Weekly Market Update: Global stocks continue their climb, Sterling declines

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Market Update

Global stocks posted strong gains last week, up +1.3% in local currency terms and +3.7% in Sterling terms after the Pound depreciated versus other major currencies. Sterling fell shortly after the UK general election when Boris Johnson signalled the UK will leave the EU with or without a deal in 2020, thus raising fears of a no-deal Brexit; the GBP/USD rate fell from the post election high of 1.35 to 1.30, however, the Pound is still up nearly +2% versus the US Dollar year-to-date. UK stocks were up 3.1% last week, with Healthcare and Energy stocks leading the index higher. US and European equities were up +4.0% and +3.7% in Sterling terms respectively, however, the best performing region over the period was Emerging Markets, which were up +4.3% for the week. Globally, Energy and Utilities were the best performing sectors. UK 10Y yields were essentially flat across the week, closing the period at 0.782%, however, US 10Y yields were up +9.5bps, closing the week at 1.917%. In US Dollar terms gold was flat last week, however, the oil price climbed +0.6%, pushing the year-to-date return up to 33.0%.

CIO Analysis

2019 draws to a close with markets in a buoyant mood, a distinct contrast with last year when rising US rates caused a significant equity market sell-off and analysts raised their probabilities for a US recession. And yet, here we are 12 months later with global equities up 25% year to date (the more instructive figure being 8% since August ’18) and US equities continuing to lead the way. Optimism abounds with the Fed having completed its U-turn, a phase one trade deal between the US and China done (albeit with fanciful expectations for Chinese imports from the US), and the Brexit deadlock broken for the time being at least. In the bond markets the amount of negative yielding instruments has shrunk, and the US 2-10 curve has steepened so that the yield gap is around its widest in nearly a year. Such a change in fortunes should remind investors of the fickleness of market sentiment and discourage complacency. Despite the stellar returns, economic growth remains lacklustre with the drivers for asset prices being the weight of money in the market and the low interest rate environment. However, we do not expect to see either factor reverse in 2020, so despite equity markets being ‘expensive’ (again) we are not inclined to turn our backs on equities just yet.

David Baker, CIO

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