Market Commentary 17th August 2021 from Charlie Hancock

Posted by Telford Mann

Market Commentary 17^th August 2021

Equity Indices

UK equity indices built on the gains seen during the previous week, with the FTSE 100 rising by 1.34% and the FTSE 250 index gaining 1.42%.

Official Gross Domestic Product (GDP) data showed that despite a relatively rapid pace of growth during the 2^nd quarter of this year, the UK economy is lagging other G7 nations in the economic recovery. The UK economy expanded by 4.8% in the 2^nd quarter, slightly behind the Bank of England’s 5% forecast. The data confirmed that the UK economy is currently around 4.4% smaller than the pre-pandemic peak.

FTSE 250 engineering company Meggitt PLC saw their share price rise by 14.23% across the week, after the previous week’s takeover offer from US firm Parker Hannifin was beaten by another US company, TransDigm, with an offer of £9.00 per share. At the end of last month, Meggitt shares were trading at around £4.70.

Europe

European equity indices also moved higher last week, with the broad FTSE All World Index – Europe ex UK gaining 1.61%. Germany’s DAX index rose by 1.37%. Headlines regarding the pandemic in Europe were positive last week, helping to boost investor sentiment.

The current wave impacting much of the continent appeared to be slowing last week, whilst the proportion of vaccinated adults in the European Union now exceeds those in the US. After a slow start to their vaccination campaign, the EU is also expected to overtake the UK in the coming weeks.

Data on Eurozone industrial production during June showed a further unexpected decline, with supply chain issues continuing to dampen activity in factories. In particular, the automotive sector appears to be dealing with ongoing supply constraints which have not yet shown signs of fading.

US equity indices moved higher, but the gains were more subdued than those seen in UK and European indices. The S&P 500 rose by 0.71% to reach a new all time high, whilst the Dow Jones Industrial Average also reached a record level, rising by 0.87%. The NASDAQ 100 index gained 0.18%.

The reaction to official inflation data last week was muted, with indices rising slightly following the release of the data. US consumer prices rose at an annualised rate of 5.4% during July. The core measure of CPI, which excludes food and energy prices, came in below expectations, leading to some economists stating that the rise in inflation has peaked.

A closely watched consumer sentiment index produced by the University of Michigan showed a significant decline this month, with economists expecting the index to be flat from July’s level. The spread of the delta variant in the US was cited as the main driver of the deterioration in consumer confidence.

Asia

The FTSE All World Index – Asia Pacific rose by a marginal 0.07%, with declines in indices in the region towards the end of the week weighing on the broad index. China’s Shanghai Composite Index gained 1.68% and Japan’s Nikkei 225 climbed by 0.57%.

The Chinese government released a five-year plan last week, which set out proposals for increased regulation on education services, technology and monopolies. New technology focussed laws will cover online platforms, e-finance and cloud services. Chinese authorities continued with mass testing in areas where coronavirus outbreaks have occurred, with a “zero covid” approach appearing to be the aim.

Sentiment on Japan continued to be impacted by rising coronavirus cases, with the government coming under pressure to impose harsher restrictions. New daily case numbers reached record levels, with many citing the recent Olympic Games as the key driver. Public support for Prime Minister Suga fell to an all-time low.

Bond Yields

UK government bond yields declined last week. Weaker than expected economic growth data for the 2^nd quarter seemingly contributed to declining expectations for an interest rate rise in the near future. Across the week, the 10-Year Gilt yield moved from 0.61% to 0.57%.

Europe

The 10-Year German Bund yield was broadly unchanged at -0.47%, with Bund yields very stable during the week in comparison to other developed government bond markets.

Data showing that Eurozone industrial production weakened in June appeared to keep expectations for monetary tightening by the European Central Bank (ECB) in check.

After rising during the early part of the week to reach 1.37%, the disappointing consumer confidence data released on Friday appeared to prompt a sharp reversal in the 10-Year Treasury yield. Across the week, the 10-Year yield declined from 1.30% to 1.28%.

Currency

GBP / USD – Current 1.3866 Previous 1.3872

GBP / EUR – Current 1.1758 Previous 1.1798

Sterling saw little change against both the US Dollar and the Euro across the week, declining by 0.04% and 0.34% respectively.

Commodities

Gold

The Gold spot price moved 0.95% higher to reach $1,779.74 per ounce, with the precious metal slowly recovering from the sharp decline seen during the previous week.

Oil

After falling below $70 per barrel at the start of the week, the Brent Crude spot price ended the week marginally lower at $70.59 per barrel (-0.16%). Analysts cited Covid-19 driven travel restrictions in China as one of the main drivers, whilst concerns about instability in Afghanistan appeared to have an impact across commodity markets towards the end of the week.