China surge boosting markets

Encouraging figures from China and continued support packages from governments around the world have boosted markets, all topics discussed in the latest financial podcast from one of our partners, Architas…

In brief

* The US market performed strongly last week, up 4% although this is coming off the back of a week when the market was down 2%. The rebound was due to a number of positive data surprises.

* We’re continuing to see robust economic data in China, particularly with regards to services. And that’s resulted in growing optimism from both individuals and businesses about the economic recovery and the stock market.

* The price of gold was driven higher because of its quality as a defensive asset, offsetting the risk-on nature of equity markets. Gold has therefore been one of the strongest performing assets of this year.

Our view

It was a good week for markets. At the beginning of the week, we saw home sales in the US had jumped 44% in May, more than double the estimate. The US Federal Reserve’s lower interest rates have increased buyers’ appetite for houses in the US, with a lot of housing data even surpassing pre-coronavirus levels.

However, the key reason markets were higher was that the unemployment rate fell more than expected, down to 11.1%. There was a record 4.8 million gains in payrolls or people being hired throughout the month. Although this does reflect conditions early in June, before the recent resurgence of Covid-19 cases. There are lots of reasons to be positive, but we would watch out for this pick up in Covid-19 cases and see where that’s going.

How are things looking in China? We’re continuing to see robust economic data in China, particularly with regards to services. And that’s resulted in growing optimism from both individuals and businesses about the economic recovery. Recent data suggests that overall activity growth expanded further in June. And that was on the back of policy support and a global economic recovery. General market conditions appear to be improving, which is encouraging, as we expect the normalisation of domestic consumption and the services sector to be the key drivers of the Chinese recovery. Small and medium-sized businesses sentiment has been improving as business owners become more confident about the economic outlook.

How has that been reflected in China’s stock market? The growing optimism has, in turn, led to the domestic onshore Chinese market rallying. It was up 6.8% last week, and overnight alone rose by over 5%. The last time Chinese equities were at current levels was July 2015. When, as you may recall, prices rallied before crashing quite sharply in August. Retail investors have driven this recent surge. They have been piling into tech and internet names in particular.

How has the increasing confidence in growth been playing out in the inflation-linked bond markets? The inflation-linked bond market had a good week. Inflation or index-linked bonds can help to hedge against inflation risk because they increase in value during inflationary periods. And because the economy is beginning to recover, confidence is rising. And we also see expectations increasing for inflation. Consequently, inflation-linked bonds significantly outperformed the nominal bond index by 1.5% for the week.

And we can see the impact of that on the gold price as well? Yes, the price of gold was driven higher because of its quality as a defensive asset, offsetting some of the risk-on behaviour of equity markets. Gold has therefore been one of the strongest performing assets this year, despite its being a big week for risk-on markets.

You might expect gold to suffer in this kind of environment. But gold remained pretty steady and resilient for the week. We think the reason for that was mainly because of its inflation-hedging characteristics which have helped it to stay reasonably strong.

What do we expect for the week ahead? It is a relatively quiet week. But we are going to be seeing manufacturing sentiment data released in the US and construction figures in the UK. This might provide an interesting read on the state of the economy and both are expected to improve. We should also see initial jobless claims come out in the US on Thursday again. It’s expected that the jobless figure will drop because of continued improving labour market conditions. Finally, we have US crude oil inventory data coming in mid-week. The previous reading indicated that supply was decreasing, which is positive for maintaining the price of oil. If supply has dropped even further we would expect the oil price to bounce higher.

What next for investors?

* Markets will look for signs in the US that coronavirus infection rates could be increasing, which would 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, as well as 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.