16th September 2019

Stock markets had another good week of solid gains, with the cheaper parts of the market flourishing. Trade tensions between China and the US eased, the European Central Bank announced more monetary easing and there was even a more positive skew to Brexit negotiations. This week the focus is firmly on central banks, with the US meeting on Wednesday being the key one.

Last Week

  • Stocks continued to bounce back
  • Government bonds sold off heavily as did gold stocks
  • The European Central Bank eased policy
  • Trade tensions between China and the US eased

This Week

  • The key event this week will be the Fed meeting which concludes on Wednesday night at 7pm. It is widely expected that there will be a 0.25% rate cut; to 1.75%. As ever, the comments from Jay Powell’s press conference will likely be the highlight.
  • The Bank of England meet on Thursday; we expect them to hold rates at 0.75% and remain dovish. There is also the Bank of Japan meeting on Thursday.

Last Week’s Highlights​

Stocks had another good week, led by the cheaper and smaller parts of the market. The rally saw the US market get to within 1% of the highs posted at the end of July. The Japanese stock market has been one of the bright spots so far this month, up 3.7% last week, 6.2% in September and up nearly 9% since the 26th August. The Nikkei 225 Index has now risen for eight consecutive days in a row, with cheaper value stocks (such as financials and materials) outperforming higher PE growth stocks.

Value stocks generally did well last week (due largely to the push higher in bond yields). Banks as a sector were the stand-out performers, up by 6.4%. Consumer staples and technology were the laggards; both slightly under water for the week. Last week in the UK, Barclays was up 11.8%, RBS up 11% and Lloyds was up 9.2%.

Bond yields surged higher, with the yield on the US 10-year note going to its highest in over a month and having its biggest weekly move since President Trump’s election in 2016. This made for weekly losses of 2.1% for US Treasuries and 2.7% for UK gilts, with UK gilt yields rising a huge 26 basis points on the week to finish at 0.76%; a long way from their lows of 0.41% on 3rd September. High yield bonds were the best performers amongst the broad market indices, with spreads pushing towards their tights for the year helping to offset the impact of rising nominal rates. The amount of negative yielding debt globally is now “just” $13trn as opposed to the $17trn that was reached at the end of August.

The pound had a decent week, rising by 1.8% vs the US dollar and by 1.3% against the Euro. UK data was generally better than expected and a “No-Deal” Brexit was effectively made harder.

Gold mining stocks lost some of their shine last week, dropping by 7.3% and they are now 14% down from their early September highs but still up over 35% for the year.

The European Central Bank surprised markets last week with their new quantitative easing package. Rates were cut by 0.1% to -0.5% (as expected), but the surprise came in a new (and open-ended) €20bn a month asset buying program. In addition to this, they also announced a tiering system for banks (to cushion the impact of negative rates on their margins) as well as a third round of Targeted Long Term Refinancing Operations.

Trade tensions between China and the US eased over the week. China moved first, announcing a small list of US products that would be exempt from tariffs due to take effect on September 17th. President Trump quickly responded (by tweet!) that the US would postpone their planned 5% increase on $250bn of Chinese imports by two weeks in October as a mark of respect to the People’s Republic 70th anniversary celebrations.

Economic data was thin on the ground, but what little there was supported the case of a resilient US consumer; so vital to global growth. US retail sales rose a healthy 0.4% in August (vs expectations of 0.2%), a key consumer sentiment reading (University of Michigan) rose more than expected and core inflation data rose by 2.4% on a year-over-year basis; more than anticipated and the most since mid-2018.

Asset Returns

Equities & Oil: returns are all in base currency, save for Global and Emerging which are in GBP. Bond returns are all shown in GBP. Gold in GBP. Source: Bloomberg.

Japanese equities continued their surge last week and are up nearly 9% since the end of August

Source: Source: Bloomberg / Psigma

Rory McPherson
Head of Investment Strategy