Employment boost for equity markets

Light at the end of the tunnel as the US sees better than expected job figures to boost investment markets. Take a read or listen to the latest podcast from the investment team at Architas. We hope you will find very useful…

In brief

* Better than expected news on US unemployment was a significant catalyst for equity markets. Unemployment was expected to rise to close to 20% from 14.7%, but it dropped to 13.3% as 2.5 million jobs were created.

* The UK’s chief Brexit negotiator, David Frost, said that talks would continue even if no progress was made on a range of areas. This quashed PM Boris Johnson’s earlier claim that he would walk away if a deal was not in sight by June. This was good news for sterling.

* This Wednesday, the US Federal Reserve (Fed) should announce their proposal on where interest rates go from here. The expectation is there will be no change in rates. The market will focus on what the Fed has to say about the state of the economy.

Our view

We saw another strong rally in US equity markets.

Yes, we saw very strong movement on Friday, driven by news that unemployment decreased in the US. Unemployment was expected to rise to close to 20% from 14.7%, but it dropped to 13.3% as almost 2.5 million jobs were created. This was a significant catalyst for US markets. Cyclical stocks, which perform well when the economy is doing well, rose strongly. So did energy and financial stocks. This shows that the easing of lockdown measures is starting to enable employers to hire back workers, which led to the very positive response in the market.

Turning to Brexit talks, there was not much progress last week?

The official line was that no significant progress was made, but behind the scenes, there was the suggestion that Michael Barnier, the EU’s Brexit negotiator, was prepared to be flexible over the UK’s state aid rules. This is the EU’s most contentious demand – that its rules limiting government subsidies to businesses are inserted into British law. In return, Britain repeated its offer to accept some tariffs on agricultural products. Earlier in the week, there was some hope that the deadlock on fishing rights would be broken via a compromise from Barnier, but this was blocked at the last minute by the EU countries most impacted by fishing rights in UK waters. However, the most significant event came at the end of the week when David Frost, the UK’s chief Brexit negotiator, said that talks would continue even if no progress was made on a range of areas. This quashed Prime Minister Boris Johnson’s earlier claim that he would walk away if a deal was not in sight by June. So this was good news for sterling.

The oil market was strong last week, and this positive sentiment spilled over into high yield bonds.

Yes, another very strong way for high yield bonds. This asset class has been performing well since mid-May. The boost to energy stocks over the week was a big factor as it was the lower-rated riskier bonds (CCC rated bonds) that drove the asset class but the broader part is also doing very well.

Does this include ‘fallen angels’?

Fallen angels are bonds that have just been downgraded from investment grade status due to companies falling into financial trouble. They often have a ‘BB’ credit rating (which is the credit rating just under investment grade bonds). At the moment over a quarter of BB bonds are made up of ‘fallen angels’. This asset class has been recovering very strongly since the Fed came out in support of it a few weeks ago. This has meant the typical owners of high yield bonds like insurance companies and large institutions, which would typically have to sell bonds that lose their investment grade status, have held on to them which has provided some support for the asset class.

The Fed meeting is the main item on the agenda for this week?

Yes, on Wednesday, the Fed should announce their proposal on where interest rates go from here. The expectation is there will be no change to interest rates in the US. What the market will focus on is what the Fed has to say about the state of the economy. Their key focus is getting unemployment to a cyclical low and keeping inflation around 2%. Then on Thursday, new US unemployment numbers will be released. There’s been a gradual improvement in this data week on week. Last week 1.8 million new people signed on for initial jobless claims. That’s expected to reduce to 1.5 million this week.

What next for investors?

* Stock markets have started to focus on issues outside of the global pandemic, with Brexit back on the agenda.

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

* 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.