Market Commentary 5th November 2018

Posted by melaniebond
Market Commentary 5th November 2018
Equity Indices
The FTSE 100 continued to see volatility this week with large daily swings, however the overall outlook was positive, with the index ending almost 1% up at 7,094. UK markets rose in tandem with all other major world indices, although did not experience the same growth as some other markets. Despite the positive outlook for Brexit being projected from Number 10, Brexit uncertainty continues to weigh on investor’s minds.

Following a torrid October, with UK markets experiencing their worst month since August 2015, there appears to be a global rebound taking place. A rally in banking stocks helped push the FTSE 100 to a 3 week high of over 7,100 on Wednesday.

BT was the big winner of the week, with its share price up over 11% following better than expected half-yearly profits. BP and Shell saw share price increases as they posted strong profits in Q3 off the back of strong oil prices, however both dropped towards Friday as lower oil prices are likely to affect Q4 earnings.

FTSE 250 member Computacenter suffered off the back of weaker than expected revenues, plunging over 12% to Wednesday.

European equity markets also rebounded this week, with the FTSE All World Index – Europe ex UK gaining 2.4% across the week and the German DAX index rising by 1.6%. The DAX benefitted from Chancellor Merkel stating that she would see out her term to 2021 with investors relieved that there is not likely to be political uncertainty within the Eurozone’s biggest economy in the medium term.

Italian banks helped push shares up as Italian bond yields fell following Standard & Poors decision to not downgrade Italy’s investment rating. VW reported a surge in profits as litigation costs eased with the cost of pay-outs following “dieselgate” abating.

US equities rallied this week, with the S&P 500 index rising over 3% and the NASDAQ up over 3.5%. US markets benefitted from reports that US consumer confidence hit a new 18-year high in October, and this fed through to other world markets.

The S&P 500 had suffered its worst month since September 2011 amid ongoing US-Chinese trade tensions, slowing global growth and rising US interest rates. However analysts report that there is often positive growth following US mid-terms and there is hope that this may lead to a sustained recovery.

A weakening US Dollar helped globally trading blue chip companies. President Trump tweeted that he had had a “very good conversation” with Chinese Premier Xi Jinping on trade and this alleviated fears that he wanted to impose additional tariffs on Chinese imports into the US. FAANG stocks continued to perform well with both Amazon and Facebook reporting revenue increases of approximately 30% in Q3.

Shares in Apple fell over 6% on Thursday as the tech giant forecast lower-than-expected sales for the upcoming Christmas period and increased entry-level prices for its new generation of computers and I-Pads.

Asian equities saw the biggest growth over the week with the FTSE All World Index – Asia Pacific up over 5.2% across the period. China’s Hang Sang Index and Japan’s Nikkei 225 index both saw significant growth of over 5% throughout the week with the region benefiting from a thaw in US-China relations and progress in the US-China trade war.

The Chinese government continued to announce further stimulus measures this week with a proposal to halve car taxes tabled in an effort to boost the automobile industry.

Japan’s Nikkei 225 benefitted from strong financial reports from car makers such as Honda, Mazda and Toyota, as well as an increased profit outlook from Sony. Sony reported growing demand for its online gaming services.

Bond Yields
The 10-Year Gilt yield rose by approximately 6.4% across the week to reach 1.49% on Friday. With a rebound in global equity markets, UK government bond yields increased as investors moved back into equities. A strengthening Sterling, coupled with the MPC’s unanimous decision to hold interest rates at 0.75%, also helped to push yields up.
10-Year German Bund yields also rose this week, increasing by over 13% to reach 0.43% on Friday. With both Moody’s and Standard & Poors maintaining Italy’s investment rating, Italian bond yields dropped with investors seemingly more confident that the Eurozone’s third largest economy is unlikely to default on its debt. This investor sentiment, coupled with the general shift towards equities this week saw a move away from safe haven assets, with German Government bond yields rising as a result. The European commissioner also downplayed tensions between the ECB and Italy over Italy’s upcoming budget.
US 10-Year Treasury yields followed their European counterparts in rising throughout the week to finish the week 4.2% up at 3.21%. As with other geographical regions, the demand for safe haven assets was dampened this week, with Treasury yields rising as a result. Strong wage gains in the US also contributed to increased yields with continued expectation of further interest rate rises in the near future.
GBP / USD – Current 1.2963 Previous 1.2835

GBP / EUR – Current 1.1387 Previous 1.1253

The pound was 1% higher against the dollar during the week, posting its biggest weekly gain since March. Sterling was also around 1.2% higher against the Euro. With Brexit Minister, Dominic Raab, saying he expects a deal with the EU to be finalised by 21 November and The Times reporting that the UK has struck a deal with the EU on post-Brexit financial services, confidence in Sterling rose. One survey now reports that three quarters of UK firms feel confident about post Brexit trade.

The spot price of Gold rose by approximately ¼% across the week to reach $1,233.53 per ounce. However, it was not a smooth increase. There was a large drop to $1,215 per ounce through Wednesday, with the following rebound likely to be due to a weakening dollar. With the majority of Gold trades priced in dollars, Gold would have appeared more attractive to investors holding other currencies this week as the dollar weakened. This would have countered any drop in gold prices as a result of rising equity markets.
The price of Brent crude continued to plummet this week, down 5.8% to reach $72.83 per barrel on Friday. Continued concerns surrounding relations with Saudi Arabia and warnings of a global oversupply of oil were exacerbated by the announcement that the US were to reinstate sanctions against Iran as they pulled out of the Nuclear Deal. With Mike Pompeo (US Secretary of State) saying that the EU would not receive an exemption on Iranian oil sanctions, oil prices have dropped far from October’s high of over $86 per barrel.