Weekly Market Update: Oil rallies and UK stocks trade higher on retail sales numbers

Read our full Market Update Week 7

Market Update

It was an excellent week for equity investors, with most major indices posting gains. US stocks closed the week up +3.0% in Sterling terms, despite poor retail sales figures. The impressive returns were evenly spread, with UK, European and Japanese equities returning +2.6%, +3.3% and +2.2% respectively. Emerging Markets were the outlier, down -0.5% in local terms and flat in Sterling terms. However in Monday’s trading Chinese equities were up +2.7% on news that trade talks between the US and China are set to continue in Washington this week, following high-level meetings in Beijing previously. The Pound was down -0.4% vs the US Dollar and -0.2% vs the Euro. Bonds were mostly flat over the week, apart from Emerging Market bonds which fell -0.5%. Gold closed the week up +0.5% in USD terms and Oil rallied significantly, up 5.4%, and is now trading at a 3-month high. Global oil supply has remained low and high prices could feed into greater inflationary pressures.

CIO analysis

Last week’s highlight was the especially weak US retail sales report. This is for two reasons. One, it is the first major index to indicate some government shutdown-related pain. Two, the market shrugged it off very quickly, which brings us to the crux of the matter. The Fed’s newfound dovishness makes market dips a buying opportunity for traders. Despite the news, as well as a host of data indicating a global economic slowdown, US large caps pushed above the 200 day moving average for the first time in more than two months. This cycle has been marked by Fed conditioning of financial assets. Will we reach a point where financial assets will no longer respond to economic fundamentals? History suggests that this can happen over the shorter term. However over the longer term it is still prudent for investors to ignore trading action and watch earnings and economic trends as a bellwether for investment decisions. Overvaluation is not simply a matter of the P/E ratio for the next 12 months.

David Baker, CIO

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