control in the region and as a result analysts expect sentiment to continue improving. In Hong Kong, where mass testing is being conducted, there were only 6 positive results from a batch of 128,000 tests.

Bond Yields
UK government bond yields declined across the week, with the 10-Year yield moving from 0.31% to 0.26%. The sell off in equities during the latter half of the week saw demand for government debt rise.
The 10-year German Bund yield was driven lower across the week, from -0.41% to -0.48%. Downward pressure on yields appeared to be driven by investors becoming nervous, combined with data showing that inflation in the Eurozone was particularly weak during August.
The 10-Year Treasury yield moved as low as 0.63% on Thursday as investors sought the security of government debt, before better than expected employment data helped to drive yields higher on Friday. Across the week, the 10-Year yield declined from 0.74% to 0.72%.
GBP / USD – Current 1.3279 Previous 1.3353

GBP / EUR – Current 1.1214 Previous 1.1215

The Pound lost some ground against the US dollar, declining by 0.55%. Although the Dollar has been weakening in recent months, the greenback briefly reasserted its status as a ‘safe haven’ currency by rising during the market nervousness last week. The Pound was broadly flat against the Euro.

Gold was not a beneficiary of the risk-off mood in the second half of the week and the spot price fell by 1.6% to reach $1,934, with a stronger dollar reducing the asset’s attractiveness. The price of the precious metal typically has an inverse relationship with the US Dollar, due to most Gold trades being priced in Dollars.
Oil prices weakened last week, with the Brent Crude spot price falling by 5.30% to $42.66 per barrel. The negative sentiment present in financial markets during the latter half of the week appeared to drive concerns around weaker demand for oil.