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Market Update – 04/09/2020

The equity markets saw volatility return last week, with Thursday seeing declines of 3% and Friday 1%. Before this last week, the S&P 500 advanced for four straight weeks, with technology stocks leading the index to a new record high.

The strength of the stock market, though, seemingly disconnected from current economic fundamentals, has been supported to date by aggressive fiscal and monetary stimulus and stronger-than-expected economic indicators of future growth. Investors also await US employment data after disappointing private-sector employment data released halfway through the week.

US equities were down for the week by 1.5%, with the technology sector recording a 2% fall, following record all-time highs having been reached on Wednesday. European equities, which have much lower exposure to technology, were down by 1% and UK equities were 1.8% lower. Japanese equities were 0.7% higher whilst Australian shares were down by 2.4%. Emerging markets lost 1.1% although there was a wide dispersion of returns between countries.

The fall in US technology stock was brushed away as a healthy correction by many, as the five largest US stocks, with a combined value of $8 trillion, had been trading on an average price to earnings ratio of 44 times, close to the 50 times P/E ratio peak for the five biggest stocks during the dotcom bubble.

Against a backdrop of soft equity markets, disappointing private-sector employment data out of the US and news that the Eurozone had slipped into deflation for the month of August, government bond yields fell (yields move inversely to price), with 10-year US Treasuries currently yielding 0.72%, German Bunds minus 0.47% and UK Gilts 0.26%.

Amongst commodities, gold fell by 1.4% over the week, now trading at $1,928 an ounce, and copper slipped by 0.23%. However, iron ore had a strong week, rallying by over 5%. Crude oil weakened, as Brent crude fell by 1.8%, now trading at $44.2 a barrel, and US WTI (West Texas Intermediate) fell by 3.2%, trading at $39.2.

The official manufacturing PMI came in at 51 for August, with any number above 50 indicating expansion, whilst the non-manufacturing PMI came in at 55.2, higher than forecast. Tesla, the US electric car manufacturer surged by almost 13% in one day following a five for one stock split, having rallied by 74% in the month of August alone, and up almost five times this year. However, on Wednesday, data released on the Eurozone showed that headline inflation had fallen by 0.2% in August, down from an increase of 0.4% in July. Deflation had impacted 12 of the 19 countries, including Germany, Italy, Spain, Portugal and Greece.

This puts further pressure on the European Central Bank for yet more stimulus, following the central bank citing in June that one of the key reasons for increasing its emergency bond-buying programme from €750bn to €1.35trn had been due to weak inflation expectations.

The information contained in this article is believed to be correct but cannot be guaranteed. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Opinions constitute our judgment as at the date shown and are subject to change without notice. This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation.
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