Market Commentary 22nd October 2018

Posted by melaniebond
Market Commentary 22nd October 2018
Equity Indices
The FTSE 100 rose by approximately 0.3% across the week, although there was continued volatility with daily gains and losses in the region of 0.4%. Brexit uncertainty continues; however the strengthening of the Dollar against Sterling is likely to have contributed to the small increase in the FTSE 100.

UK markets followed the US as global investor sentiment turned more positive, although global geo-political turmoil is likely to see market volatility continue. Tobacco and mining stocks recovered from last weeks losses, helping to push the FTSE 100 back above 7,000 points.

Airlines suffered over the week, amid continued Brexit uncertainty and industrial action in Europe. The Big 4 supermarkets continued to struggle, losing market share to the discount brands of Aldi and Lidl. Aldi has seen a 10.5% growth in market share over the past year, with Lidl growing by over 7%. Contrasting to a loss in market share seen by Tesco, Sainsbury’s and Asda. Lower oil prices continued to have a negative impact on Shell and BP shares during the week.

The FTSE All World Index – Europe ex UK rose by 1.6% to Tuesday, before giving back all the gains to end the week down 0.2%. The German DAX index fared even worse, sliding by approximately 0.5%. European equities continued to fare badly, with increasing concerns over the disagreement between the European Central Bank and Italy making investors nervous. Michelin shares dropped nearly 7%, citing reduced demand from China and fewer car sales as the reason for a reduction in sales forecast. Stricter emissions testing rules affected the car industry as a whole, with Daimler and VW also suffering. Spanish Banks fell after a Supreme Court ruling stated that they must pay Stamp Duty on mortgage loans.
The S&P 500 index rallied throughout the week, and despite a mid-week slump wiping out some gains, finished the week 0.6% up. Positive earnings reports by companies such as Proctor & Gamble and Gillette helped alleviate investor fears. The upcoming mid-term elections do not appear to have had any significant effect on markets as of yet, although a Democratic win could have negative implications for US Equities, as President Trump could be forced to reign in tax cuts and de-regulation.

Heightened tensions between the US and Saudi Arabia over the disappearance of journalist, Jamal Kashoggi, is likely to cause the markets concerns over the next week, with many business leaders pulling out of an investment summit due to be held in the country this week. Threatened US sanctions would be met with an Oil trade war.

FAANG stocks remained stable and it is yet to be seen what the impact of the appointment of Sir Nick Clegg as Vice-President, Global Affairs and Communications, will have on Facebook’s fortunes.

Asian stocks followed the US stock pattern, with early gains in The FTSE All World Index – Asia Pacific being wiped out mid-week, before eventually ending the week 0.35% up. Despite weaker than expected economic growth (albeit still 6.5%) in China, investors were reassured by top Chinese officials publicly reassuring them by talking up economic prospects. Furthermore, there has not been any indication that the state has been injecting large sums in order to prop up the economy, as in 2015.

Japan’s Nikkei 225 Index fell slightly again amongst trade uncertainty. The Automobile sector would be particularly hard hit by a no-deal Brexit, with Japanese firms producing 1.5million automobiles per annum in Britain. The chairman of Toyota says a no-deal Brexit should be “avoided at all costs”.

Bond Yields
10-Year UK Gilt yields again fell slightly across the week to reach to 1.58% on Friday. Although they had dropped as low as 1.54% on Thursday. Following a sharp increase in yields over the past 2 months, yields are at their highest since February. In comparison to their counterparts at the Fed, the Bank of England has been reluctant to raise interest rates as quickly and this has seen a divergence in yields between the US and UK. Whilst US yields have practically doubled over the last 2 years, UK yields have remained broadly flat. With the government reporting lower than expected borrowing in September yields dropped slightly over the week.

However, ahead of next week’s budget, with commitments to increase NHS funding by £20billion a year, combined with pessimistic GDP growth projections from the OBR, there are suggestions that the Government will not meet its aim of eliminating the deficit entirely by the mid-2020s and as such yields may remain at a higher level of the short to medium term.

Yields on 10-year German Bunds fell 16% to Thursday, before rebounding to 0.46% on Friday to end the week 8% down. Yields on Italian government debt continued to rise during the week, reaching their highest point since 2014 as the President of the European Central Bank criticised Italy’s 2019 Budget. The spread between Italian and German government debt increased again to the widest point in over 5 and a half years. S&P and Moody’s are due to conclude their ratings reviews by the end of the month, with many expecting a downgrade, which would leave Italy one grade above “junk”.
10-Year Treasury yields in the US ended the week broadly flat at 3.19% on Friday. Minutes from the Federal Reserve’s latest meeting, showing that planned interest rate hikes are likely to go ahead, coupled with persistent strength in employment data caused yields to rise slightly. Both the Fed and markets are anticipating a fourth rate hike of the year in December, however strong employment data and rising wages could reassure investors that rates are rising due to a strong economy and yields may settle at their current rate.
GBP / USD – Current 1.3024 Previous 1.3159

GBP / EUR – Current 1.1365 Previous 1.1378

Sterling dropped by approximately 1% against the dollar during the week, giving back the gains of the previous week, and was again broadly flat against the Euro. With no further progress on a Brexit deal being made, Sterling fell against the dollar and with Theresa May facing mounting pressure, both at home and abroad, analysts believe Sterling could drop further over the coming weeks.

Lower-than-expected government borrowing in September could alleviate some pressure, although a drop to below $1.30 is likely.

The Gold spot price opened at a 12 week high and remained stable across the week to reach $1,226 per ounce on Friday. The continuance of weak US Equity growth has seen investors allocate more capital to the “safe-haven” of Gold and Wall Street is bullish on Gold, with analysts believing that a short-term rise likely due to weakness in the Dollar and US Treasury Yields.
The price of Brent crude continued to fall, dropping by $1.50 a barrel to Thursday, before rebounding slightly on Friday to end the week 1.2% down at $79.78 a barrel. A bearish Weekly Petroleum Status Report from the US Energy Information Administration, coupled with weak Chinese economic growth has put downward pressure on prices.

US consumption remains strong and some state-run Chinese refineries have returned to service following maintenance, leading analysts to believe there may be a short-term rise in Oil prices, although geo-political issues continue to disrupt supply, with some traders speculating that Saudi Arabia could cut production by as much as 500,000 barrels a day, were sanctions to be applied.