Weekly Markets Update: US Equities reach highs; May’s Chequers plans ambushed

Mon 24 Sep 2018

Read our full  Market Update Week 38

Market Update

UK stocks traded higher with the FTSE 100 edging closer to the 7500 level, closing at 7472 point, up +2.65% for the week. In the US the S&P 500 reached new highs, returning +0.8% in GBP terms. Global stocks were up +1.5% in local terms and +1.6% in GBP, with Financials and Materials the driving force behind returns. European, EM and Japanese equities returned +2.6%, +2.2% and +3.8% respectively in Sterling terms. US 10Y Treasury yields once again breached the 3% level, closing the week at 3.063%. Investors will be keeping a keen eye on the level as over the last year the yield has consistently fallen back when going through 3%. Sterling gained +0.5% vs JPY, remained unchanged vs USD and fell -1.0% vs the Euro following the rejection by EU leaders of Theresa May’s Chequers plans for Brexit. Oil rose 4.0% in USD, and is up +18.8% year-to-date. Gold and Metals also appreciated, up +0.5% and +5.1% respectively.

CIO Analysis

US Treasury yields pushed through 3% in the past week, a sign that excess demand may be subsiding. In that case, yields could go higher over the medium term. However the important part remains that pension funds and other institutional investors can now invest their money with a relatively risk-free asset at a decent yield. The dividend yield for the MSCI world is an estimated 2.5%, which means that investors who were previously forced into equities in search of yield, rather than bonds, can return to financial orthodoxy. It also means that upward pressures on the US Dollar could persist, despite the US Dollar falling to 1.18 versus the Euro, down from a high of 1.12, as investors find the yield more attractive. And therein lies the conundrum for financial markets. The strong US Dollar has upset the relationship between the emerging and developed markets, dented global trade (most transactions take place in USD) and could also hurt US economic performance, especially at a time when the government seeks to improve exports. The strong US Dollar may also give the Fed pause, prompting Mr. Powell to reconsider some of the planned rate hikes, for fear that tighter credit and a slowdown in exports could stall the economy.

David Baker, CIO