Weekly Market Update: UK equities benefit from Oil rally

Read our full Market Update Week 19

Market Update

Last week saw equity markets retreat in local terms, offsetting the previous week’s gains. Emerging markets sold off the most, falling -2.3% in local terms (-1.8% in GBP) weighed down by a stronger US Dollar and rising US Treasury yields. EM were followed by US equities and global equities at -0.5% and -0.4% in USD respectively. In GBP US stocks were flat, while global stocks gained +0.1%, due to the US Dollar strength. European equities returned +0.4% (-0.5% in EUR), fairly unperturbed by the prospect of two Eurosceptic parties governing Italy. Elsewhere UK large caps gained +0.8%. Japanese stocks lead the markets with the a +1.1% increase in Yen (+0.4% in GBP). Meanwhile, 10 year government yields continued to rise as UK 10Y Gilt yields climbed 5.7 bps to 1.50%, US 10Y Treasury yields increased 8.6 bps during the week, ending the week at 3.06%, followed by a rise of 2 bps for German 10Y Bund yields. Oil also continued to rally, up roughly +18% in local and Sterling terms year-to-date gaining a further +1.3% last week. Metals were fairly flat at +0.1%, while gold fell -1.4%.

CIO Analysis

At the time of writing the FTSE 100 is at 7848, an all-time high. The index has been on an extremely strong run, with positive returns in each of the last eight weeks. What has driven returns? First it should be noted that global equities have also seen good, if not quite so strong gains in this period, rebounding after a weak start to the year and further supported by a strong global earnings season. However it is the resources-heavy nature of the FTSE 100 that has seen it outperform other global indices. Names such as BP and Royal Dutch Shell have seen returns of around 25% in the last two months as oil has neared $80 per barrel, while recent US Dollar strength means that their revenues translate into Sterling at a higher value. The strong US Dollar is something all commodity producers, such as Rio Tinto, benefit from, since commodities trade in USD. Although we are underweight UK equities overall, our positioning within UK equities is in favour of large caps, which we prefer due to their greater ability to source revenues and move operations around the world, traits particularly prevalent in commodity producers.

David Baker, CIO