Market Commentary 8th July 2019 from Charlie Hancock

The main driver for stock markets last week was the news that President Trump and President Xi managed to hold some constructive talks during the G20 summit hosted in Japan at the weekend. Investors were in a bullish mood for the early part of the week, with the positive news on the US-China trade war outweighing negative data on UK construction and manufacturing activity.

Following Tuesday’s news that June was the worst month for UK construction activity in over 10 years, housebuilder Persimmon PLC posted a disappointing trading update on Thursday which showed that revenues had declined. The company’s share price fell 3.8% across the week.

European equities were lifted by positive news on the US-China trade dispute. In particular, reports that Trump will allow US companies to sell equipment to Huawei as long as it is “no great national security problem” helped European technology stocks to advance. Investors were also positive following the news that the current head of the International Monetary Fund (IMF), Christine Lagarde, has been nominated to replace Mario Draghi as the head of the European Central Bank.

European equity markets were sent downwards on Friday following the release of weak European economic data and a stronger than expected US jobs report. Data showed that German manufacturing orders declined across all sectors during June, Eurozone retail sales declined and new car sales in the UK declined for the fourth month in a row.

US markets rallied as investors digested the positive news reports from discussions between President Trump and President Xi. In addition to Trump’s announcement of no new tariffs and fewer restrictions on US companies doing business with Huawei, China agreed to increase their purchases of US farm products and re-start negotiations regarding wider trade disputes between the two nations.

Friday afternoon saw the release of data showing that the US added more jobs than expected during June. Data of this nature is not supportive of an interest rate cut by the Federal Reserve and consequently US equities gave up some of the early week gains.

Investors were focused on the positive outcome of talks between the US and China at the G20 summit, with markets not significantly impacted by economic data released during the week. Surveys for China’s manufacturing and services sectors showed that both contracted further in June. In addition, the Bank of Japan’s closely watched quarterly business survey showed confidence across the board declined during the 2^nd quarter.

The fall in yields came as investors digested comments from Mark Carney, the head of the Bank of England, warning on the impact of a no deal Brexit. Carney also said that the risk of a global trade war poses a threat to domestic economic growth in the UK and acknowledged that the market is now expecting a more cautious policy stance on interest rates. Data released during the week showing that construction and manufacturing activity in the UK have worsened also contributed to the decline in Gilt yields.

Government bond yields across the Eurozone declined after it was announced that Christine Lagarde had been nominated to take over from Mario Draghi as President of the European Central Bank. Based on Lagarde’s history at the IMF, it is expected that she will continue the current policy stance of lowering interest rates.

The non-farm payroll report released on Friday showed that the US economy added 224,000 jobs in June. This was significantly more than expected and showed a strong bounce from the 72,000 jobs added in May. Consequently, markets lowered their expectation of an interest rate cut by the Central Bank later this month.

GBP / EUR – Current 1.1140 Previous 1.1166

The Pound declined by around 1.4% against the US Dollar and 0.25% against the Euro last week. The main drivers for the Pound declining were comments from Mark Carney warning of heightened risks to the UK economy and much weaker than expected data for the construction and manufacturing sectors.

The GBP to USD rate declined as the US Dollar strengthened, due to markets pricing in an increased chance of the Federal Reserve leaving interest rates unchanged later this month. The Euro declined against other major currencies, which meant that the fall in Sterling against the Euro was less pronounced that the movement against the Dollar.