Bonds & gold up, stocks slip

Mixed messages from different countries as a range of measures are put in place to boost economies. The latest podcast from one of our partners, Architas, looks at the likely impact on markets this week…

In brief

* Stock markets sold off last week due to fears around a second wave of coronavirus. This could lead to a reversal of some of the lockdown easing measures we’ve seen, and that’s why the market is concerned.

* Bond markets did well across the board, particularly government bonds. Demand remained high as uncertainty continued around a re-acceleration of coronavirus cases and the pace of the US recovery.

* Last week gold almost hit $1800, a price last seen nine years ago, fuelled by a dash to perceived safe-haven assets.

Our view

Stock markets sold off last week, what caused this? This was due to fears of a second wave of coronavirus in the US, particularly in southern states, such as Arizona, South Carolina, Mississippi and Georgia. The US government set criteria for states to reopen, and none of these states, representing 8% of the population, meet the criteria.

There are also concerns about Texas and Florida, where there is a significant ramp-up in cases, and the worries are very much around hospital bed capacity. It’s likely to lead to a reversal of some of the lockdown easing measures we’ve seen, and that’s why the market is concerned. If we look at the US as a whole, on average the hospital bed capacity is running at 37%. But in the most densely populated areas – the Tri-state area of New York, New Jersey and Connecticut – it’s running at 51%; so much healthier numbers in those areas where they had very strict lockdown measures. We’ll have to wait and see; the market is going to be focusing on this over the coming weeks. Some genuine cause for concern there.

This strengthened the bond market?

Yes, bond markets did well across the board, particularly government bonds. Demand for government bonds remained high as investors cited continued uncertainty around a reacceleration of coronavirus cases in many US states and about the pace of the US recovery.

Gold also had a big week?

Yes, gold has had a good run recently, trading within a $50 range between $1700 to $1750 since the end of April. But over the last week or two the price moved higher, and last week it almost hit $1800. A price not traded at since nine years ago. Fuelled by a dash to perceived safe-haven assets, similar to what government bond markets are doing.

It was a bad week for oil again.

Brent oil was down 4% for the week on the back of the weaker sentiment. On Sunday fracking pioneer Chesapeake Energy Corporation became the largest oil-and-gas company to file for bankruptcy protection during the coronavirus pandemic. The company had too much debt on its balance sheet and, in the face of a weak oil price and lower demand; it could not afford the interest payments on the debt. Occidental, which is the US’s biggest onshore producer, has written off as much as $9billion in asset valuations. Similar to what we saw with BP last week, when they wrote down $17.5 billion in assets.

Do you expect more major oil companies to write down the value of their assets?

Yes, Occidental and BP are the biggest oil companies out there, so there is potential for others to do the same. It depends on what assumptions they’ve used in the first place, in terms of valuing their reserve assets. But using the example of Occidental and BP, we wouldn’t be surprised to see some others doing the same.

What’s on the agenda then for this week?

If we look at the US, we have a bit of a busy calendar from an economic data standpoint. We’ve got some manufacturing data coming out on Wednesday, and we expect to see an improvement there for the June figure over May. We also have the US Federal Reserve minutes, which could shed a bit of light on the recent meeting. But the most important economic data point this week is going to be the US unemployment number, which comes out on Thursday. If we see any surprise on the upside or downside it could move the market.

One thing we thought was worth mentioning is that last week, Donald Trump spoke about the possibility for further stimulus. And Larry Kudlow, the top White House economic official, has also talked about the potential for further direct payments to individuals. What we take from that is if there is an elevation in cases and hospitalisation rates, it is likely to lead to more stimulus, which generally has helped markets thus far.

What next for investors

* Markets will look for signs in the US that coronavirus infection rates may be increasing, which could upset stock markets.

* Elsewhere, gold and government bonds should continue to act as relative safe-haven assets. Markets have started to focus on further potential stimulus and issues outside of the global pandemic, with trade back on the agenda.

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

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.