Multi-Asset

Being Stuck in Traffic Jams Feels Good

After a dramatic fall into negative territory in April, West Texas Intermediate (WTI) oil prices are surging back this month as drivers are back on the road.
May 2020

That which does not kill us makes us stronger

Nietzsche

After a dramatic fall into negative territory in April, West Texas Intermediate (WTI) oil prices are surging back this month as drivers are back on the road (Chart 1). Month-to-date, WTI oil prices are on pace for their best month ever, rising from $20.50 per barrel to $30.00 per barrel, a 66% gain as of May 20th. Aggressive production cuts, notably by U.S. shale producers, has also helped in reversing the accumulation of inventories.

Chart 1: Toronto Drivers Getting Back on the Road

Chart 1: Toronto Drivers Getting Back on the Road

Source: Apple, BMO GAM (as of May 20, 2020)

Trump Resurrecting Chinese Tensions

After taking the backseat to investors’ concerns lately, U.S.-China trade tensions are back in the spotlight. Indeed, tensions never really went away after the signing of the phase one deal, and COVID has brought forward longstanding issues with China’s conduct of policy. Noncompliance of phase one purchases, which in any case are subject to market forces in the agreement, is not the issue at hand. We think the recent escalation underscores broadening bi-partisan sentiment against China within the U.S. and souring relations with other countries (Source: Politico)[i]

Moreover, COVID has emboldened U.S. priorities for protectionism and economic security and accelerated pre-corona trends toward decoupling and reshoring. The U.S. is acting with Huawei restrictions while proposing legislation to delist Chinese companies from U.S. exchanges and sanctions over human rights abuses. In its latest bravado, the U.S. administration issued a broad critique of China’s economic and military policies, from IP theft and protectionism to human rights.

Exposed are risk-correlated commodity countries such as Canada and Asian assets, limiting the scope for USD weakness and putting our EM overweight at risk. However, we are less concerned about U.S.-China trade tensions this time around. We think markets will continue shrugging harsh language as long as tariffs aren’t imposed again. Asian equities (Chart 2) may be less exposed thanks to rebounding Chinese growth, supported by infrastructure spending. The Presidential election and the economy’s feeble state will also motivate Trump to avoid risk-off measures like tariffs and stick to a toughening stance instead. That said, we firmly believe that tensions are here to stay with scope for more non-tariff barriers. Finally, protectionism and reshoring are among the pre-corona trends (such as info tech disruption and retail apocalypse) that the pandemic has accelerated.

Chart 2: U.S. Trade Wars Led to Asia Underperformance but Less Likely in 2020

Chart 2: U.S. Trade Wars Led to Asia Underperformance but Less Likely in 2020

Source: Bloomberg, BMO GAM (as of May 20, 2020)

Portfolio Update: Staying the course

After being very active in recent weeks following the COVID rollercoaster, there were no major changes to our portfolios last week. The outlook remains clouded by the virus, but we are increasingly looking beyond 2020 and 2021 when assessing investment opportunities. We still expect upcoming economic releases to show a dramatic GDP contraction in Q2, but this is old news. It’s probably fair to say the worst is now behind us and investor resilience has grown stronger from the experience of the recent weeks.

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