Market Commentary 10th May 2021 from Charlie Hancock

Posted by melaniebond
Market Commentary 10th May 2021
Equity Indices
During another strong week for the UK’s flagship index, the FTSE 100 rose by 2.29%. The mid-cap FTSE 250 index moved 1.24% higher.

The FTSE 100 was boosted by strong performance in commodity related stocks, with rising metal and oil prices prompting investors to seek increased exposure to these sectors. Anglo American rose by 10.15% across the week, whilst Glencore saw their share price rise by 9.33%. In the energy sector, Royal Dutch Shell gained 5.34% and BP rose by 3.48%.

The Bank of England raised their 2021 economic growth forecasts, with the central bank expecting the UK economy to expand by 7.25% this year. This rate of growth would be the fastest expansion since 1941 and would see the UK economy recover the output lost during the pandemic by early next year.

European equity indices moved higher last week, with the broad FTSE All World Index – Europe ex UK climbing by 2.47%. Germany’s DAX index rose by 1.74%.

Germany’s DAX index was dragged lower during the early part of the week, after microchip company Infineon warned that semiconductor shortages will impact car production. Automobile manufacturers who cancelled orders at the start of the pandemic are reportedly struggling to keep production lines operating. Whilst the wider DAX index recovered across the week, automakers lagged, with Mercedes-Benz owner Daimler AG falling by 1.33% and Volkswagen declining by 0.91%.

Covid-19 related news continued to provide reasons for investors to be optimistic, with most European nations now reporting that more than 25% of adults have received a single vaccine dose. The Netherlands and Belgium began to ease lockdown measures and the European Commission announced plans to re-open European Union borders to tourists by the end of June.

The S&P 500 gained 1.23% last week. A rotation out of technology and growth stocks into more cyclically exposed areas of the market saw the Dow Jones Industrial Average rise by 2.67% and the NASDAQ 100 decline by 1.02%.

Investors rotated out of stocks which are sensitive to rising interest rates, following comments from the Treasury Secretary, Janet Yellen. The former Federal Reserve chair stated that interest rates may have to rise to prevent the economy from overheating.

Economic data for the week largely surprised to the downside, with non-farm payroll numbers expanding by 266,000 in April. Economists had been expecting the rapid economic recovery currently underway to create around 1 million jobs. A closely watched manufacturing activity index came in significantly lower than expected, whilst construction spending during March rose by less than anticipated. On the positive side, weekly jobless claims fell to their lowest level since the pandemic commenced.

Asian markets were mixed last week, with the broad FTSE All World Index – Asia Pacific gaining 0.94%, Japan’s Nikkei 225 rising by 1.89% and China’s Shanghai Composite Index falling by 0.81%.

The rotation from technology orientated companies into more cyclically exposed businesses weighed on Chinese indices, whilst lifting Japan’s headline index, which is heavily weighted towards industrial companies. Investors in Japan also appeared to be encouraged by the easing of some Covid-19 related restrictions.

Data for China was encouraging, with a services Purchasing Managers’ Index rising to its highest level so far this year and data on tourism showing a recent surge during Labor Day celebrations. Exports during April were higher than expected.

Bond Yields
The 10-Year Gilt yield declined from 0.84% to 0.77% across the week, despite the Bank of England suggesting they may taper their quantitative easing programme in the near future.
The 10-Year German Bund yield moved from -0.20% to -0.22% last week.

The yield dropped sharply to -0.24% at the start of the week, with a heavy decline in the DAX index coinciding with investors rotating into safe haven assets such as German government debt. With sentiment improving as the week progressed, Bund yields rose again.

The 10-Year US Treasury yield declined from 1.63% to 1.58% last week.

Whilst Janet Yellen suggested that interest rates may need to rise during a speech on Tuesday, she later backtracked, stating that her remarks were not intended to be a prediction of central bank policy. Friday’s jobs report, which was significantly below expectations, prompted Treasury yields to decline.

GBP / USD – Current 1.3984 Previous 1.3822

GBP / EUR – Current 1.1501 Previous 1.1492

The Pound gained 1.17% against the US Dollar last week, with strong economic forecasts from the Bank of England prompting currency traders to take a bullish view on Sterling. The Euro also experienced some strength last week, with Sterling seeing a marginal gain of 0.09% against the Eurozone currency.

With metal prices in general rallying last week, Gold found significant support from investors. The spot price of the precious metal climbed by 3.51% to reach $1,831.24 per ounce.
Oil prices continued to rise steadily, with the Brent Crude spot price gaining 1.53% to finish the week at $68.28 per barrel.