Market Commentary 12th November 2018

Posted by melaniebond
Market Commentary 12th November 2018
Equity Indices
Volatility continued to be the theme of the week, with the FTSE 100 seeing daily falls and losses of up to 1%, before ending the week broadly flat at 7,105.

All markets benefitted from the result of the US Mid-terms, with strong gains seen following Tuesday’s polling. However, this was not enough to counteract the news that the service sector (which accounts for 76% of the UK economy) saw its business activity growth ease to its lowest level since the Referendum. Consumer confidence dipped to 28%, according to the Barclaycard consumer spending data, the lowest figure since the survey began in 2014. Despite reports that a “financial services” Brexit deal is imminent, continued uncertainty looks to be stifling UK GDP growth. Furthermore, a global fall in markets seen as a result of US China trade relations, helped wipe out gains seen earlier in the week.

Associated British Foods saw a 10% increase in share price following an increase in pre-tax profits. This was helped by a 5% rise in sales at Primark (one of ABP’s many holdings). There was however a drop in like-for-like clothing sales, which was mirrored by Marks and Spencer’s, as consumer confidence dropped.

Betting companies suffered a poor week with William Hill down 9% and PaddyPower down 5.5%. William Hill has lowered its profit outlook and following Tracey Crouch’s resignation as Sports Minister, there are increasing calls to reduce the maximum stake for Fixed-odds Betting Terminals.

European equity markets followed UK markets this week, with gains made following the US elections largely wiped out by the end of the week. The FTSE All World Index – Europe ex UK ended Friday 0.1% down, although the German DAX index rose 0.3% across the week. Like in the UK, business confidence is down, with growing trade tensions resulting in confidence reaching its lowest point in over 2 years.

There is continued unrest surrounding Italy’s budget proposal, with the European Commission admitting that they would apply sanctions if an agreement could not be made.

US equities continued to rise this week, with the S&P 500 index up around 1.6%, with the NASDAQ and Dow Jones also up. US markets received a shot in the arm following the Mid-terms with the S&P 500 posting its second best single day rally following a midterm election in history. A single day gain of 2.1% was only bettered in 1982 and was far in excess of the average 0.7% gain usually seen.

The Democrats regaining control of the House of Representatives was largely expected, with a split government generally seen as a good thing for US markets. With more checks and balances now in place, it will be harder for President Trump to push through his more controversial policies. This should reduce political risk over the next 2 years and curtail fiscal spending, which would increase America’s debt.

Tech stocks generally saw the results as positive, with Amazon, Alphabet and Apple all seeing price rises throughout the week.

The buoyant mood in the US fed through to world markets on Tuesday and Wednesday, although not even the US was immune from the slight downturn through Friday. The US Federal reserve opted to hold interest rates, although an increase is anticipated in December. Amidst continued uncertainty around trade relations with China, US markets are still tempered.

Asian equities saw a slight rise over the week, with the FTSE All World Index – Asia Pacific up 0.4% across the period. Market movement was more pronounced though in China, with the Hang Sang Index down 1.2%, and Japan, with the Nikkei 225 index seeing a 1.6% rise.

Although China has promised to reduce import tariffs and open up its economy more, continued escalating tariffs with the US do not look like stopping in the near future. Both China and the US have spoken about finding a solution to the trade war, although neither appears to want to back down first. China’s surplus with the US has reduced by $2.4billion to $31.7billion since September.

Bond Yields
The 10-Year Gilt yield rose throughout the week, before a sharp drop on Friday meant they ended the week 1 basis point down at 1.49%. Despite a rebound in global equity markets causing UK government bond yields to increase early in the week as investors moved back into equities, recent decisions to not raise interest rates in the UK and US helped temper yield increases. In addition, the fall in global equity markets on Friday also helped push yields up.
10-Year German Bund yields also dropped this week, ending the week 4.7% down at 0.41% on Friday. Like in the UK, Bund yields saw daily increases until Thursday, before a sharp drop on Friday as equity markets suffered. With tensions between Italy and the European Commission still high, German Bunds remain a safe haven for investors. Conversely, Italy did not see the same drop in yields as their budget uncertainty continues and investors remain wary.
US 10-Year Treasury yields followed their European counterparts in rising throughout the week, before dropping on Friday to finish the week marginally down at 3.18%.

Like the rest of the world, the demand for safe haven assets was dampened early in the week, before a slip in global markets on Friday resulted in yields reducing. However, with interest rate rises expected in December, coupled with rising wages and consumer confidence, yields are expected to increase in the future.

GBP / USD – Current 1.2976 Previous 1.2963

GBP / EUR – Current 1.1456 Previous 1.1387

The pound was broadly flat against the dollar during the week, and around 0.6% higher against the Euro.

Brexit Minister, Dominic Raab, has continued to promote positivity over a Brexit deal being reached shortly and confidence in Sterling has remained high over the past few weeks. With uncertainty in the Eurozone over Italy, Sterling saw another week of rises against the Euro. As a result of the midterms, the Dollar strengthened globally, which counteracted the confidence in sterling and resulted in the two currencies remaining largely neutral.

The spot price of Gold dropped by approximately 1.8% across the week to reach $1,209.65 per ounce.

With equity markets generally up or flat over the week, the safe haven of gold appears less attractive to investors. As a result, a reduced demand for gold was seen this week, coupled with a strengthening dollar which would have made dollar traded gold appear less attractive to foreign investors. In addition, according to some analysts, falling oil prices would have created increased pessimism in the Commodity sector as a whole.

Oil prices continued to suffer this week, with Brent crude down 4.1% to reach $70.18 per barrel on Friday.

With oil prices down over 18% since the beginning of October as a result of swelling global supplies and reduced demand, the sector is technically in a bear market. The US has reinstated sanctions against Iran, although hope that this may reduce global supply have not been realised, as Saudi Arabia and Russia have increased production. Furthermore, with countries such as China, India and Turkey granted exemptions from Iranian sanctions, Iran will continue to be able to export.