Market Commentary 26th November 2018

Posted by melaniebond
Market Commentary 26th November 2018
Equity Indices
The FTSE 100 ended the week 0.7% down at 6,953 amidst continuing concerns over slow global growth and Brexit. In addition, an extended sell-off of US tech stocks has weighed on global markets this week. The index had pushed into positive territory mid-week, however with the UK and EU agreeing in principle to a Brexit deal, a rising Sterling pushed the index into negative territory. With many FTSE 100 companies generating revenue abroad, a stronger Sterling has a negative impact when remitting profits back to the UK. The FTSE 250 fared better, ending the week level. With its constituent companies more domestically focused, it is less susceptible to Sterling’s movement.

Mining companies fared badly this week, giving up their gains of the previous week. With Mexico considering legislation which would make it more difficult to mine in the country and Morgan Stanley downgrading its stock, Fresnillo finished the week over 16% down. Energy suppliers also suffered off the back of the incoming energy bill cap, with Centrica down 9%.

European equity markets fared badly this week with the FTSE All World Index – Europe ex UK down 1.5% and Germany’s DAX down 0.5%. Italian banks fared badly as bond yields rose following Brussel’s official rejection of Italy’s budget. This paves the way for unprecedented sanctions to be levied against Italy. Italy are not backing down on their budget with Deputy Prime Minister, Matteo Salvini, stating that they are convinced with their numbers and that sanctions would be disrespectful to Italians. In conjunction with falls in global equity markets, this led to drops across European markets.
US equities were hardest hit of the global indices this week with the S&P 500 ending 2.2% down and the Dow almost 3% down. Trade tensions with China continue to weigh on the market. President Xi Jinping and Vice-President Mike Pence traded attacks at the Asia-Pacific Economic cooperation summit, which did little to allay investors fears. However, with Presidents Trump and Xi Jinping expected to talk at this week’s G20 summit there is hope that there will be no escalation in tariffs.

Apple continued to fall, down over 7% over the week. This is partly reflective of overall US concerns, with 20% of revenue derived from the Greater China area and part manufacturers also based there. In addition, increasing prices seem to be creating reduced demand with holiday sales expected to be lower than in previous years.

Asian equities followed the general trend in equities this week, with the FTSE All World Index – Asia Pacific down 1.1%. US-China trade tensions are one of the main factors weighing on markets with economists stating that there haven’t been any promising developments since the trade war began.

Carmakers Nissan, Renault and Mitsubishi suffered badly at the start of the week following the arrest of Chief Executive, Carlos Ghosn. Revelations that he had been misappropriating company funds for personal use resulted in him being sacked. This led to small gains across the week for the three companies, although not nearly enough to claw back the initial losses.

Bond Yields
The 10-Year Gilt yield rose throughout the week to reach 1.43% on Thursday, before falling to 1.38% on Friday. The yield had been rising due to concerns about Theresa May’s ability to agree a Brexit deal and a weakening Sterling. This caused investors to seek the safe haven of UK Government Bonds. However, following the publication of a draft Brexit agreement, both Sterling and investor confidence rose causing yields to fall back.
10-Year German Bund yields continued to fall across the week, with yields down 8% at 0.34%. With Brussel’s rejecting Italy’s budget proposal, European investors have flocked to the safety of German bonds causing the spread between 10 Year German and Italian Government Bond Yields to widen even further. A fall in equity markets across the week also made bonds more attractive to investors.
US 10 year Treasury Yields fell by 2 basis points over the week to 3.04%, its lowest yield in over a year. Poor equity performance, falling oil prices and reducing European yields have all had an impact on decreasing yields in the US. However, indications from the Federal Reserve pointing to an interest rate rise of 0.25% in December, has tempered further falls in yields.
GBP / USD – Current 1.2854 Previous 1.2841

GBP / EUR – Current 1.1306 Previous 1.1257

The pound fell slightly against both the dollar this week and gained 0.75% against the Euro. Expectations that Brexit terms are due to be signed off this week caused a spike in Sterling against the Euro, although Spain’s statement that they would not sign without having more say over the government of Gibraltar threatens to block a deal. Initial gains against the Dollar were wiped out, with fears that the draft proposal would not get through a Parliamentary vote.

The Gold spot price finished the week broadly level at $1,223. The gold price remained broadly flat as falling equity markets were cancelled out by a strengthening dollar. Despite a fall in equity markets over the week, investors were not pushed towards gold. With the Dollar strengthening, gold appears more expensive to foreign investors, making it appear less of an attractive prospect as a safe-haven.
Brent crude prices continued their sharp decline, ending the week 12% down at $58.80 per barrel. Increased global supply (particularly US shale and Saudi and Russian exports) and reduced global demand are the main drivers behind falling prices. This is good news for UK drivers with Asda announcing lower fuel prices, with other supermarkets likely to quickly follow.

OPEC are pushing for a supply cut of at least 1million barrels per day in an effort to prop up prices. However, analysts fear this may not be enough and a strengthening dollar may push prices even lower.