Market Commentary 16th November 2020 from Charlie Hancock

Posted by melaniebond

Market Commentary 16^th November 2020

Equity Indices

UK equities performed strongly last week, with optimism around a Covid-19 vaccine lifting investor sentiment. The FTSE 100 rose by 6.88% and the FTSE 250 index gained 7.55%.

Pfizer and BioNTech, who have been working together on a vaccine, announced on Monday that trials have shown their vaccine to be more than 90% effective. This prompted sectors which have been disadvantaged by coronavirus driven restrictions to surge. Airlines were one of the main beneficiaries, with International Consolidated Airlines Group (IAG) rallying by 39.58% across the week. Rolls Royce, which is heavily dependent on commercial airlines, saw their share price gain 34.70% across the week.

Banking stocks also performed well, with Lloyds Banking Group rising by 26.90%. A Covid-19 vaccine is expected to improve the economic outlook, leading to interest rate rises which should improve profit margins for banks.

Europe

European equity markets also rallied, with the broad FTSE All World Index – Europe ex UK returning 4.39% and Germany’s DAX index rising by 4.78%. Spain’s IBEX 35, which is heavily weighted towards banks and other cyclical businesses, rallied by 13.29% across the week.

Optimism was perhaps dampened by the short-term outlook for coronavirus infections in Europe. France announced that lockdown restrictions would remain in place until at least 1^st December, whilst German chancellor Angela Merkel said that case numbers are too high to relax the restrictions currently in place.

Optimism following a projected win for Joe Biden was already set to lift US stocks heading into the week, however, with the Pfizer-BioNTech vaccine news being released before the opening bell, most US equity indices rose sharply upon opening. The S&P 500 gained 2.16% across the week, whilst the technology heavy NASDAQ 100 index posted a loss of 1.27%. The Dow Jones Industrial Average, which has a heavier weighting to more cyclically sensitive companies, rose by 4.08%.

Tourism related businesses were some of the best performers last week, with investors hopeful that a Covid-19 vaccine will prompt increased travel in 2021. Royal Caribbean Cruises rallied by nearly 30% on Monday, before shedding some gains to finish the week up by 20.66%. Stocks which have benefitted from lockdown restrictions, such as Netflix and Amazon, gave up some of their recent gains. Netflix fell by 6.20% across the week and Amazon declined by 5.51%.

Sentiment later in the week appeared to be dented by rumours of lockdown restrictions in some regions. On Thursday, it was reported that Chicago are considering issuing stay-at-home orders, whilst New York could close schools.

Asia

The broad FTSE All World Index – Asia Pacific rose by 1.45% across the week. China’s Shanghai Composite index was broadly flat at -0.06% and Japan’s Nikkei 225 index gained 4.36%.

Sentiment on Chinese equities was knocked by news that the Beijing administration is drawing up antitrust legislation aimed at limiting the power of internet companies such as Tencent and Alibaba. The draft guidelines provided little detail regarding measures which could be implemented, however, the initial reaction from investors was negative. Tencent’s share price lost 10% during the first half of the week, before recovering on Thursday and Friday to finish the week down by 2.03%.

Bond Yields

The 10 Year Gilt yield rose from 0.28% to 0.34% last week, with the optimism surrounding a Covid-19 vaccine prompting investors to rotate away from Gilts and into riskier assets. The 10-Year yield rose as high as 0.42% on Wednesday, before declining on Thursday and Friday.

Europe

The 10-Year German Bund yield rose from -0.62% to -0.55%, with investors happy to ditch German government debt in favour of equities. As with Gilts, Bund yields rose sharply on Monday and Tuesday, reaching a high of -0.49%.

President of the European Central Bank (ECB), Christine Lagarde, indicated last week that the bank may expand its current quantitative easing programme. Expectations of the ECB introducing further monetary stimulus at their December meeting may therefore keep yields suppressed in the coming weeks.

The 10-Year Treasury yield moved from 0.83% to 0.89% across the week, after reaching an 8 month high of 0.96% on Wednesday. The release of weaker than expected US inflation data for October appeared to weigh on yields during Thursday and Friday.

Currency

GBP / USD – Current 1.3189 Previous 1.3156

GBP / EUR – Current 1.1153 Previous 1.1069

The Pound was relatively stable against both the US Dollar and the Euro last week. Sterling gained 0.25% against the greenback, whilst rising by 0.76% against the Eurozone currency.

Commodities

Gold

The Gold spot price reversed nearly all of the gain seen during the previous week, falling by 3.18% to $1,889.20 per ounce. Investors appeared happy to reduce exposure to the precious metal, with news around a Covid-19 vaccine driving a risk-on environment.

Oil

Oil prices continued to rise last week, gaining 5.66% to reach $42.78 per barrel. Oil traders priced in higher demand following news of the Pfizer-BioNTech vaccine efficiency rate. An end to coronavirus restrictions around the global is likely to prompt increased travel and therefore oil consumption.