Archinomics – market update & podcast

Logic Wealth Planning and Architas financial podcast 18 May

The latest 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

* Looking at US markets, there was a lot of volatility with the S&P 500 Index down just over 2%. A lot of that was caused by a speech given by the governor of the US Federal Reserve (Fed). He stated that the US economy could be subject to significant downside risk in the months ahead with the potential for lasting damage to productivity due to the impact of Covid-19.

* We’ve seen the US-China tension resurfacing over the past few weeks, and it does seem as if any mutual goodwill or optimism that seemed to exist following the agreement of the phase-one trade deal in January has evaporated.

* A range of Chinese activity data for April was released at the end of last week. The data showed that all aspects of the economy continued to improve and recover, but that recovery remains uneven with the industrial part of the economy continuing to bounce back strongly and normalise.

Our view

What were the main events in the US last week?

Looking at US markets, there was a lot of volatility with the S&P 500 index down just over 2%. A lot of that was caused by a speech given by the governor of the US Federal Reserve (Fed). Jerome Powell said the US economy could be subject to significant downside risk in the months ahead, with the potential for lasting damage to productivity and the capacity of the economy due to the impact of Covid-19, and he called for more stimulus. The Democratic-run House of Representatives approved a $3 trillion coronavirus relief bill last week. This has now moved to the Republican-controlled Senate for approval. The Republicans are less enthusiastic about this deal. As a result, it may have to be revised, and it is likely to take some time before it is approved. This is increasing volatility in markets.

Has there been any trade news between the US and China?

We’ve seen the US-China tension resurfacing over the past few weeks, and it does seem as if any mutual goodwill or optimism that existed following the agreement of the phase-one trade deal in
January has evaporated. Tensions over recent weeks have centred on issues such as technology, finance and politics and not just trade. And that is a worry. This re-escalation of tensions is being driven by the US. And specifically, President Trump who blames China for the global spread of coronavirus.

Off the back of that, we’ve seen numerous pieces of confrontational rhetoric from the US towards China. Not all of the threats Trump has made against China in the past have materialised; nevertheless, the risk of adverse scenarios and further deterioration across a number of areas cannot be ignored.

It’s important to understand that the comments from Trump should be considered in the context of the US election cycle. Much of this rhetoric against China is designed for a domestic audience, particularly when you consider that public opinion in the US towards China is at an all-time low. There’s a risk that Trump will increasingly attack China as an election ploy, taking a confrontational stance, not just across trade, but also a number of areas.

Last week there was some important data released in China.

Yes, there was a range of Chinese activity data for April released at the end of last week. The data showed that all aspects of the economy continued to improve and recover, but that recovery remains uneven with the industrial part of the economy continuing to bounce back strongly and normalise. In contrast, both consumer and business demand remains weak compared to normal levels.

Has this positive data from the world’s second-biggest economy impacted the oil price?

Yes, investors are viewing the Chinese economic recovery as the template for what the rest of the world can expect as it progresses through the coronavirus pandemic. Oil recorded positive returns over the week. The West Texas Intermediate oil price was up 19%, and that was on top of 25% the previous week and 17% the week before that, so a very strong run. In addition to the good economic data from China, demand in the US for gasoline has been stronger than expected and as more and more states gradually ease their lockdown measures.

What news are we expecting over the week?

On Tuesday we have the expiry of a monthly oil futures contract. The lack of demand from last month is what tipped oil prices negative last month. However, this month there’s much less concern around storage capacity as demand has improved, so oil prices are likely to remain at this sort of level at least for the next few days and we are not expecting a crash.

In the US, aside from the focus on the impact of lifting or easing lockdown measures, there are some key data out this week. We have some PMI data coming out of services and manufacturing. And the expectation is that this data sees a slight improvement, linked to the easing of lockdown measures. Also, there will be a focus on Fed Governor Jerome Powell speaking in front of Congress on Tuesday. So the question is will he still have concerns over the economy and economic growth, or will he change that language slightly?

And in China, it’s quite a significant week. Starting on Friday is the annual National People’s Congress meeting in China, which has been delayed by two months. This is the annual two-week government meeting where the government usually announces its macro policy stance. This year, the main things to keep an eye on will be what is announced in terms of fiscal stimulus measures and also China’s economic growth target, which is expected to be downgraded.

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.