After a prolonged period of rising markets, last month saw the first major blip since August 2015. Fears over increasing inflation and higher interest rates resulted in a big sell-off in the equity markets. The S&P 500 index, which tracks the largest US companies, shed -8.5% in the space of a week, while in the UK the FTSE 100 index dipped below 7,100 for the first time in over a year.
The market wobble resulted in a huge spike in volatility, which over the last year has remained at remarkably low levels. The VIX index, one of the most popular measures of market volatility expectations, saw a massive leap in the first week of February, reaching levels far higher than experienced throughout the whole of 2017:
The spike in volatility was not good news for investors of short volatility products. The ProShares Short VIX Short-Term Futures ETF, for example, collapsed by nearly -83% in one day.
Despite the market downturn, the UK economy is showing areas of growth. According to a recent Bank of England survey, UK wages are expected to increase by 3.1% in 2018, compared to 2.6% last year. This would be the largest rise in British workers’ pay for ten years, and would outstrip UK inflation, which currently sits at 3%.
Meanwhile, UK banking giant Royal Bank of Scotland has reported its first profit in ten years. Its total net income for 2017 was £752 million, compared to -£6.95 billion the previous year. The bank had been posting losses every year since the global financial crisis when the Treasury had to bail it out for £45 billion.
February was not a good month for developed equity markets. The FTSE 100 index ended the month down
-3.40%. Medium and smaller companies, measured by the FTSE 250 ex IT index and the FTSE Small Cap ex IT index, fell -2.80% and -3.89% respectively. In the US, the S&P 500 index declined -3.69% and in Europe the Eurostoxx index declined -4.57%. The Topix index, which measures Japanese equities, fell -3.70%.
Emerging markets also saw declines, with the MSCI Emerging Markets index losing -3.86%. Latin American equities, measured by the MSCI Latin America index, dropped -1.82% and Chinese equities measured by the MSCI China index shed -6.37%. In India, the IISL Nifty 50 PR index lost -4.85%.
The fixed income markets weren’t so badly affected. UK government bonds, measured by the FTSE Gilts All Stocks index, gained +0.25% and long dated (over 15 years to maturity) gilts rose +0.64%. In the corporate market, European corporate bonds, measured by the Markit iBoxx Euro Corporates index, decreased -0.01% while sterling denominated corporate bonds, measured by the Markit iBoxx Sterling Corporates index, lost -1.20%. In the high yield market, the Bank of America Merrill Lynch Euro High Yield index and the Bank of America Merrill Lynch Sterling High Yield index returned -0.70% and -0.37% respectively. Emerging Market sovereign debt, measured by the JP Morgan EMBI Global index, slipped -1.96%.
In the commodities market, the S&P GSCI index, which consists of a basket of commodities including oil, metals and agricultural items, declined -3.34%. The Oil Price Brent Crude PR index relinquished -4.74%. The precious metals, measured by the S&P GSCI Gold and Silver indices, went down -1.76% and -5.20% respectively. In the agricultural markets, corn and wheat climbed +3.38% and +6.34% respectively.
In the FX market, the pound lost some ground against most major currencies. The US dollar and the euro appreciated versus the pound by +3.04% and +1.29% respectively.
(All the above returns are reflected on a local currency basis i.e. they do not factor in any relevant currency movements. Unless accompanied by PR (Price Return), they do include income).
Warning – the views expressed by Courtiers in this summary and any video and video transcripts, are reached from our own research. Courtiers cannot accept responsibility for any decisions taken as a result of reading this document, watching the featured video or reading the video transcript and investors are recommended to take independent professional advice before effecting transactions. The price of stocks, shares and funds, and the income from them, may fall as well as rise. Past performance is not necessarily a guide to future returns.
We do not endorse nor accept responsibility for the content of any website not operated by Courtiers which you may visit by following a link from this article.
Seminars & Events
Valuable live commentary on the latest investment views and news, delivered with a unique Courtiers edge.Info & Booking »