Market Commentary 19th July 2021 from Charlie Hancock

Posted by Niamh Bailey
Market Commentary 19th July 2021
Equity Indices
The FTSE 100 index declined by 1.60% during a week in which most equity indices around the globe lost ground. The FTSE 250 declined by 1.93%, with weakness in Sterling contributing to the downward pressure on the mid cap index.

Concerns around rising Covid-19 cases ahead of England lifting most pandemic restrictions weighed on stocks in the travel and leisure sectors. British Airways owner, International Consolidated Airlines Group (IAG) declined by 9.23%, whilst budget rival easyJet fell by 11.70%. Cinema chain Cineworld Group fell by 19.33% and The Restaurant Group, who own brands such as Wagamama and Frankie & Benny’s, saw their share price decline by 6.61%.

Corporate news provided a reminder of the retail sector’s woes and the housing market’s strength. The John Lewis Partnership announced plans to cut 1,000 jobs in John Lewis and Waitrose stores, after axing 1,500 head office roles last year. The UK’s largest housebuilder, Barratt Developments, said they expect profits for the 12 months to 30th June to be slightly above analyst expectations of around £800 million.

After a positive start to the week, major European equity indices moved lower as investor sentiment deteriorated. The broad FTSE All World Index – Europe ex UK fell by 0.99%, whilst Germany’s DAX index declined by 0.94%. With tourism a key sector for the Spanish economy, concerns around travel restrictions contributed to Spain’s IBEX 35 index falling by 2.84%.

Pandemic related news flow appeared to be one of the main drivers of negative investor sentiment last week. After seeing a surge in cases following the removal of lockdown restrictions, the Dutch government urged people to work from home again and cancelled plans to allow events with large crowds. France implemented strict proof of vaccination requirements, with a health pass needed for certain train journeys, dining in restaurants and visiting leisure facilities such as cinemas and theatres.

Data for Eurozone industrial output during May was weaker than expected, adding to concerns around a slowing economic recovery in Europe.

The S&P 500 posted a loss of 0.97%, whilst the Dow Jones Industrial Average fell by 0.52% and the NASDAQ 100 index moved 0.98% lower. Investors paid close attention to economic and inflation data throughout the week, with the data painting a mixed picture.

Data released on Tuesday showed that headline consumer price inflation rose to an annual rate of 5.4% in June. The data was above expectations for 4.9%, although continued dovish comments from the Federal Reserve chair, Jerome Powell, appeared to calm investor nerves slightly.

Whilst retail sales data for June was stronger than expected, a closely watched US consumer sentiment survey weakened during July, defying economist expectations for an improvement on June’s survey results. With around 70% of the US economy driven by consumer spending, the data appeared to prompt fears of a slowing recovery.

US technology giants outperformed last week, with Apple gaining 0.88%, Google’s parent company Alphabet rising by 1.16% and Microsoft moving 1.01% higher.

Asian equity indices outperformed their global counterparts last week, bucking the recent trend of relative weakness. The broad FTSE All World Index – Asia Pacific gained 1.37%, whilst Japan’s Nikkei 225 posted a gain of 0.22% and China’s Shanghai Composite Index rose by 0.43%.

Chinese economic data was encouraging and appeared to calm fears of an economic slowdown, which would have a wide reaching impact given that China accounts for just under 20% of the global economy. Official data showed that the economy expanded by 7.9% during the 2nd quarter of 2021, whilst retail sales and export growth during June were both stronger than expected.

The Japanese central bank lowered their economic growth forecast for 2021, but the 2022 forecast was revised higher. The Bank of Japan said that an improvement in the vaccination campaign and the release of pent-up demand in the consumer sector could generate better than expected economic growth.

Bond Yields
UK Gilt yields followed global fixed income markets lower last week, with the 10-Year Gilt yield declining from 0.65% to 0.63%.

A rise in UK consumer price inflation appeared to limit the fall in Gilt yields. The rate of inflation rose to a three year high of 2.5% during June, up from the 2.1% recorded for May. Two key Bank of England (BoE) figures made hawkish remarks following the release of the data, hinting that bond purchases under the Bank’s quantitative easing (QE) programme could reduce sooner than expected.

The 10-Year German Bund yield declined from -0.29% to -0.36%. Concerns around rising delta variant cases in Europe and the potential for this to de-rail the economic recovery prompted investors to rotate away from equities and into government bonds.

Data showing that Eurozone inflation cooled last month may have added to the decline in yields, with consumer prices increasing at annual rate of 1.9% during June, down from the 2.0% recorded for May.

The 10-Year US Treasury yield fell from 1.36% to 1.29% across the week.

Dovish comments from the Federal Reserve chairman, Jerome Powell, appeared to add to the downward pressure on treasury yields. Powell stated during a testimony to the US congress that inflationary pressures were temporary and that substantial further progress is required before the Fed meets their labour market objectives.

GBP / USD – Current 1.3767 Previous 1.3901

GBP / EUR – Current 1.1657 Previous 1.1701

Sterling moved lower against the US Dollar and the Euro last week, posting declines of 0.96% and 0.38% respectively. With UK coronavirus infections continuing to surge, sentiment on the Pound turned negative.

The Gold spot price moved 0.21% higher to $1,812.05. The precious metal spiked during the early part of the week, with strong export growth data in China adding to upward pressure for metal prices, before falling back on Friday.
Oil prices rallied during the early part of the week, but faded after the OPEC+ group reached a compromise with Saudi Arabia which will see oil production rise over the coming months, adding supply to the market. The Brent Crude spot price moved 2.59% lower to $73.59 per barrel.