Market Commentary 20th August 2018

The FTSE 100 had a difficult week, falling by almost 2% between Monday and Wednesday, before recovering some of these losses to finish the week down by around 1.1%. Much of the losses in the first half of the week were due to lower commodity prices prompting falls in the sizeable oil and mining stocks listed on the index, with ongoing concerns around the Turkish economy also continuing to make markets jittery.

In a similar pattern to the FTSE 100, the broad gauge for European equities, the FTSE All World Index – Europe ex UK, was down by nearly 2% on Wednesday, before a quick turnaround led the index to finish the week down by around 0.9%. In the early part of the week, contagion fears over the collapse of the Turkish Lira continued to impact European markets. As the week went on, the Lira recovered somewhat amidst a promise from Qatar to invest $15 billion into the Turkish economy. Trade talks between the US and China also seemed more progressive which helped to boost the German DAX in particular.

The S&P 500 had a mixed week, with a rise on Monday, followed by falls dragging the index back down below its starting point for the week, before a further rally to finish the period up by 1%. As with other parts of the globe, US equity markets were hit by concerns around Turkey in the early part of the week. As these concerns eased slightly, US equities recovered, whilst also being boosted by China accepting a proposal from the US to have a new round of trade talks later this month. US markets also reacted well to the retail giant Walmart posting better than expected earnings, prompting the company’s share price to rise by over 10%.

The broad Asia Pacific equities gauge, the FTSE All World Index – Asia Pacific, ended the week down by around 0.15% after recovering from sharper falls experienced earlier on in the week. Emerging Market equities were sensitive to concerns regarding the Turkish economy, with falls in commodity prices also weighing on the performance of equities in this region. Whilst most Asian economies are not exhibiting the weaknesses of the Turkish economy, Asian equities are hit during a risk off situation by investors selling these assets with impunity. As with US equities, the more positive tone on US-China trade helped markets to recover somewhat before the end of the week.

Gilt yields were unable to recover from any of the falls seen last week, with 10-Year Gilt yields finishing the week at 1.24%. Data released during the week showed the unemployment rate is at its lowest point since 1975 and that retail sales had a strong month in July, however, updated data also showed real wage growth remains subdued and productivity is struggling to rise. This kind of economic data is not supportive of interest rate rises, which contributes to the market not pricing in any further rate rises by the Bank of England.

As with UK Gilts, European government bond yields struggled to recover from the falls experienced during the previous week, with the 10-year German Bund yield flat across the week at 0.31%. The concerns regarding Turkey continued to see investors preferring to hold high quality government bonds. With the amount of Turkey’s short term debt denominated in US Dollars equating to 27% of Turkish GDP, it is of little surprise that the Lira sliding against the dollar is being viewed as a real issue, causing investors to seek safe-haven assets such as German Bunds.

US government bond yields also remained largely unchanged for the week, with the US 10-year Treasury yield finishing the period at 2.86%. With the Turkish government announcing an increase in tariffs on cars, alcohol and cigarettes imported from the US, investors remained concerned about the weakening of the Lira and as a result the security of US government bonds continued to be favoured over riskier assets.

GBP / EUR – Current 1.1159 Previous 1.1189

Sterling was unable to recover from the circa 2% fall against the dollar experienced during the previous week, sliding by a further 0.25% this week. It was a similar story against the Euro, with Sterling falling by 0.27%. Whilst a fall in the UK unemployment rate and positive retail sales growth for July prompted slight rises in the pound, this was outweighed by some of the less positive economic data regarding wage growth and productivity, as well as continuing Brexit concerns.