Brewin Dolphin emailed their weekly market update on Tuesday evening (05/05/2020) as below:
Some recovery but volatility expected to continue. These weekly market updates from Fund Managers Brewin Dolphin give you a quick update on the markets. We are giving you a range of updates from different Fund Managers at this time to give you some context and understand the markets from a consensus point of view.
Andrew Lloyd
06/05/2020
Royal London are the UK’s largest mutual life and pension company with valuable resources available to them. Yesterday (04/05/2020) they published their Economic Viewpoint and Market View update and I have cut and pasted this below:
RLAM Economic Viewpoint
Market View
We will continue to provide selective economic and market updates during this ongoing crisis.
Please keep safe and healthy.
Carl Mitchell – Dip PFS
IFA and Paraplanner
05/05/2020
Further input from J P Morgan received at 18.25 on Friday night, 01/05/2020. Although this article is slightly out of date, I think this is important input and an area we need to watch.
The European Central Bank aims to ‘thread the needle’
The leader of the European Central Bank (ECB) has become very familiar with the challenge of ‘threading the needle’ in recent years and the test facing Christine Lagarde today was no different. After last month’s major announcements regarding the expansion of its QE program, the ECB announced few new meaningful measures today. It left its key interest rates unchanged and made no enhancements to its asset purchases. It did however decide to make borrowing conditions more favourable for euro area banks under its Targeted Longer Term Operations III (TLTROs) facility.
With an increasingly restricted toolkit to provide further stimulus, the ECB’s messaging had to be reassuring enough to avoid triggering market volatility and at the same time diplomatic enough to appease divergent views from across the euro area on the appropriate policy path. This task was only made harder by the downgrade of Italy’s sovereign bond rating by Fitch to one level above junk status and the large contraction in eurozone GDP for the first quarter of this year (-3.8% quarter on quarter).
Few new policy changes
With its deposit rate already at -50 basis points, the ECB’s decision to not reduce interest rates so far this year suggests a strong reluctance to go even lower. However, the ECB is not alone in seeing limited value in pushing rates further into negative territory. The Federal Reserve in its own meeting yesterday dismissed the idea that it would consider negative interest rates. The ECB is instead focusing on other tools as its main policy levers.
Borrowing costs for the TLTRO III programme were lowered to -1%, a further 25 basis points lower from last month’s meeting. The recent ECB bank lending survey showed a material increase in demand for loans across the euro area as corporates search for funds to get them though this period. In the near term, another series of short-term refinancing operations were also made available, likely as a safety net over the coming months. These are helpful measures but the magnitude of bond purchases is likely to be more important in supporting government spending to help mitigate the impact on the economy.
What are the other options?
With markets focused on debt sustainability, particularly in countries such as Italy, the ECB will need to focus on expanding its asset purchase programmes. It could do so by ramping up purchase amounts under the Pandemic Emergency Purchase Programme (PEPP). In the press conference Lagarde suggested that PEPP is the preferred tool as opposed to Outright Monetary Transactions (OMT), previously used in the sovereign debt crisis, given this is a euro area wide issue. An extension of PEPP beyond the end of this year, dependent on the duration of the virus was also highlighted as an option.
Having already announced that it would accept recently downgraded high yield bonds – so called ‘fallen angels’ – as collateral for banks’ loans and made Greek bonds eligible for the PEPP, the ECB could also widen the scope of the asset purchases to include high yield bonds. Lagarde stopped short of explicitly confirming the forthcoming implementation of these measures, but stated that the flexibility of the ECB’s mandate can be increased if required.
Ultimately, it is clear that the ECB will need to increase stimulus measures this year to ensure that the wave of bond supply required to fund government stimulus packages is smoothly digested by the market. At this meeting, Lagarde preferred to take a “wait and see approach” in the hope that coordinated government action will shoulder some of the burden and lift some of the pressure on the central bank to save the day.
Investment implications
Trying to find the perfect balance of policy announcement and forward guidance was always a tough challenge and markets appear to have reacted negatively to the measures announced today. The euro has fallen around 0.3% versus the dollar and European equities are also down on the day. The spread of Italian 10-year yields over Germany has been volatile and has broadly risen. With expectations from the ECB that eurozone GDP could fall by 5% – 12% in 2020, calls for further central bank action look set to get louder over the coming months.
As we know markets fell a further c 138 points on Friday, 2.34%. The ECB will have it’s work cut out keeping all of the eurozone happy with the issues facing the likes of Italy, Spain and Greece and the strength of Germany who don’t want too much change even when we have a crisis of this magnitude.
It does look like countries within Europe are standing on their own. As an initial response to Covid 19 some European countries closed their borders. Understandable but not very European.
Let us see how this plays out, it could be interesting. The ECB will have to do a lot more to keep everybody happy.
Steve Speed
04/05/2020
Please see below a Fund Factsheet of one of the funds we use within some of our client’s portfolios that was received earlier today (01/05/2020). The reason I have uploaded this factsheet is to show that there has been some recovery in markets, the US is probably one of the strongest to recover.
It is important to note that this fund should only be used as part of a diversified investment strategy and for clients who have the appropriate risk appetite.
Please keep safe and healthy.
Carl Mitchell – Dip PFS
IFA and Paraplanner
01/05/2020
Please see below the latest market commentary input from J.P. Morgan Asset Management who have great technical and market resources available to them. This was published on Tuesday, 28th April 2020:
We will continue to selectively provide market commentary from leading fund managers from around the country.
Please keep safe and healthy.
Carl Mitchell – Dip PFS
IFA and Paraplanner
30th April 2020
Brewin Dolphin Update: Markets in a Minute
Brewin Dolphin emailed a market update on Tuesday evening (28/04/2020) as below:
As a Discretionary Fund Manager Brewin Dolphin offer a range of Managed Portfolio Services in the UK. In keeping with our blogs over the last 6 weeks or so we seek to provide a wide range of input so that you can understand a variety of commentary and see consensus views.
Steve Speed
29/04/2020
Please see below investment market commentary dated 27/04/2020 from Brooks Macdonald (a leading UK Discretionary Fund Manager):
We are continuously listening to various investment houses for their insight on markets, which we will selectively communicate to you. We do not want to overload you with input. Please continue to check our blog content for the latest updates.
In the meantime, please keep safe and healthy.
Carl Mitchell – Dip PFS
IFA and Paraplanner
28th April 2020
Interesting input from Russ Mould of A J Bell written on Thursday and received on Saturday lunch time (25/04/2020). I am conscious of the dates of articles as some of what we receive is out of date by the time we receive it!
Why markets have rebounded and what could happen next
Short-term viral implications for investors to ponder
At the time of writing, Italy’s MIB-30 index is up by 15% from its 12 March low, a trend from which this column, looking at it solely from the narrow perspective of investments, can draw some modicum of encouragement.
It is impossible to be dispassionate about, or comfortable with, such matters, but the Milan market benchmark’s steady recovery reflects a peak in the number of new daily cases across Italy on 21 March at 6,155 and in the number of fatalities at 919 six days later.
At the time of writing the last reading for those numbers are 3,047 and 433 respectively and it is to be hoped that the trend remains down, for humanitarian reasons above all others.
As suggested here three weeks ago, this shows that equity markets are responding to changes in the curve of the coronavirus outbreak.
A slowdown in the number of cases was always going to be seen as good news, given how investors would interpret this as a sign that things were getting less bad, and that as a result the outbreak would eventually stop getting worse and once it stopped getting worse it would eventually start getting better.
This is where markets are now. The number of new cases is growing much more slowly, even if the aggregate number of those unlucky enough to catch the dreadful virus is still growing overall. This has been enough for equity markets to start pricing in what might happen if, as and when the government-imposed lockdowns are brought to an end and economic activity resumes.
As a result, several benchmarks are looking even sprightlier than that of Italy. The UK’s FTSE 100 is up 16% from its 23 March nadir of 4,994, while Germany’s DAX and America’s S&P 500 are back in bull-market territory, with gains of more than 20%.
The question now is whether these gains can be maintained or extended and in the short term a lot of that will depend upon the shape of the upturn. The latest Bank of America institutional investor sentiment survey suggests that U-shaped is the current favourite, over W, V, L, ‘bathtub’ or tick-shaped (or any other options that you could think of).
ALPHABET SOUP
What is interesting to note is how a V-shaped recovery is only third choice, according to that Bank of America monthly survey. This suggests some degree of circumspection among the professional investment community and it is easy to see why, as Spain, New Zealand and the UK, to name but three, extend their lockdowns and other nations such as Italy ease them at a very steady pace.
When it comes to judging what sort of recovery might ensue, investors can ask themselves the following questions:
1 When will I first want to use public transport?
2 When will I first want to eat in a restaurant or drink in a bar or pub?
3 When will I first want to board an aeroplane or cruise ship?
4 When will I first want to attend a public event at a cinema, theatre or sports stadium?
The answers could be informative. In addition, you can then imagine that you have been furloughed or even lost your job and see if the answers change at all. The assumption that all of those unlucky enough to find themselves in that position walk straight back into full-time employment could be an optimistic one as unfortunately some firms are going to fail, no matter how much support they receive from the government, management, staff and customers alike.
These questions are very difficult, if not impossible, to answer. As such, investing money on the back of them could prove a fraught exercise, even if markets do seem to have one very powerful ally in the form of central banks, notably the US Federal Reserve. The value of the assets held on the American central bank’s balance sheet has swollen by $2.2tn, or 53%, since the end of February.
That tidal wave of liquidity looks to be carrying US stocks higher. Students of history will however remember that the first round of quantitative easing that began in autumn 2008 had a similar initial effect, only for the S&P 500 to buckle in face of weak macroeconomic data and corporate earnings reports and only bottom five months later.
This column will revisit the issue of central bank intervention in an analysis of long-term potential implications of the coronavirus outbreak for financial markets next week. Before then there is one further short-term indicator of note: whether the FTSE 100 can reach (which it did very briefly on 20 April, only to fall back) and stay above 5,816, the high reached after the three-day rally that followed the low on 23 March.
If so, that could break the traditional ‘bear’ market pattern of a series of lower highs and lower lows and give investors real grounds for hope, at least from a portfolio point of view.
A J Bell offer products in the pension SIPP, SSAS and investment areas. They have a Stockbroker within their business too. Russ Mould is quite often heard commenting on Radio 4.
Steve Speed
27/04/2020
Lessons Learned from the ongoing Pandemic
We are currently in the midst of an ongoing Global Pandemic, but I’m sure that everybody is already aware of this, as this blog is coming ‘Live from Lockdown’ and I know the majority of you will be reading this in ‘Lockdown’ at home and are probably fed up with hearing about it by this point, from one news bulletin to the next.
We are posting regular blog updates to keep you informed on the developments within the markets as they change with the Pandemic response, so I won’t go into this here, however what I will talk about and what I want you take away from reading this, is what lessons can we learn from this situation?
Other than the obvious lessons we have learned, such as to wash our hands more and never take a trip to the pub for granted! What can we take away from this with regards to financial planning?
Ask yourself the following question,
‘If a situation like this ever arises again, what position financially would I like to be in?’
Whilst this might vary from person to person, I’m sure the answer would generally have the same theme, to have the necessary financial resources to ensure that you wouldn’t be affected by market drops or being unable to earn for a short period of time.
Now you should have an answer to the first question in your mind, ask yourself the next question,
‘What steps can I take to help move towards being in this position?’
Again, this will vary but should follow the same themes.
Do you have an adequate emergency cash fund? The guidance is generally to have around 3 to 6 months emergency fund in an easily accessible cash account for unforeseen circumstances. This would be particularly useful, if not necessary, during a time like this. This was certainly an unforeseen circumstance.
Do you have any expensive debts/ liabilities such as credit cards and loans? What can you do to reduce these? (We should all be spending less now without the freedom to go the pub, go out for a meal and casually stroll around the shops spending too much!). Reducing expensive debts and liabilities will free up more cash for you to build up your emergency funds, Pensions/Investments etc.
Do you have other assets to fall back on? We advise our clients to have a ‘3 pot approach’ which is having a range of different assets such as Pensions, Cash and Stocks & Shares or Investment ISAs to help manage risks in and in the run up to retirement. For example, switching to cash assets from drawing on Pensions/Investments during a market crash (like now!) to allow the funds to have time to recover.
Protection
We have now all seen how fragile life really is. At times like this we think about what life cover, Income Protection and Critical Illness cover we have in place. Do you have enough cover in place to protect your family?
At People and Business IFA we are happy to audit your protection for you and take a holistic view that takes account of your assets, liabilities and employee benefits.
Summary
The aim of this post is to give you some ‘food for thought’ and to get you thinking about how you can improve your financial position to help you generally, not just in times like these.
I will also take this opportunity to once again to remind you to please remain calm and stay invested. Keep funding your pensions/investments if you can (the market downturns give great opportunity for investing and buying assets at low prices!).
Keep calm, stay safe and we will hopefully all get through this together.
Andrew Lloyd
24/04/2020
The Great Glut: A historic supply and demand shock in the oil market
JP Morgan posted a great article earlier this week about the current oil situation (see below);
Rising production and collapsing demand due to the COVID-19 pandemic is creating an unprecedented glut in the oil market. As a result, we are currently witnessing a pronounced supply and demand shock that has driven oil futures below zero for the first time.
At the current pace of production, the world will run out of storage for oil by the middle of the year compounding the imbalance in the market and adding to the pressures faced by producers to slash prices to sell their inventories. As a consequence, energy stocks have been the worst performer year-to-date in global equity markets, while credit spreads of sub-investment grade energy companies have widened dramatically, signaling increasing concerns about the solvency of the sector.
The major oil producing countries, known as OPEC+, have now agreed to cut production starting in May to try to avert the crisis. But will their action be enough to balance the oil market? And what are the implications for investors?
An unprecedented drop in oil demand
The COVID-19 pandemic has led to the implementation of rigorous measures globally to contain the spread of the virus. Travel restrictions, social distancing and stay-at-home orders have reduced global oil demand by an estimated 5.6 million barrels per day (mb/d) in the first quarter of 2020 compared to the same period last year. With the full force of the containment measures expected to continue into May the situation in the oil market may deteriorate further in the near term.
Peak destruction in oil demand is expected in April and May, with an average decrease of 20mb/d. Even in a scenario where global COVID-19 containment policies are gradually lifted by the end of May, the U.S. Energy Information Agency (EIA) is estimating a loss of oil demand in 2020 between 5.2mb/d to 9.3mb/d. To put this number into perspective, in 2009 – the year of the last global recession – oil demand decreased by 0.8mb/d.
Exhibit 1 shows that almost 58% of global oil demand is derived from fuel for transportation. The impact on demand, and thus the oil market, is significantly worse than in normal recessions because of the widespread implementation of travel restrictions, which has reduced global air traffic by 30%. Quarantine measures have also caused a significant drop in road traffic, by roughly 40%, leading to a large drop in demand for petrol and diesel.
EXHIBIT 1: GLOBAL OIL CONSUMPTION BY SECTOR
% of total oil demand
Source: British Petroleum, J.P. Morgan Asset Management. Data shows an estimate of global oil consumption by sector for 2020 from the BP Energy Outlook 2019. Data as of 31 March 2020.
Storage capacity issues in the U.S. created a previously unknown experience of a negative price in the oil futures market. Futures for the month of May 2020 fell sharply as producers effectively paid others to take their oil inventories. Halting production is not feasible for some producers since it could permanently damage their oil fields. Giving, or paying others to take, away their oil for one month may have been the preferred option for the long run health of their business.
Record deal to cut production
The imbalance in oil markets came to the fore in early March, when Russia and Saudi Arabia couldn’t agree on production cuts. In fact, quite the opposite took place as Saudi Arabia, in retaliation, started a price war by giving rebates on their crude oil exports and announced an increase in production starting in April. However, the steep fall in oil demand and rapidly rising inventories have now convinced the world’s top producers to reverse course.
On Easter Sunday, the members of the Organization of the Petroleum Exporting Countries (OPEC) and the main non-OPEC oil producing countries (known as OPEC+) agreed to a historic cut in production to contain the oil glut. Oil production will be cut by 9.7mb/d beginning on 1 May. After that, the group will taper the cuts in July by 2.1mb/d and in January 2021 by another 2.0mb/d. The remaining 5.6mb/d cut will be in place until the agreement expires in April 2022. To put the cuts into perspective, Exhibit 2 shows the main oil producers and their level of current production.
EXHIBIT 2: CRUDE OIL PRODUCTION BY COUNTRY
Million barrels per day (mb/d)
Source: EIA, Refinitiv Datastream, J.P. Morgan Asset Management. 2020 and 2021 data using dotted lines are J.P. Morgan Asset Management estimates based on announced cuts. Data as of 15 April 2020.
Despite the historic size of the announcement it is only a partial step towards the drop in oil consumption as the world’s major economies grind to a halt. An immediate rebalancing of the oil market was never realistic since many higher cost non-OPEC producers would have avoided a large share of the required production cuts. Oil inventories will therefore continue to rise in the short term, likely putting further pressure on storage capacity and oil prices over the next couple of months.
If producers stay compliant to the agreement, and if the major global economies start to ease containment measures form mid-year then fuel and oil demand should start to rise and oil market fundamentals could improve in the second half of the year. However, there remains a large ‘if’.
Even if virus containment measures ease in the coming weeks, the world is going to be awash in oil for some time – economies may be slow to get back up and running to a pace that would warrant a strong increase in demand, especially when it comes to international travel.
What does this mean for investors?
Equity and credit investors in energy can expect a couple more difficult months ahead, with fundamental headwinds and challenging newsflow. Corporate earnings will likely have further to fall and preserving liquidity will remain a main task for the time being.
While sectors such as airlines, logistics and selected industrial (such as chemicals) traditionally benefit from low energy prices, they also face bigger challenges on the demand side of their businesses. Low oil prices will also put pressure on commodity-exporting emerging markets, such as Russia, the Middle East and Latin America. However, this benefits importers in Asia, especially India, whose current account deficit position could benefit from cheaper oil.
It is often in challenging times like these when the foundations of the next upswing are laid. The weak players are dropping out and exploration companies are significantly reducing their capital expenditure. Today’s cancelled projects will be missed in three years’ time. So, companies that survive the “Great Glut” may be able to look forward to a more balanced oil market in the next five years than they have experienced in the previous five.
A good update from JP Morgan giving us an insight to the current oil situation. JP Morgan have great technical and market resources available to them and continuously provide useful insights.
Hopefully now we’ll see a drop in prices at the pumps!
Andrew Lloyd
23/04/2020