Please find below our Weekly Market Update for the week ending 1st June 2018.
A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
Investors began the week by selling Italian bonds after Sergio Mattarella, the Italian President, rejected a bid by the ‘Five Star Movement’ and ‘The League’ on Tuesday to form a coalition. Investors feared that his move would trigger new elections that could potentially give a stronger Eurosceptic mandate to the two populist parties. This ignited a sell-off of Italian bonds, with Italy’s 2-year bond yields reached their highest level in more than 4 years to 2.7% – at one point reaching as high as 2.73%, up nearly 2 percentage points from Monday’s market close. On the other hand, US Treasury yields plunged more than 15 basis points to 2.77% as the situation it Italy spurred investors to seek out the safety of US government debt. When many investors quickly buy into bonds, the price of the bond rises and as yields act inversely to price, bond yields fall – and vice versa. The buy-in of US Treasuries earlier this week led to the biggest fall in percentage yield for the US bond since the global market turmoil that followed the UK’s vote to leave the EU in June 2016. Global equities also suffered; on Tuesday, the Dow Jones index fell 1.6% and S&P 500 was down 1.2% to a 3-week closing low after having its worst day since April 24th, with the S&P Financial sector shedding a hefty 2.7%. Financials also came under pressure in Europe, being a main factor in the German Dax redacting 1.5% and the FTSE 100 falling 1.26% on the day.
Despite the tumultuous beginning of the week, concerns over the Italian political situation eased on Wednesday after the two Italian parties, 5 Star and The League, restarted talks to form a coalition government, and also reflected on an apparent successful auction of €5.6bn of Italian debt. Yields began to fall on Italian bonds while they rose on US treasuries, the Spanish Ibex index gained 0.5% on the day, the Dax was up 0.9% and the FTSE was up 0.8%. It seems as if the crisis in Italy has been temporarily averted.
However, as one crisis is avoided, another one is poised to return after the US said it would begin levying tariffs on imports of steel & aluminium from the EU, Canada and Mexico from Friday 1st June. The EU immediately promised retaliatory tariffs, with both Mexico and Canada also saying they will take action. The dollar surprisingly weakened on the announcement, falling 0.2% on the day against the euro. The dollar index, which measures the US currency against a basket of its peers, has now fallen 0.77% this week – it’s biggest drop in one week since the beginning of February this year – which will surely be well received to the Emerging Markets which have been struggling against the recent resurgence of the dollar. Furthermore, the weakening dollar has allowed the Japanese Topix index to fall for 7 consecutive days, as the Yen strengthens against the US currency.
Gary’s market comments in conjunction with our investment partners
More time and money is being invested, by the funds that Vestra hold, into assessing the risks that disruptive technologies pose to their businesses. Terry Smith, a well-known technophobe, has recently added Facebook to his global equity fund. Moreover, in recent weeks Lindsell Train, Troy Trojan and Findlay Park, three funds that invest in ‘old’ or ‘unexciting’ companies with strong brands such as Unilever, Diageo and Heineken, have all spoken or written about measures they have taken to stay ahead of the game. One way that Vestra have expressed this idea in the MPS portfolios and Volare funds has been the inclusion of the L&G Global Technology tracker, giving direct and specific access to these modern, disruptive companies that have shown leadership in their own sectors – such as Apple, Facebook and NVIDIA. This particular fund is up 32% since inclusion in January 2017. The balanced portfolio has 16% of the equity exposure invested in technology stocks.
7IM portfolios have often benefited from their diversified approach to other currencies, but most recently in particular from their investment in Japanese Yen. The expansion of their holdings in late 2017, and a further increase in March, took the overall holdings in the currency to a level in line with 7IM’s long term strategic asset allocation position, which is 6.5% in Yen in the Balanced portfolio, as an example.
7IM is committed to a basket of holdings that is aimed at mitigating against risk, which – alongside the Yen – includes, US Dollar, gold, and equity puts. These holdings should help smooth portfolio returns in the event of continued market volatility.
Sources: LGT Vestra and 7IM