Market Commentary 4th January 2021 from Charlie Hancock

Posted by melaniebond

Market Commentary 4^th January 2021

Equity Indices

During a shorter trading week, with the London Stock Exchange closed during the Bank Holidays, the FTSE 100 lost 0.64%. A strengthening Pound Sterling hampered the large cap index, with the more domestically focussed FTSE 250 index falling by 0.28%.

UK and European Union (EU) negotiators reached a last-minute trade deal, with Prime Minister Boris Johnson and EU leaders making the announcement on Christmas Eve. The market reaction was muted however, with lower trading activity during the holiday period having an impact. Sentiment was also hampered by a rapid increase in coronavirus cases, with further areas placed into ‘tier 4’ restrictions.

UK regulators also approved the vaccine developed by AstraZeneca and Oxford University, with the roll out commencing this week. Investors are likely to be encouraged by this, with the Oxford vaccine easier to distribute than the Pfizer-BioNTech version which must be stored in ultra-low temperatures.

Europe

The broad FTSE All World Index – Europe ex UK rose by 1.45% across the week, with all major indices in the region in positive territory. Germany’s DAX index gained 0.97%.

After receiving approval from EU regulators, member states started to roll out the Pfizer-BioNTech vaccine. Sentiment in Europe was also aided by the EU and China reaching agreement on an investment treaty after 7 years of negotiations. EU officials stated that the treaty, which is due to come into effect in 2022, will result in improved access to the Chinese market for European companies.

US equity indices rose last week, with similar gains across the major indices. The S&P 500 index gained 1.43%, the Dow Jones Industrial Average saw a rise of 1.35% and the NASDAQ 100 index moved 1.39% higher.

There was some last-minute disagreement on the much-awaited fiscal stimulus bill, with President Trump initially refusing to sign the bill. Mr Trump stated that the $600 direct payment to US citizens was not sufficient and appeared to agree with democrat calls for $2,000 payments, however, after the republican controlled senate rejected calls for higher stimulus payments, the President agreed to sign the bill.

Asia

Asian equity indices outperformed their global counterparts last week, resulting in the broad FTSE All World Index – Asia Pacific climbing by 2.66%. Japan’s Nikkei 225 gained 2.91% and China’s Shanghai Composite Index rose by 3.27%.

The Chinese government stepped up their regulatory threats against internet retail giant Alibaba, with state media announcing on Christmas Eve that market authorities have commenced an investigation into alleged monopoly conduct. Subsidiary company, Ant Group, also made headlines headlines after the Peoples Bank of China (PBoC) told Ant executives to “rectify violations” in the group’s various underlying businesses. Investors appeared confident that regulatory threats will be confined to Alibaba, with other large cap internet stocks seeing strong performance last week.

Official data released by the Japanese government was weak, with retail sales during November showing a decline and the rate of growth for industrial output remaining flat. With economic data pointing to a sluggish recovery, the government appeared to ramp up preparations for fiscal stimulus measures.

Bond Yields

Gilt yields declined across the week, moving from 0.25% to 0.20%. Despite the positive news on a UK-EU trade agreement, investors appeared to be relatively cautious given the rapid increase in coronavirus cases and the possibility of further lockdown restrictions.

Europe

The 10-Year German Bund yield was flat across the week at -0.57%. Although European equities were in positive territory, the lack of a rise for Bund yields suggested that the mood amongst investors was somewhere between ‘risk on’ and ‘risk off’.

The 10-Year Treasury yield moved marginally lower last week, down to 0.93% from 0.95%. With negotiations for larger fiscal stimulus payments rejected by senior republican members in the senate, there was little to drive yields higher across the week. The decline in treasury yields suggested that investors remained cautious, with attention turning to the upcoming Georgia senate runoff elections.

Currency

GBP / USD – Current 1.3670 Previous 1.3523

GBP / EUR – Current 1.1185 Previous 1.1011

The Pound rose against most major currencies last week, with optimism around the UK-EU trade deal prompting currency traders to buy Sterling. The Pound rose by 1.09% against the Dollar and 1.58% against the Euro.

Commodities

Gold

The gold price rose by 0.90% last week to reach $1,898.36 per ounce. The rise indicated that demand for traditional ‘safe haven’ assets increased across the week, with investors in a cautious mood despite a strong finish to the year for US equity indices.

Oil

Oil prices declined last week, with the Brent crude spot price moving 0.88% lower to $51.80 per barrel.

It appeared that oil traders were speculating on increased supply, fuelled by comments from Russia’s deputy prime minister, who stated that they will support production increases at January’s meeting between OPEC+ members.