Despite an extraordinary start to the year where the FTSE 100 index hit a new high on each of the first 12 trading days of the year, the index ultimately lost 0.57% in January. European markets also had a lack lustre start to the year, with the FTSE World Europe ex UK losing 0.12% in local currency terms. This translated to a modest 0.68% gain in Sterling terms.
US equity markets saw all of the major equity indices hit record highs over the month, despite the uncertainty created by the transition to a new administration led by a “political outsider”. The S&P 500 had a total return of 1.86% in US Dollar terms, but produced a more muted 0.05% in Sterling terms. This was because the Pound strengthened 0.6% over the month in comparison to the US Dollar. A number of US companies released their quarterly earnings statements in January. More cyclical companies such as energy and financials have been at the forefront of earnings growth. It remains to be seen if this will be sustainable as it was driven by higher oil prices and the modest interest rate increase in December.
Despite the threat of a more protectionist trade environment the FTSE World Asia Pacific ex Japan index returned 2.59% in local terms and 3.92% in Sterling terms. The FTSE Emerging market index also recovered from the weakness seen at the end of 2016 with a total return of 3.58% in local currency terms and 2.78% in Sterling terms. The FTSE Japan returned just 0.04% in Yen terms but this equated to 1.80% in Sterling terms.
Gilt prices have fallen and yields have risen in tandem due to the inverse relationship between price and yield. The FTSE Actuaries UK Conventional Gilts All Stocks index was down 1.74% % for the month of January and has lost 4.82% in the six months between July and January. The 10-year benchmark gilt yield is now 1.29% compared to 0.75% in September. Stronger growth, higher inflation and the potential for an early end to QE operations have put upwards pressure on European government bond yields and a decline in prices. The German 10-year Bund yield reached 0.4% in January, its highest level since January 2016. The percentage of Eurozone government bonds trading with a negative yield has fallen from a high of 52% in September to below 25% in January. Nevertheless, the difference between the 2.45% yield on the US 10-year Treasury and the 10-Year Bund is now the largest it has been in over 20 years.
Oil prices moderated slightly, with Brent crude down 1% in US Dollar terms and 2.75% in Sterling terms. Gold prices strengthened in the last month up 4.23% in US Dollar terms and 2.37% in Sterling terms. It is worth keeping in mind that like all commodities, gold prices are volatile and on a 5-year view the price is down 26.85% in US Dollar terms and 10.42% in Sterling terms.