Market Commentary 5th August 2024 – from Charlie Hancock

Posted by melaniebond

Market Commentary 5^th August 2024

Equity Indices

UK equity indices moved lower last week as investor sentiment around the globe deteriorated. The large cap FTSE 100 index lost 1.34%, whilst the mid-cap FTSE 250 index saw a decline of 2.48%.

The Bank of England’s Monetary Policy Committee (MPC) voted 5 to 4 in favour of cutting interest rates by 0.25%, taking the central bank’s key interest rate down to 5.00%. The BoE noted that inflation in the services sector of the economy remains above their target, which was a driver for some members voting to keep rates on hold. The BoE’s governor, Andrew Bailey, stated that they “need to make sure inflation stays low and be careful not to cut interest rates too quickly or by too much”.

A Purchasing Managers’ Index (PMI) for UK manufacturing pointed to the strongest improvement for the sector last month since July 2022. Meanwhile data on the property market indicated that house prices remained stable in July, with a year-on-year rise of 2.1% according to mortgage lender Nationwide.

Europe

European equity indices sold off across the week and the FTSE All World Index – Europe ex UK moved 2.61% lower. Germany’s DAX index declined by 4.11%, France’s CAC 40 lost 3.54% and the Swiss Market Index fell by 2.99%.

European economic data was mixed. The Eurozone economy expanded by 0.3% in the second quarter of the year, which was better than expected. Germany’s economy continued to stagnate, with a contraction of 0.1% during the quarter.

The Eurozone’s unemployment rate increased to 6.5%, whilst the bloc’s inflation rate was higher than expected in July, with the Consumer Price Index (CPI) rising by 2.6% year-on-year. The picture varied across member states, with inflation accelerating in Germany and France but easing in Spain.

Equity indices in the US were relatively stable during the first half of the week before selling off sharply during Friday’s session. The S&P 500 posted a loss of 2.06%, the Dow Jones Industrial Average declined by 2.10%, whilst the tech-heavy NASDAQ 100 fell by 3.06%.

Investors paid close attention to US labour market data on Friday. The US economy added 114,000 jobs during July, which was significantly lower than expected. The unemployment rate rose to 4.3%, which marked the highest level since October 2021. The unemployment rate is now 0.9% higher than the post-covid low seen in Spring 2023. The data prompted a negative stock market reaction, with investors concerned that the US is heading towards a recession.

US corporations continued to report second quarter earnings during the week, with several mega-cap companies reporting worse than expected profits. Amazon.com Inc issued weak guidance for the coming quarter, whilst investors appeared concerned about the company’s level of spending on Artificial Intelligence (AI) investments.

Asia

Asian equity indices were mixed. The FTSE All World Index – Asia Pacific moved 0.87% lower, Japan’s Nikkei 225 fell by 4.67%, whilst China’s Shanghai Composite Index posted a gain of 0.50%.

Chinese economic data pointed to muted growth. The manufacturing sector unexpectedly shrank during July, with a slowdown in exports. Other data indicated that consumer spending slowed in July, which was backed up by US multinationals reporting weak demand for their products in China. The real estate sector continued to face issues, despite recent stimulus efforts, with new home prices falling by 20% year-on-year last month.

The Bank of Japan (BoJ) tightened monetary policy last week, hiking their key interest rate to 0.25%, whilst also confirming plans to gradually reduce bond purchases made via their quantitative easing programme. The Japanese yen strengthened against other major currencies last week, which prompted some sharp declines in Japanese equities, given that many large Japanese companies are heavily reliant on exports.

Bond Yields

The 10-Year Gilt yield declined from 4.10% to 3.83% across the week, with the risk-off mood amongst investors driving an increase in demand for government bonds across the developed world. The Bank of England’s decision to cut interest rates also contributed to Gilt yields moving lower.

Europe

The 10-Year German Bund yield fell from 2.41% to 2.17%.

Investors rotated away from equities into European government debt last week. Data showing that Eurozone unemployment rose last month also appeared to push yields lower.

The 10-Year Treasury yield moved from 4.20% to 3.79%, with the bulk of the week’s decline in yields coming following Friday’s jobs report. Investors ramped up their expectations for the Federal Reserve to cut interest rates at their September policy meeting.

Currency

GBP / USD – Current 1.2801 Previous 1.2867

GBP / EUR – Current 1.1735 Previous 1.1854

The Pound declined by 0.52% against the US Dollar and 1.00% against the Euro, with the BoE’s decision to cut interest rates pushing the Pound lower.

Commodities

Gold

The Gold spot price gained 2.35% last week, rising to $2,443.24 per ounce. The precious metal benefitted from the risk-off sentiment which took hold during the week, given its ‘safe haven’ status, whilst lower US Treasury yields also contributed to the spot price rising.

Oil

The Brent Crude spot price declined by 5.32% to $76.81 per barrel. Data pointing to a weakening US labour market contributed to expectations for falling oil demand, which prompted traders to turn bearish on oil.