Market Commentary 13th July 2021 from Charlie Hancock

Posted by Niamh Bailey
Market Commentary 13th July 2021
Equity Indices
The FTSE 100 index finished the week broadly flat, with a decline of 0.02%. The FTSE 250 index posted a gain of 0.71% after a stronger start to the week than the large cap 100 index. Investors shrugged off rising UK coronavirus cases, with no indication that the UK government plans to tighten Covid-19 restrictions in the near future.

Sentiment was mixed last week, with a sell off occurring during Thursday’s session after investors became concerned about a slowing global economic recovery. Major UK indices recovered some ground on Friday as the worries abated.

Official data released on Thursday showed the UK economy is estimated to have grown at 0.8% during May, with momentum slowing from the 2.0% growth rate recorded for April. The UK economy is now estimated to be 3.1% smaller than its pre-pandemic peak in February 2020.

Equity indices in Europe were mixed last week. The broad FTSE All World Index – Europe ex UK rose by 0.30%, whilst Germany’s DAX index gained 0.24%. The headline French and Italian indices posted declines for the week after suffering relatively steep declines on Thursday.

European equity indices were choppy, with investor sentiment changing throughout the week. Concerns around a slowdown in the economic recovery were fuelled by signs of a surge in coronavirus infections in some parts of Europe, notably Spain.

The European Central Bank (ECB) announced they would now target average inflation of 2% over the medium term, reducing expectations for any monetary tightening in the near future to combat rising inflation. The ECB’s previous strategy was to target steady inflation of just under 2% and the central bank acknowledged the new policy may result in a period where inflation is moderately above the target level.

The S&P 500 moved 0.40% higher, with the index seeing relatively subdued movements during the first half of the week, followed by a sell off on Thursday and a rally to a new all-time high on Friday. The Dow Jones Industrial Average gained 0.24% across the week, whilst the NASDAQ 100 rose by 0.67%.

Sentiment was muted during the early part of the week, with headlines regarding the delta Covid-19 variant adding to the cautious mood. Travel related stocks suffered declines, with American Airlines moving 2.75% lower across the week. Royal Caribbean Cruises suffered a 4.30% decline.

Economic data was slightly weaker than expected, which added to concerns around slowing economic growth. In particular, the number of new weekly jobless claims came in higher than anticipated, suggesting that improvement in the US labour market may be stalling.

Major Asian equity indices underperformed their global counterparts last week. The FTSE All World Index – Asia Pacific fell by 1.91%, with weakness in Japanese equities weighing on the broad index. The Nikkei 225 index declined by 2.93%, whilst China’s Shanghai Composite Index was marginally higher after gaining 0.15%.

The Japanese government announced Tokyo would re-enter a state of emergency to stem a rise in coronavirus infections. The measures are due to last until the final week of August, with no spectators allowed at the upcoming Olympic Games as a result. Prime Minister Yoshihide Suga suggested that restrictions may be lifted early if the situation improves, but investor sentiment remained fragile and the headline Nikkei 225 index declined throughout the week.

Chinese indices were relatively stable last week, despite renewed concerns around regulatory issues. The government announced greater scrutiny would be placed on technology companies with a focus on those seeking international stock market listings. Didi, a Chinese company which operates a taxi-hailing mobile app, saw their US listed shares decline by 22.45% across the week after Beijing authorities launched an investigation into Didi and effectively banned its use in China.

Bond Yields
UK Gilt yields declined, with demand for government debt rising around the globe last week. The 10-Year Gilt yield fell from 0.70% to 0.65%.

With investors in a cautious mood and headlines around a slowdown in the global economic recovery surfacing, demand for ‘safe haven’ assets such as government bonds increased.

The 10-Year German Bund yield declined from -0.24% to -0.29%. A shift in policy stance from the ECB appeared to add to the downward pressure on yields, with the central bank signalling they are comfortable with inflation running above their 2% target for a period of time. This reduces the likelihood of an interest rate hike in the near future to dampen rising inflation.
The 10-Year US Treasury yield moved from 1.43% to 1.36%, reaching the lowest level seen since February. Weaker than expected US economic data appeared to contribute to the decline, together with the release of minutes from the Federal Reserve’s latest policy meeting.

The minutes indicated that most members of the Federal Open Market Committee do not feel the central bank’s asset purchase programme should be tapered yet, with substantial further progress required before the economic recovery meets their goals.

GBP / USD – Current 1.3901 Previous 1.3824

GBP / EUR – Current 1.1701 Previous 1.1659

Sterling gained 0.56% against the US Dollar and 0.36% against the Euro last week. Currency traders appeared unphased by rising UK coronavirus infections.

The Gold spot price gained 1.18% to reach $1,808.32 per ounce. After failing to sustain a breakout above $1,900 in May, movements in the price of the precious metal have been muted, remaining close to the $1,800 mark.
Oil prices declined sharply in the middle of the week, with worries about global growth impacting sentiment, however, prices recovered some ground on Thursday and Friday. The Brent Crude spot price finished the week 0.81% lower at $75.55 per barrel. Concerns around disagreements between OPEC producing nations continue to be closely monitored by oil traders.