Archinomics – market update & podcast

Architas podcast 26 May

Sit back, take a read or listen to the latest important information that keeps you updated about investment markets – from the investment team at Architas. We hope you will find very useful…

In Brief

* Last week the S&P 500 Index was up over 3% with the best performers being cyclical companies (‘cyclical’ businesses sell goods and services that many buy when the economy is doing well) and smaller-sized companies. This is mainly due to the euphoria about the easing of lockdown measures.

* For the first time China announced that it wasn’t going to set an economic growth target for the current year. Markets sold off following these announcements, as there is a fear that this could weaken market confidence in policies aimed at supporting growth.

* There has been an increase in trade tensions between the US and China, with the focus mainly on technology, politics and markets. Fundamentally this re-escalation is being driven by the US blaming China for the global spread of Covid-19.

Our View

What happened in US markets last week?

Last week the S&P 500 Index was up over 3%. It was a good week for value or cyclical companies (‘cyclical’ businesses sell goods and services that many buy when the economy is doing well), and smaller-sized companies. If we look at individual sectors, industrial companies were among the best performers followed by energy-related companies. This is largely due to the euphoria about the easing of lockdown measures. Also partly due to some better than expected data released in the US, with manufacturing and services firms reporting a slightly slower rate of contraction in May compared to April. Trade tensions did rise over last week and are starting to involve financial markets. We have investment commentators saying that this is election rhetoric for the forthcoming presidential election and that’s possibly why the market isn’t focusing too much on it at this point.

Trade tensions rose last week.

In terms of trade tensions, the focus is mainly on technology, politics and markets. What we’ve seen is that the potential delisting of Chinese stocks trading as ADRs on the US market and possible restrictions on US purchases of Chinese stocks. A couple of weeks ago, for example, President Trump sent a letter to the government’s central pension fund telling them not to invest in index funds that hold Chinese stocks, which is potentially the first step in the conflict spreading to the financial sector. Fundamentally, this re-escalation of tension is being driven by the US blaming China for the global spread of Covid-19. As a result, we’ve seen numerous pieces of confrontational rhetoric from the US towards China. Because markets have focused on the risks surrounding coronavirus, a lot of the risks related to trade do seem to be less priced into Chinese stock markets. However, as we head into the US presidential election in November, US-China relations and the resulting impact on markets will come into focus.

Last week China announced it would not provide an estimate for its economic growth target for 2020.

Yes, for the first time, the world’s second-largest economy announced that it wasn’t going to set a GDP target for 2020 due to significant uncertainty from the pandemic and the impact of weaker global growth and international trade. However, it’s important to note that China isn’t completely ignoring setting targets. There is a focus on employment levels and other socialeconomic goals, which will rely on stable growth support. Putting a number on a growth figure is currently impossible, given all of the prevailing uncertainty. We initially saw markets sell off on Friday following the announcements. Generally, there is a fear that not setting a growth target could weaken market confidence in policies to support growth. We’ll see further developments from the National People’s Congress this week.

What else is coming up this week?

Looking at the week ahead, the US market will firmly focus on the easing of lockdown measures. One of the largest cities to remain in lockdown is New York and the number of cases coming out of the city is on the decline. The daily death rate has fallen below 100 for about five days in a row, which is very positive. As a result, we’re likely to see an announcement about the easing of restrictions in New York City, which should be received positively by markets. Trade tensions are going to remain a key focus for markets. Now that lockdown measures are easing, markets will start to refocus on the trade conflict.

What is next for investors?

* Stock markets have started to focus on issues outside of the global pandemic with trade tensions between the US and China on the rise.

* While things look challenging, signs that the coronavirus outbreak may be stabilising have provided markets with a degree of optimism.

* In the meantime patience and a long term view might be needed while waiting for a revival of economic activity and asset prices.

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