Market Commentary 18th January 2021 from Charlie Hancock

Posted by melaniebond

Market Commentary 18^th January 2021

Equity Indices

The FTSE 100 index declined by 2.00% during a week in which most global equity indices were in the red. The FTSE 250 fell by 2.13%. Investors were in a cautious mood, with some taking profits after a strong start to the year for equity markets.

Official data released last week showed that the UK economy contracted during November, with lockdown restrictions severely impacting the service sector. The decline interrupted six months of consecutive growth.

Oil prices remained strong across the week, helping companies in the energy sector to outperform the wider market. BP PLC rose by 1.26% and Royal Dutch Shell gained 0.18%.

Europe

European equity indices also moved lower last week, with the broad FTSE All World Index – Europe ex UK falling by 2.01%. Germany’s DAX index logged a decline of 1.86%.

Last week saw European nations tighten coronavirus related restrictions further. Italy announced its state of emergency would be extended until the end of April, the German health minister stated that lockdown restrictions would remain in place into February and France imposed a night-time curfew.

Official data showed that the German economy shrank by 5% during 2020, with the contraction being less than anticipated. Economists believe this will be one of the least severe declines recorded for a European nation. France is expected to report a contraction of around 9%.

US equity indices declined last week, with the technology heavy NASDAQ 100 index suffering the largest fall at 2.30%. The S&P 500 index declined by 1.48% and the Dow Jones Industrial Average fell by 0.91%. Small cap stocks outperformed, with the Russell 2000 index rising by 1.51% across the week.

Following disorder at the Capitol Building during the previous week, investors appeared to be in a nervous mood. Security services raised concerns about the inauguration ceremony for president elect Joe Biden, which is scheduled for the 20^th January. Efforts to impeach Donald Trump also dominated headlines during the week.

Investors paid close attention to Joe Biden’s speech on Thursday, where he announced plans for a $1.9 trillion stimulus package. The measures include significant funding for the roll out of Covid-19 vaccines, as well as direct stimulus cheques of $1,400.

Asia

The broad FTSE All World Index – Asia Pacific rose by 0.23% last week, with strong performance for Japanese equities helping to lift the index. The Nikkei 225 recorded a gain of 1.35%, whilst China’s Shanghai Composite Index was broadly flat at -0.10%.

China recorded better than expected export growth during December. Exports for 2020 as a whole were 3.6% higher than the previous year, helping China’s economy to rebound quickly from the Covid-19 shock experienced during the first quarter. News reports suggested that China is battling to contain outbreaks of Covid-19, with speculation of nationwide restrictions being imposed ahead of the Lunar New Year celebrations.

Japan extended the state of emergency to further regions last week as the number of coronavirus infections continued to rise. The governor of the Bank of Japan, Haruhiko Kuroda, stated that the economy was improving at a moderate pace despite the rise in cases. Mr Kuroda also implied that interest rates would be kept on hold and asset purchases would continue until inflation exceeds the bank’s 2% target.

Bond Yields

The 10-year Gilt yield ended the week unchanged at 0.29%, after rising as high as 0.35% during the middle of the week. Concerns around a double dip recession following weak economic data contributed to investors taking a cautious approach, with demand for Gilts rising towards the end of the week.

Europe

The 10-year German Bund yield moved from -0.52% to -0.54% last week, reflecting increased demand for German government debt as investors sought increased exposure to ‘safe haven’ assets.

The spread between Italian and German government debt widened, as investors demanded a higher yield for the riskier Italian issued bonds. Political instability contributed to the rise in Italian yields, with the coalition government losing its majority in parliament following the resignation of three ministers. Reports suggested that failure to form a new coalition will result in a general election later this year.

The 10-year US Treasury yield declined across the week from 1.12% to 1.09%. With investors in a relatively cautious mood, demand for Treasuries increased.

Worse than expected economic data added to the gloomy sentiment last week, with US retail sales declining for the third month in a row during December. Weekly jobless claims rose to their highest level since August 2020.

Currency

GBP / USD – Current 1.3590 Previous 1.3568

GBP / EUR – Current 1.1238 Previous 1.1094

The Pound rose by a marginal 0.16% against the US Dollar, with the greenback experiencing strength against most major currencies. Sterling gained 1.30% against the Euro.

Commodities

Gold

Gold continued to decline last week, with the precious metal failing to attract interest despite most equity markets declining. The spot price fell by 1.11% to reach $1,828.45 per ounce.

Oil

The Brent Crude spot price reached its highest level since January 2020 during the week, before moving slightly lower to finish the week with a decline of 1.59% at $55.10 per barrel. The surprise production cut by Saudi Arabia continued to be the main driver for prices during the week.