Monthly review end-January 2020
- 07 February 2020
- 5 minutes
Stock prices and bond yields were rising in early January after investors reacted positively to the preliminary trade deal between US and China being signed. This was soon and emphatically eclipsed by concerns over the coronavirus which began in Wuhan and spread fairly rapidly to other countries. This deflated investor confidence and sent stock prices and bond yields sharply lower, especially in China.
Investors in the UK weren’t just coping with the implications of the coronavirus. Concerns re-emerged over the nature of the UK’s exit from the European Union. Prime Minister Boris Johnson has insisted that the UK will depart in December this year, while also taking a hard line towards negotiations in public. However, there was some comfort being taken from a decisive election result that enables parliament to function and Brexit to progress. With this in mind, the Bank of England felt that an interest rate rise was not necessary.
US-China deal signed
Confidence in the US was more clear-cut in early January with the benchmark S&P 500 stock index hitting another record high. Unemployment reached a 50-year low while the preliminary trade deal with China was finally signed. However, as concerns over the coronavirus grew, stock prices fell with oil producers looking particularly vulnerable to lower demand from the world’s biggest consumer, China.
It was a similar story elsewhere. Companies with substantial interests in or sales to China suffered the most, while the prices of lower-risk rated opportunities such as utility stocks and government bonds were pushed higher.
As the demand for and price of a bond rise, its yield falls. As a result, lower-risk rated government bond yields fell significantly during January. This process was exacerbated by central banks keeping interest rates low. If interest rates are increased, other low-risk rated investment opportunities such as savings deposits can offer higher interest rates. Bonds tend to offer a fixed return that doesn’t rise or fall with interest rates. So when interest rates go up, bonds tend to become less attractive, but if they stay low, they remain attractive keeping demand for them and their prices up, and their yields down.
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