Archinomics – market update & podcast

Architas podcast 04 May

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

* Last week was a positive week for the oil price, after a few very turbulent weeks during April. This reflects increasingly positive sentiment around the US and European economies reopening, bringing increased demand for fuel. Also, optimism around the rollout of coronavirus treatments.

* There was some dramatic news from one of the large UK oil companies last week. Shell reduced its dividend for the first time since the Second World War. It hasn’t cancelled the dividend altogether, but has reduced it by two thirds from 47 cents to 16 cents.

* This week there is a Bank of England (BoE) meeting. The expectation is that there could be more quantitative easing announced. Monetary support from the BoE could help the UK government bond market over the summer.

Our view

The oil price has been volatile over the last few weeks. How were things last week?

Last week was a positive week for the price of oil, after a few very turbulent weeks during April. This reflects the general increase in positive sentiment around the US and European economies reopening, which brings increased demand for fuel and also optimism around the rollout of coronavirus treatments.

There wasn’t anything particularly positive, specifically related to energy. In fact, the Energy Information Administration (EIA) released their view that US crude production is currently only a million barrels per day less than its all-time high in mid-March. The low price isn’t translating to a massive reduction in output.

The increase in efficiency over the past few years goes a long way to explaining that. Since October 2014, there are 80% fewer drilling rigs in the US, but they’re producing in aggregate over 36% more oil than they were back then.

What’s in the picture for the price of oil?

We could see a repeat in May of the recent oil price pressures. Capacity concerns could return if demand doesn’t pick up significantly, particularly if OPEC’s agreement isn’t honoured as closely as the initial announcement suggested.

There was some dramatic news from one of the large oil companies in the UK last week?

Yes, Shell reduced its dividend for the first time since the Second World War. It hasn’t cancelled the dividend altogether, but it has reduced it by two thirds from 47 cents to 16 cents.

Is this purely about the fall in the oil price?

No, I don’t think so. The oil price war will have an effect on profitability going forward, but it’s also about the long-term health of the company as it transitions away from fossil fuels. Cutting the dividend gives it breathing space and more flexibility and lessens the need to take on more debt.

What did BP do when they announced their quarterly figures?

BP earnings were down radically in the quarter, but no cut in dividend yet. Also, BP is a little bit more resilient, and it can withstand a lower oil price than Shell in order to maintain its dividend and capital expenditure plans.

What’s the focus for the week ahead?

The market will be very focused on the latest round of US nonfarm payroll data due on Friday. Over recent weeks we’ve seen a massive increase in US unemployment claimants. And in the last six weeks alone, an unprecedented 30 million Americans have sought unemployment benefits, taking the overall unemployment rate to close to 20%. Now, the hope is that this will be a temporary thing and we’ve already seen a reduction in the number of new claims over recent weeks. But it will give us a clear indication of what we can expect for future GDP growth from the US.

Also, we have the Bank of England (BoE) meeting coming up. The expectation is that there could be more quantitative easing announced. Monetary support from the BoE could help the UK government bond market over the summer months, when trading volume is usually much lower. Equally, the BoE may want to wait before taking action, but be ready if any action is necessary.

What 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.