Will Brexit start to influence markets?

Comments from the US Federal Reserve have influenced investors recently, and focus could also soon shift to Brexit talks. Read about the latest news, or listen to the podcast from the investment team at Architas. We hope you will find very useful…

In brief

* Jerome Powell, Chair of the Federal Reserve (Fed) said the economic recovery was going to take longer and that rates needed to be kept lower for longer. This spooked the market and the S&P 500 Index was off over 4% on the week.

* Unsurprisingly with a weaker economy and lower expectations for inflation, that’s positive for government bonds as they play their role as a safe haven asset. As a result, government bonds were stronger around the world in a risk-off week

* The other significant events in the next week or two will focus around Brexit. The deadline for having a deal in place was supposed to be the end of this month. Otherwise, Brexit could be delayed beyond the end of 2020.
Archinomics

Our view

It was a risk-off week led mainly by comments from the Fed.

If we look back on the week, we had a Fed meeting and Jerome Powell, Chair of the Federal Reserve said the economic recovery was going to take longer and that rates needed to be kept lower for longer. This spooked the market and the S&P 500 Index was off over 4% on the week. We saw some sectors sell off aggressively like energy down 11% and financials down 9%, with tech providing the best performance on the week as we’ve seen many times during this crisis.

We’ve seen an increase in Covid-19 cases in some parts of the US.

That’s another reason why the market was off, because there has been a pickup in cases and people are calling it a second wave. But really it’s a continuation of the first wave. If we look at the States where this pick up in cases is happening, they are sparsely populated and never really had lockdown measures implemented to the same extent as other States. Areas like Texas and North Carolina, where you’ve seen cases doubling the last couple of days. The number of cases is far lower than in the more populous States. Still it is something that the market is concerned about, in case this leads to something more significant with lockdown measures being implemented again.

The UK had a surprisingly weak GDP growth forecast from the OECD?

During last week, we saw the OECD come out and say that the UK would be the worst hit amongst the advanced economies. And true to form that was what we saw when the GDP numbers were released from the UK. In April alone, we saw a decline of 20% in GDP, and that’s on top of the 5% decline that we saw in March. Putting that into perspective, in the global financial crisis and in the Great Depression that peak to trough decline in GDP was only 7%. The reason why the UK has been so severely hit is partly due to the mix of services in the economy. We saw accommodation and food services down 90% and construction down 40%, so some very hard hit sectors.

How has that played out in bond markets?

Unsurprisingly with a weaker economy and lower expectations for inflation, that’s been positive for government bonds, as they play their role as a safe haven asset. As a result, government bonds were stronger around the world in a risk-off week. The global aggregate index of bonds around the world, including investment grade corporate bonds as well as sovereign bonds, was up about 0.7%. If we turn to the high yield sector, it was quite a poor week, following quite a strong couple of weeks. Default rates are rising. They are around 6.5%, which is reasonably high, and we expect that this will rise higher.

This week the news will be led by the central banks.

Yes. On Tuesday we have Jerome Powell providing testimony at a semi-annual Senate banking committee. And the big question is, will he spin a more positive or upbeat outlook for the economy? We think that’s pretty difficult given the increase in Covid-19 cases in a couple of US states. Also, the US will be reporting retail sales figures. And the market will be hoping these figures will provide good news and be a positive catalyst from here.

And we have a Bank of England (BoE) meeting as well. What expectations for that?

The BoE meets on Thursday. There is the expectation for an increase in quantitative easing, maybe of about £100 billion. There is some talk about the potential for moving rates into negative territory. We think it’s probably a little premature and that’s a move that they might keep in their back pocket for later in the year. Having said that, just the signalling of the potential for negative rates later in the year might itself do the trick and give the markets pause for thought. The other significant events in the next week or two will focus around Brexit. The deadline for having a deal in place was supposed to be the end of this month. We’ve got the UK government really trying to focus on getting this over the line by then. So a difficult period in terms of negotiating, a problematic period for markets, some unease and uncertainty around what outcomes we might see.

What is next for investors?

* Signs in the US that the coronavirus outbreak may be returning could upset markets, alongside reports of a slower than expected global recovery.

* Elsewhere, stock markets have started to focus on issues outside of the global pandemic, with Brexit 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.