Archinomics – market update & podcast

Logic Wealth Planning and Architas podcast 11 May

More important information to keep you updated about investment markets. Here is the latest news and podcast from the investment team at Architas. We hope you will find very useful…

In brief

* There was another significant stimulus package coming out of the US. This will be used as a payment protection plan to support medium and small-sized businesses, to help hospitals, for virus testing and also to support farmers who have been hit by this crisis.

* Last week in the US oil prices turned negative as demand for oil continued to fall. And of course, when demand falls, that can lead to increased inventories, so storage facilities have been filling up fast, with full oil tankers outside harbours.

* This week there is a focus on corporate earnings. There are a lot of big companies reporting: Alphabet (parent company of Google), Microsoft, Apple, Amazon, and Facebook. They will also provide guidance on full-year estimates for 2020 and how the lockdown is impacting their profitability.
Archinomics

Our view

We’ve seen another significant stimulus package coming out of the US.

Yes, another stimulus package was passed totalling $484 billion. $320 billion of that is going to be used for the payment protection plan, which is to support medium and small-sized businesses. $75 billion is being put aside to help hospitals and $25 billion for virus testing. And importantly, $60 billion is to support farmers who have also been hit by this crisis.

Another important thing to highlight is that a couple of US states have started to lift their lockdown measures. As of Friday last week, Georgia was looking to implement some easing of restrictions. We also have Alaska and Oklahoma looking to do the same. This will be a good test case to see how these states get on with the easing of restrictions.

The big story last week was the oil price gyrations.

Last week in the US oil prices turned negative as demand for oil continued to fall. And of course, when demand falls, that can lead to increased inventories, so storage facilities have been filling up fast, with full oil tankers outside harbours.

At the same time, an oil futures contract was due to expire which normally requires the holders of the contact to take physical delivery. However, in the current climate it was been difficult to find interested buyers because most already have plenty of oil in storage with nowhere to keep it. This oversupply and lack of storage led to the negative pricing.

The recent cuts in production agreed by OPEC were a case of too little, too late. Those cuts will only really take effect from May. Also, with the decreased oil price, there could be an impact on inflation, which is already expected to be pretty low. And we are starting now to think about the potential for deflation which would be a very difficult economic situation.

Did the US Federal Reserve (Fed) change their message on high yield bonds?

A few weeks ago the Fed said they would look to buy exchange traded funds (ETFs) of corporate bonds including high yield bonds. The market took this very positively, which contributed to a strong rally in recent weeks. But last week the Fed softened their wording to say they may elect to purchase high yield ETFs. They haven’t said they’re not going to do it, but they are trying to dampen the market’s enthusiasm. This is mainly what contributed to the poor week for high yield, certainly in the US.

What’s happening in the week ahead?

On Wednesday there will be a Fed interest rate update. The expectation is that there will be no change because we have already seen aggressive rate cuts over the last month. The market is going to focus on the Fed’s views on markets and if the stimulus programme is working.

The other focus will be on corporate earnings. This week there are a lot of big companies reporting. We’ve got Alphabet (parent company of Google), Microsoft, Apple, Amazon, and Facebook, to name a few. These are all heavyweights within the US index benchmarks. The focus will be on what they have to say about Q1, but importantly about the guidance for full-year estimates for 2020 and how the lockdown is impacting their profitability. If you think of Google, they get a lot of advertising revenue from retail companies, so there should be some weakness there. Apple’s iPhone sales are down so there is likely to be some weakness there. On the flip side, companies like Amazon should be holding up because of online sales and Microsoft should be ok because they’re focused on the cloud and technology and working from home should support that.

What is next for investors?

* Stock markets will likely remain turbulent but, for those with a long-term view, the benefits of having a diversified balanced portfolio might help to spread risk.

* It is going to be difficult to predict what will happen in the short term, but we believe that investors should expect volatility to remain elevated over the coming months.

* As such, the basic principle of diversification across asset classes, currencies, regions and investment managers is as important as ever.

Listen to the latest podcast HERE.

* Logic Wealth Planning provides independent financial advice in Manchester, Bury, Rochdale, Cheshire and the surrounding area, but not limited to the region.