Weekly Market Update: Global stocks gain in local currency terms, Oil rallies on drone attack

Read our full Market Update Week 37

Market Update

Global stocks were down -0.2% last week in Sterling terms and up +1.3% in local currency terms as Sterling appreciated versus other major currencies as Boris Johnson adopted a softer stance on the Irish border; increasing the likelihood of a deal being reached before the October 31st deadline. UK, US and European stocks returned +1.2%, -0.4% and -0.2% respectively in Sterling terms. Over the week, Sterling gained +1.8% versus the Dollar, pushing the GBP/USD rate firmly back above the 1.2 mark again. Japanese stocks posted a strong gain, up +2.0% in Sterling terms. Globally, the best performing sectors were financials and materials, while consumer staples and healthcare stocks lagged the index. UK 10Y Gilts sold off considerably, with the yield up from +0.51% to +0.76%, and in a similar fashion, US 10Y Treasury yields jumped 33.6bps to close the week at 1.896%. In US Dollar terms Gold fell -1.2%, and Oil fell -4.3% throughout the week, however, the commodity rallied +19% on Sunday after the drone attack.

CIO Analysis

Oil prices surged over the weekend, as terrorist attacks on key Saudi oil fields have effectively wiped out the world’s spare capacity with Saudi crude production halved. The US responded immediately with the President authorising the use of strategic reserves. What does this mean for investors? A higher geopolitical premium on oil is business as usual for a strategic as opposed to a financial asset. Inflation is very tame across the board, despite significant easing, higher oil prices may only create temporary inflation pressure. Despite possible knee-jerk reactions from bonds and futures markets we don’t anticipate this issue to change the dovish direction of central banks. Bond prices on the other hand, are at historically high levels (with over $17 trillion of negative-yielding debt globally) and bond traders, who don’t want to be locked into low yields for a long time are looking for an excuse to take profits off the table. Fundamentally, this event alone would not usually move fixed income, but at current valuation levels bond markets are very sensitive and thus fixed income investors should remain vigilant.  In Europe, Boris Johnson has travelled to Luxembourg to meet Jean-Claude Juncker for talks over a working lunch today with EU chief negotiator Michael Barnier set to join. Johnson has reiterated his position that he will not accept any delay to Brexit and Dominic Raab has downplayed earlier comments by Steve Barclay of ‘scope for an extension by mutual consent’. Meanwhile the UK Supreme Court is set to commence proceedings into the legality of the prorogation of parliament. Such a ruling would be seen favourably by the markets as it should increase the likelihood of an orderly Brexit. Policy uncertainty is applying downward pressure on Sterling, and until some clarity can be achieved on the nature, and timing, of Brexit this is unlikely to change.

-David Baker, CIO

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