Market Commentary 9th August 2021 from Charlie Hancock

Posted by Telford Mann
Market Commentary 9th August 2021
Equity Indices
UK
The FTSE 100 gained 1.29% last week, whilst the mid cap FTSE 250 index moved 2.21% higher. Strong corporate earnings together with news on mergers and acquisitions contributed to the positive sentiment on UK equities.

HSBC reported better than expected profits for the first half of 2021 and announced that dividends would resume. The bank stated that they were profitable in every region, but the UK was a particularly strong area. HSBC’s UK lending business experienced a record quarter for mortgages amidst a buoyant housing market. Across the week, the bank’s share price gained 3.12%.

Defence and Engineering company Meggitt PLC, which is a constituent of the FTSE 250, agreed a takeover offer from US firm Parker-Hannifin for $8.8 billion on Monday.  The bid of £8 per share represented a premium of around 70% based on the company’s share price prior to the announcement. Asset management company Sanne Group, who are also a member of the FTSE 250 index, said they were considering selling the business to private equity firm Apex Group. Experian published data last week showing that private equity buy-outs in the UK reached record levels during the first half of 2021.

Europe
European equity indices moved higher, with the broad FTSE All World Index – Europe ex UK gaining 0.92%. Germany’s DAX index rose by 1.40%.

Sentiment on European equities was boosted by encouraging earnings results.  French bank Societe Generale saw their share price gain 11.36% across the week, after posting better than expected 2nd quarter earnings and announcing a share buyback scheme of around €470 million. The bank said profits were lifted by strong activity in retail banking, particularly for mortgage and consumer credit products.

Investors shrugged off data showing that German industrial output unexpectedly declined during June, with supply chain disruptions seemingly having a detrimental impact. Rising coronavirus cases across much of the continent also had little impact on investor sentiment.

US
US equity indices saw gains across the week, but underperformed against major European and Asian indices. The S&P 500 rose by 0.94%, the Dow Jones Industrial Average gained 0.78% and the NASDAQ 100 moved 1.00% higher.

In comparison to their global counterparts, US indices had a relatively choppy week, with investors weighing up rising coronavirus cases against corporate earnings and economic data. Surging cases in states with low vaccine take up prompted concerns of hospitals in some areas becoming overwhelmed.

Official data released on Friday showed that the US economy added 943,000 jobs in June, significantly above economist expectations for 858,000 additions. The US unemployment rate declined to a pandemic low of 5.4%. A strong labour market may bring forward the expected timeline for the Federal Reserve raising interest rates or tapering their bond purchase programme, however, investors reacted positively to the data, with US indices rising during Friday’s session.

Asia
Asian equity indices bounced back last week, with the broad FTSE All World Index – Asia Pacific gaining 1.28%. Japan’s Nikkei 225 recorded a weekly gain for the first time in several weeks, with the index rising by 1.97%. China’s Shanghai Composite index moved 1.79% higher.

Official Chinese Purchasing Managers Index (PMI) data indicated that business activity grew at a slower pace in July, with both the manufacturing and services indices falling in comparison to the readings for June. Outbreaks of coronavirus cases, which have prompted restrictions in some regions, appeared to be one factor behind the slowing economic momentum. The PMI data appeared to reduce expectations of monetary tightening by the People’s Bank of China, with government bond yields declining across the week.

Economic data for Japan was disappointing, with consumer spending declining amidst rising coronavirus cases and a closely watched composite PMI falling in July.  The International Monetary Fund (IMF) downgraded their 2021 Japanese economic growth forecasts, with Japan being the only G7 nation to see a downgrade.

Bond Yields
UK
The 10-Year Gilt yield drifted lower for most of the week, before reversing on Friday. Across the week, the 10-Year increased by 5 basis points to 0.61%.

The Bank of England’s monetary policy committee left the UK base rate unchanged at 0.10% and voted to maintain the bank’s bond purchase programme at £875bn. The bank lowered their forecasts for 2021 economic growth and raised their expectations for inflation, with consumer prices expected to rise an annual rate of 4% during the final quarter of this year. Fixed income markets appeared unphased by some hawkish remarks from officials at the bank, with the surge in yields on Friday coming in the wake of the US jobs report.

Europe
The 10-Year German Bund yield declined last week, falling from -0.46% to -0.50%.

German Bunds bucked the trend amongst developed fixed income markets last week. Data showing a fall in output from German manufacturers contributed to the decline in yields, together with subdued Eurozone producer price inflation.

US
After declining below 1.20% during the first half of the week, the 10-Year US Treasury yield rose from 1.22% to 1.30%. A stronger than expected jobs report appeared to bring forward expectations of monetary tightening from the Federal Reserve, with yields rallying following the release of the report.
Currency
GBP / USD – Current 1.3872 Previous 1.3904

GBP / EUR – Current 1.1798 Previous 1.1715

Sterling declined by 0.23% against the US Dollar, with the greenback seeing notable strength on Friday following better than expected labour market data. Against the Euro, Sterling gained 0.71%.

Commodities
Gold
The Gold spot price declined by 2.82% last week, falling to $1,763.03. The spot price was broadly flat until Friday, before a surge in the US Dollar prompted a relatively sharp decline. With most contracts for Gold traded in US Dollars, a stronger greenback typically makes the precious metal less attractive to investors holding other currencies.
Oil
Oil prices declined last week, with the Brent Crude spot price falling by 7.38% to reach $70.70 per barrel. Oil traders appeared to be factoring in lower demand amidst rising delta variant cases, particularly in the US. Political uncertainty also appeared to impact prices, with the US and the UK formally blaming Iran for an attack on an Israeli controlled oil tanker.