Market Commentary 24th August 2021 from Charlie Hancock

Posted by Telford Mann

Market Commentary 24^th August 2021

Equity Indices

UK equity indices moved lower across the week amidst deteriorating investor sentiment. The FTSE 100 index fell by 1.81%, whilst the FTSE 250 posted a decline of 0.16%. Investors appeared to be concerned about the economic recovery being damaged by rising delta variant cases, together with the prospect of major central banks tightening monetary policy.

A flurry of coronavirus related headlines contributed to weakness in travel related stocks, with International Consolidated Airlines Group falling by 4.06%. Cruise ship operator, Carnival PLC, saw their share price decline by 5.90%. Weakness in commodity prices also weighed on the FTSE, with oil giant BP falling by 5.73% and mining company Anglo American posting a decline of 15.36%.

Economic data for the UK was mixed, with inflationary pressures appearing to ease slightly in July amidst a decline in retail sales. The labour market continued to improve during the 2^nd quarter, with the unemployment rate declining from 4.9% to 4.7%.

Europe

The broad FTSE All World Index – Europe ex UK declined by 2.24%. France’s CAC 40 index struggled, posting a decline of 3.91%. Germany’s DAX index fared relatively well, declining by 1.06%.

An estimate for Eurozone Gross Domestic Product (GDP) indicated that the economy bounced back from a decline of 0.3% during Q1. The easing of Covid related restrictions during the 2^nd quarter helped the Eurozone’s economy to expand by 2%.

French luxury goods maker, Kering, saw their share price decline by 17.29% across the week amidst concerns of falling demand from wealthy customers in China. The sell-off was sparked by comments from Chinese President Xi Jinping, who stated during a conference that he wishes to restrain “unreasonable incomes” to tackle wealth inequality in China. Rival luxury company LVMH declined by 12.65%.

US equity indices declined on Tuesday and Wednesday, before recovering some ground as the week drew to a close. The S&P 500 posted a decline of 0.59%, the technology heavy NASDAQ 100 fell by 0.29%, whilst the more economically sensitive Dow Jones Industrial Average lost 1.11%.

On Wednesday, investors paid close attention to minutes released for the Federal Reserve’s latest policy meeting. The minutes showed that most members of the Federal Open Market Committee believed tapering of the central bank’s bond purchase programme could begin before the end of the year.

Robert Kaplan, a senior figure at the central bank, suggested on Friday that he would support a delay to the tapering if rising delta variant cases impact the economic recovery. The comments appeared to spark an improvement in investor sentiment, with all major US indices posting gains on Friday.

Stocks which are sensitive to the path of the US economic recovery struggled last week, with banking giants JPMorgan Chase & Co and Bank of America declining by 3.36% and 3.05% respectively. A decline in oil prices contributed to Exxon Mobil falling by 7.18%.

Asia

Asian equity indices posted steeper declines than their global counterparts last week. The broad FTSE All World Index – Asia Pacific moved 4.34% lower. Japan’s Nikkei 225 index declined by 3.45%, whilst China’s Shanghai Composite Index suffered a 2.53% loss.

Chinese economic data contributed to the negative investor sentiment, with weaker than forecasted data suggesting that economic growth may be slowing. Industrial output and retail sales during July were lower than expected, with analysts citing disruptions from heavy flooding and Covid-19 outbreaks.

Japan’s economy expanded by more than expected during the 2^nd quarter, with growth of 0.3%. Consumer spending was a key component of growth during the period, but this is widely expected to weaken during the 3^rd quarter following the introduction of harsher Covid-19 restrictions. Japan’s Consumer Price Index (CPI) declined for the 12^th month in a row.

Bond Yields

UK gilt yields moved lower across the week, with investors increasing their exposure to government bonds amidst a sell-off in equity markets. The 10-Year Gilt yield declined from 0.57% to 0.52%.

Weaker than expected inflation data also contributed to the decline in yields. Official data from the Office of National Statistics (ONS) showed that inflation rose by less than expected during July. The annual rate of inflation measured by CPI was 2.0% for July, falling from the 2.5% recorded for June.

Europe

The 10-Year German Bund yield moved from -0.47% to -0.50% across the week, with demand for German Bunds increasing as investors rotated into assets deemed to be ‘safe havens’. Periphery bond yields were broadly unchanged across the week, with the Italian 10-Year yield moving from 0.56% to 0.55%.

A final reading for Eurozone CPI showed the annual rate of inflation was 2.2% during July, in line with previous estimates.

US treasury yields were relatively stable across the week, with little change following the release of minutes from the Federal Open Market Committee’s latest policy meeting. The 10-Year Treasury yield declined by 2 basis points to 1.26%.

Currency

GBP / USD – Current 1.3623 Previous 1.3866

GBP / EUR – Current 1.1644 Previous 1.1758

Sterling moved lower against both the US Dollar and the Euro last week, declining by 1.75% and 0.97% respectively. The US Dollar gained against most major currencies, with investors and currency traders increasing exposure to the greenback.

Commodities

Gold

The Gold Spot price was broadly flat last week, rising by 0.08% to reach $1,781.11 per ounce. The precious metal continues to struggle for any significant support during periods of volatility in equity markets.

Oil

Oil prices declined throughout the week, with the Brent Crude spot price moving 7.66% lower to reach $65.18 per barrel. Oil traders were weighing up the potential for demand to fall as a result of rising delta variant cases, particularly in the US, together with the impact of a strengthening US Dollar.