Market Commentary 3rd September 2018

Posted by melaniebond

Market Commentary 3^rd September 2018

Equity Indices

It was a difficult period for the FTSE 100, with the index falling by around 2.5% across the week. The key driver for this downwards movement appears to have been a stronger pound. With the constituent companies generating around 70% of their revenue overseas, a strong pound usually impacts the index negatively. Whilst the picture was bleak for the index as a whole, this week saw Coca-Cola agree to acquire Costa Coffee from Whitbread PLC for £3.9billion, prompting the latter’s share price to rise by almost 20%.

Europe

After a benign start to the week, the broad gauge for European equities, the FTSE All World Index – Europe ex UK, saw a downwards movement from Wednesday onwards and finished the week down by around 1.8%, reversing much of the gains seen last week. Concerns around global trade tensions continues to drive markets and European equities appear to be particularly sensitive to news in this area. Automotives were the worst performing sector in Europe last week amidst negative rhetoric from President Trump regarding trade with the EU.

In contrast to UK and European equity indices, the S&P 500 had a positive week overall and finished the period up by around 1%. The S&P 500 is trading near its all-time high and US stock markets are continuing to be resilient to trade war concerns, with the market appearing to price in little negative impact on US companies from renegotiated trade deals. With US stock market indices trading at these high levels, some analysts are predicting that a correction is likely to take place in the coming months, with the US midterm elections being a key driver.

Asia

The broad Asia Pacific equities gauge, the FTSE All World Index – Asia Pacific, ended the week down by around 0.55%. Asian equities are suffering from growing trade war fears and a strong US dollar, with Analysts recently cutting their 2018 earnings estimates for Asia Pacific companies. The exception to this is Japan, where analysts have been raising earnings projections. The economic woes of Turkey and Argentina continued to prompt contagion fears for emerging markets in general, which negatively impacted some Asian markets during the week.

Bond Yields

UK Gilt yields jumped significantly this week, returning to the levels seen in April amidst heightened Brexit concerns. The 10-year gilt yield started the week at 1.28% and climbed to a high of 1.49% before finishing the period at 1.43%. Yields were aided by a stronger pound and rumours that the Bank of England had approached Mark Carney to stay on as Governor for an additional year to help manage the uncertainty caused by Brexit.

Europe

In contrast to yields in the UK, government bond yields in Europe fell across the week amidst rising demand for these assets, with the 10-year German Bund yield falling by around 13% to finish the week at 0.33%. Ratings agency Fitch revised its outlook for Italian government debt from stable to negative which, coupled with a risk-off attitude towards European equities, saw investors seek the security of German Bunds.

Government bond yields in the US were largely unchanged across the week, with the 10-year Treasury yield rising 0.3% to finish at 2.86% on Friday. This slight rise was prompted by news of the US and Canada failing to reach an agreement on the North American Free Trade Agreement (NAFTA) before Friday’s deadline set by President Trump.

Currency

GBP / USD – Current 1.2960 Previous 1.2845

GBP / EUR – Current 1.1170 Previous 1.1039

This week saw sterling strengthen against both the dollar and the Euro, finishing the week up by 0.8% and 1.2% respectively. The pound was the best performing major currency over the week, with the US dollar and the Euro both weakening. News regarding French President Emmanuel Macron hoping to push other EU leaders towards achieving a deal with the UK provided relief for the pound. The lack of positive news recently regarding Brexit means that any optimistic comments are welcomed by the pound, however, currency analysts remain sceptical and feel that this rise in Sterling is likely to be short lived.

Commodities

Gold

The Gold spot price fell by around 0.8% across the week to $1,201 per troy ounce. Last week’s risk-off attitude towards equities generally as well as a weakening US dollar failed to benefit the gold price. The upbeat sentiment on the US economy is dampening the demand for gold which means that price rises are likely to be subdued in the near future.

Oil

The price of Brent crude continued the trend of the previous week to rise by around 2.2% to $77.95 per barrel. The looming US sanctions which will tighten Iranian exports from November continue to be the main concern regarding supply and consequently this remained the main driver for oil prices over the last week.

Portfolios

After experiencing a rally in the early part of the week, the portfolios were hampered by negative performance in most equity and bond markets. Most of the growth portfolios experienced a slight fall, with the Score 5 and Score 6 strategies experiencing a positive return across the week. In contrast to the previous week when all growth strategies beat their respective benchmarks, Score 6 was the only growth strategy to outperform its benchmark last week. It was a slightly better story for the Ethical portfolios, with ethical bias strategies 4, 5 and 6 achieving a positive return. The ethical bias strategies 2, 4 and 6 all outperformed their benchmarks. For the Lite portfolios, only Score 6 posted a positive return and all of the strategies slightly underperformed their benchmarks.