Day: 2 June 2020

Mike Pyle, Global Chief Investment Strategist, together with Elsa Bartsch, Head of Macro Research, Ben Powell, Chief Investment Strategist for APAC and Vivek paul, Senior Portfolio Strategist, all part of the BlackRock Investment Institute share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.

China’s economy – the first to enter lockdowns and the first to emerge from them – is restarting. We see the economy likely returning to near-trend growth by late 2020, supported by policy stimulus, especially on the monetary front. China’s economic restart – along with that in East Asia more broadly – underpins our modest tactical overweight in equities and credit in Asia outside Japan.

This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise – or even estimate – of future performance. Sources: The coronavirus shock is reinforcing structural trends and introducing new ones, such as the policy revolution, surging sustainability wave and accelerating deglobalization. In many ways, the future is arriving fast. This has led us to change our long-term return expectations – and shift our strategic asset class preferences away from nominal government bonds and toward credit.

The unprecedented nature of the coronavirus shock makes alternative data sources more important than ever to sniff out emerging economic trends that official data may be slow to capture. BlackRock’s Systematic Active Equity (SAE) team has been using big data analysis to track the economic recovery as well as policy signals. One such example is the daily usage of Chinese mobile apps that help facilitate activities such as ride sharing, job hunting and travel bookings. These metrics have rebounded after a sharp dip in late January when lockdown measures were imposed, yet mostly remain below pre-virus levels. See the chart above. Job and housing related app usage is the exception, reflecting a spike in unemployment and pent-up demand. Such trends may preview how the recovery could play out across sectors elsewhere, although China’s experience is no clear roadmap for developed economies that were hit by the virus later and have undertaken different public health approaches.

We see the Chinese government’s recent economic policy actions as lending further support for the restart. The Chinese government unveiled some notable policy moves at the recent annual session of the National People’s Congress, the country’s top legislature. A shift in tone on monetary policy – potentially opening the spigot for increased credit growth– is particularly significant. It adds to fiscal stimulus that so far hasn’t been overwhelming, in our view. The government has moved away from setting an explicit 2020 growth target for gross domestic product (GDP), and is focusing on social issues including job creation as part of an ongoing effort to balance economic growth with financial and social stability. Already, industrial profits and revenues for April recovered sharply on an annual and sequential basis. Together with other positive survey data, this points to a potential strong upturn in economic growth in the second quarter.

One risk to China’s restart – and the world’s – is further deterioration in U.S.-China relations, after the pandemic has brought them to their lowest point in decades. Whatever goodwill came from the Phase 1 trade agreement has now been lost amid mutual recriminations, China’s steps to enhance its global position and a bipartisan re-assessment of the China relationship, made more pointed by the U.S. election year. Potential flashpoints include trade commitments, technology and investment restrictions and policies toward Hong Kong. A decoupling between the two countries in sensitive industries such as technology is accelerating.

The global economy is likely to have two engines of growth in the years ahead: The U.S. and Asia, centered in China. Strategic portfolios will want allocations to both regions. The U.S.-China decoupling likely only adds to this investment case — with exposures across the two regions adding diversification. For example, government bonds from the region offer higher expected returns just as developed market government bond yields have hit record lows. This is true over the tactical horizon as well, and we are overweight Asia ex-Japan equities and credit. Many Asian countries have demonstrated their ability to curb the virus spread so far, and look poised for a strong economic restart. We are watching U.S.-China tensions closely as a key risk to this view.

Market Updates

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, May 2020. Notes: The two ends of the bars show the lowest and highest returns versus the end of 2019, and the dots represent year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, MSCI USA Index, the ICE U.S. Dollar Index (DXY), MSCI Europe Index, Bank of America Merrill Lynch Global Broad Corporate Index, Bank of America Merrill Lynch Global High Yield Index, Datastream 10-year benchmark government bond (U.S. , German and Italy), MSCI Emerging Markets Index, spot gold and J.P. Morgan EMBI index.

 

Measures to contain the virus are gradually being eased in many developed economies. May’s data suggested the worst of the contraction may be behind us, but we see a bumpy restart in coming months. The big question remains: how successful policy execution will be in bridging cash flow constraints and preventing permanent damages to the economy – and what the risk is of policy fatigue in coming months. Markets became wary of rising U.S. China tensions.

Week Ahead

• Monday: Manufacturing PMI for Japan, euro area, the U.S. and China (Caixin)
• Wednesday: Services PMI for Japan, China (Caixin) and the U.S; U.S. factory orders; euro area unemployment
• Thursday: European Central Bank (ECB) monetary policy meeting
• Friday: U.S. non-farm payrolls; German industrial orders

This week’s ECB meeting and U.S. payrolls data will be the focus. Markets will focus on whether the ECB will increase the size of its pandemic emergency purchase program. How the ECB intends to deal with the German constitutional court ruling and the potential scenario where the Bundesbank has to pull out of the purchase program will be closely watched. The U.S. jobs data may show a further rise in the unemployment rate, after it hit the highest level since the Great Depression in April.

BlackRock’s Key risks & Disclaimers:

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 1st, 2020 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. 

Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.

MeDirect Disclaimers:

This information has been accurately reproduced, as received from  BlackRock Investment Management (UK) Limited. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what their professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland, with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice.

The Digest

Despite the month-end selloff on Friday, global equities put in a strong performance last week. The Stoxx Europe 600 Index and S&P 500 Index both closed the week up 3%, with rotation into value the key dynamic. Markets in the Asia Pacific (APAC) region were also broadly higher, with Japan the clear outperformer. The European Commission’s (EC’s) announced recovery package, further hopes over lockdown easing and fiscal stimulus in Asia drove equity market moves.

Lockdown: Measures Continue to Ease Across the Globe

We’ve seen further steps towards European economies reopening. France has relaxed travel restrictions within the country and is now allowing schools, cafes and restaurants to reopen. Tighter restrictions will remain in force in regions yet to show enough progress. Germany’s measures are now in the hands of the 16 federal states, with shops of all sizes now allowed to reopen (with social distancing measures). Border controls with Austria, France and Switzerland are set to be lifted on 15 June. Increased travel is to be permitted in Italy, with travel between regions and to and from the country to be allowed from 3 June. In Spain, from 1 July people travelling from abroad will no longer have to spend two weeks in quarantine upon their arrival to the country.

The positive rhetoric on the potential for easing of travel restrictions played into the equity market rotation dynamic, supporting the travel and leisure industries.

In the United Kingdom, Prime Minister Boris Johnson relaxed measures further for England, allowing more social interaction. The “track and trace” scheme also came into action. Both of these moves were faster than expected, likely in an attempt to distract from the Dominic Cummings scandal dominating headlines and putting the government under a lot of pressure. These moves come alongside studies from the Financial Times showing that the United Kingdom now has the highest excess death rate amongst countries producing “comparable data”, and also fares badly on other metrics. Whilst it is likely too early to draw too many conclusions, it is highly likely that the relative level of deaths in the United Kingdom will come under further scrutiny in the future.

From a purely economic standpoint, however, there are some positive signs coming from UK data. Since the reopening of the economy, the housing market has surged and the decline in spending has eased. That said, Bank of England (BOE) Governor Andrew Bailey gave a downbeat assessment of the economy and reiterated his earlier guidance that the BOE was prepared to provide further economic support.

Rotation: Momentum -> Value

Outside of the pandemic and geopolitical backdrop, rotation out of growth/momentum into value stocks (and from recent winners to losers) at the global level was a feature of last week’s action as individual stock fundamentals took a back seat to factor/basket moves. Positioning in cyclicals was at multi-year lows, with extreme concentration in certain equities, making the conditions ideal for such a move on the right catalysts. The catalysts came in the form of the following:

• The EC’s recovery fund.
• Fiscal stimulus/expansion from Japan/China.
• A wealth of headlines regarding economic reopening/restarting driving hopes for economic recovery.
• Fears of policy action from US President Donald Trump on social media have put big US technology companies under pressure.

The momentum unwind did start to reverse towards the end of last week, with Trump’s rhetoric towards China growing more aggressive. The US president seems to become emboldened as markets rally, as he continues to use index performance as a measure of his efficacy. As this year’s US national election draws closer, Trump is trying to balance being seen as tough on China, whilst also not damaging the fragile market recovery. China’s increasingly aggressive approach to Hong Kong is now also very much part of the narrative. However, even with this later reversal, the continuously beaten up travel and leisure, auto and bank stocks remain the week’s clear winners, whilst the recently favoured health care sector was the week’s underperformer.

With last week’s move, global equities have now rallied more than 31% from the low on 23 March but it’s important to look at this in the context of fund flows. Despite the rally, we’ve seen sizeable redemptions from equity funds, both active and passive. This suggests that a significant amount of the move higher has been driven by the closing of short (sell) positions, rather than real buying of equities.

European Commission: Fiscal Solidarity Comes Through

We’ve talked a lot about the need for fiscal solidarity within the European Union (EU) in these Notes, and it does look like it is finally coming through. Last week the EC unveiled a rescue package of €500 billion in grants and an extra €250 billion in loans, higher than had been anticipated. It is not the size of the package that is so significant, however, it is the large-scale joint issuance, transfers, and joint tax revenues—all of which seemed far off just two weeks ago. The plan will be financed by the issuance of a common bond, pushing the message of solidarity.

The high proportion of grants also carries a strong political message as it amounts to fiscal net transfer. Under a new allocation key, the support will mainly go to the European South (which has been harder hit by the pandemic) and to Eastern countries where the “Green Transition” (which directs members to transition to climate neutrality) could be more costly. This move should help to calm some of the risk of a North vs. South narrative, which had the potential to play into the hands of populist political parties.

Political risk in Europe still remains, however. The recovery fund forms part of the EU budget, which means entering a long negotiation process. The final agreement is likely to look very similar to the package discussed this week, but negotiations will seek the unanimity of all EU member states and the endorsement of national parliaments. Legacy problems like fiscal rules and debt sustainability remain, but for now the fragmentation risk has declined significantly. Peripheral spreads continue to be a key indicator of sentiment/risk, and they continue to tighten. We also saw an aggressive move higher in the euro following the release.

Capital Raisings: The Deals Keep on Coming

It was another bumper week for capital raisings in Europe, with US$6.9 billion raised in primary placings and the hot ticket that was the initial public offering (IPO) of coffee company JDE PEETS. The JDE PEETS deal size was around US$2.8 billion and multiple times oversubscribed. On this theme, there was an interesting article in the Financial Times last week about the future of the IPO and how “IPO ‘roadshows’ from home” may cause bankers to question old ways in this area. Deals such as JDE Peets have been successful despite the lack of a traditional roadshow, casting doubt on the need for all the hobnobbing in a post-COVID-19 world.

US Protests

Whilst the market largely seems to be ignoring it for now, we can’t ignore the situation in the United States where protests sparked by the death of a black man, George Floyd, at the hands of police in the city of Minneapolis reached a 6th day. Mass protests leading to clashes between police and citizens have swept across the country as anger builds over the response from authorities over the man’s death.

The scenes have become increasingly violent as multiple police forces have been recorded using various levels of force, including rubber bullets and tear gas, on peaceful protestors. After using inflammatory language in a tweet last week that Twitter removed, Trump has failed to formally address the situation, instead just repeating calls for “law and order” on the social media platform.

We do not see this situation calming any time soon, with further escalation likely. It is also unclear just now what kind of impact the mass protests, large numbers of detainees, and gatherings would have upon the ability to manage COVID-19 in communities. For now, equity markets have not reacted to this crisis, but if prolonged we could see further uncertainty around US economic recovery.

Week in Review

Europe

As discussed, European markets were broadly higher, with rotation out of momentum and into value the key theme. Alongside the catalysts we have already discussed, we are seeing more signs that macro data has bottomed, raising hopes for the start of a recovery as lockdowns continue to ease.

In Germany, the expectations component of the May ifo Business Climate Index (which is a good predictor of future growth) improved to 80.1 versus 69.4 prior. The consumer confidence data across the region also improved month-over-month, with German and Italian figures showing significant upticks last week. In addition, the negative earnings revision estimates we had been seeing for Stoxx Europe 600 Index companies are starting to slow down.

Brexit Talks Resume

The latest round of Brexit talks begin on 1 June and continue throughout the week. There is usually a press conference on the Friday after the talks have concluded, so we expect most headlines to come on 5 June. This round of talks is important—indeed EU negotiator Michel Barnier said this week’s Brexit talks with the United Kingdom are crucial for whether a free-trade agreement can be reached because this is the last round before the high-level stock-taking meeting in mid-June, whereby the two sides will assess progress before the end-of-year deadline. Prime Minister Johnson has warned that the EU must give ground by June if there is to be a UK-EU zero-tariff, zero-quota trade deal this year, or run the risk of a breakdown in talks that would mean the United Kingdom leaving on World Trade Organization terms with tariffs imposed.

If there is no progress on issues like a level playing field, protection of fundamental rights, governance and fisheries, then we see a risk of going into July with a stalemate.

United States

US equity markets rose last week, displaying reasonable resilience amidst rising political tensions and social unrest. The S&P 500 Index traded through the 3,000 level for the first time since the broad market selloff at the start of March, a level which had provided some resistance through May.

Investors appeared to shake off headlines around further strains in the relationship between the United States and China, as well as reports of widespread social unrest in the last few days in the former. The same equity rotation we saw in Europe was also evident in the United States too with financials, one of the year’s key underperformers, leading the way last week. Industrials were also strong as confidence grows that the United States may be through the worst of the virus.

In terms of the week’s laggards, communication services were weak, whilst the year’s winner so far, technology, was up moderately. Energy stocks were under pressure as inventories continued to rise.

US-China relations were in focus at the start of the week, triggered by an announcement from the Chinese government advising of new national security legislation in Hong Kong. Critics, such as the US government, claim that the new law infringes on the freedom-of-speech rights of Hong Kong citizens.

The National People’s Congress of China also stated a new bill would be proposed to “establish enforcement mechanisms”. President Trump said that his administration is “not happy” with the Chinese government, whilst Trump’s top economist, Larry Kudlow, said that China would be “held accountable” for this “huge mistake”.

It wasn’t just the United States displaying condemnation of China’s actions regarding Hong Kong—many countries throughout the West displayed their disapproval. However, it was the potential for further tariffs or sanctions from the United States which markets were focussed on. Hong Kong is a key trading partner for the United States, but with the autonomy of Hong Kong becoming more compromised, the US government has stated it may remove the former British colony’s special trading status, a move that would undoubtedly shake up markets in the Far East.

Data was in focus too last week. US gross domestic product (GDP) shrank 5% in the first quarter (Q1), a larger decline than was estimated one month ago. As the country began to re-open, we saw improvements in personal consumption as well as personal income data. Initial jobless claims continued to trend lower, whilst continuing claims also started to ease. We note the monthly non-farm payrolls will be in focus this week, within the employment report out on 5 June.

Asia Pacific

As discussed already, the main focus for Asian markets was fresh war of words between the United States and China on a number of issues (trade, COVID-19, Taiwan, and Hong Kong). With that, market performance was muted in Hong Kong +, and Shanghai. Elsewhere, Korea’s equity benchmark traded +3% as the Bank of Korea cut interest rates by 25 basis points (bps) to 50 bps. Australian equities traded +4.7% as the lockdown continued to ease there; Reserve Bank of Australia Governor Philip Lowe noted signs the Australian economy is bottoming amidst better-than-feared health outcomes.

The stand-out performance came from Japanese equities last week, with the Nikkei trading +7.3%. A number of factors spurred sentiment. The government ended the COVID-19 state of emergency and Prime Minister Shinzo Abe suggested this was a victory for the “Japan model” as the number of new cases fell from 600-700 a day a month ago to 20-30 a day at this point. Abe doubled Japan’s stimulus measures on Wednesday of last week, approving a ¥117 trillion (US$1 trillion) set of measures, including help for small businesses. Japanese equities also likely benefited from the global rotation into value names last week, with banks and autos doing well. However, challenges remain; Japanese retails sales and industrial production figures both came in weaker than expected last week.

Looking at other macro data, over the weekend we saw Chinese purchasing managers indices (PMIs) rebound, with the China official May Composite PMI at 53.4, and the Manufacturing PMI at 50.6.

Week Ahead

The European Central Bank (ECB) meeting on Thursday is the main focus this week. The ECB seems almost certain to increase the size of its Pandemic Emergency Purchase Programme (PEPP) at the 4 June meeting. The present pace of buying, government financing needs and brewing trouble in Italy suggest it needs to be increased to over €1 trillion from a current €750 billion. In addition, we think the severity of the coronavirus crisis calls for the Governing Council to err on the side of a larger figure.

Market Holidays:

• Monday 1 June: Austria, Denmark, Hungary, Norway, Switzerland, Germany, Romania (Whit Monday)
• Friday 5 June: Denmark (Constitution Day)

Monday 1 June:

• Economic / Political: Brexit negotiations resume
• Data: Global: (May) Manufacturing PMI; Stoxx Europe 600 Quarterly Index Review announcement, rebalancing on close of 19 June 2020

Tuesday 2 June:

• Data: Japan: (May) Services PMI; Hong Kong: (May) composite PMI; Australia: Q1 GDP

Wednesday 3 June:

• Economic/Political: Anti-government protests in Rome
• Data: Global: (May) Services & Composite PMI; Eurozone: (April) unemployment rate; Germany: (May) unemployment rate; US: (April) factory orders, (May) ADP employment change

Thursday 4 July:

• Economic/Political: ECB interest-rate decision and press conference (expect more on emergency stimulus)
• Data: Euro area: (April) retail sales; UK: (May) new car registrations; US: (30 May) initial jobless claims

Friday 5 June:

• Data: Germany: (Apr) manufacturing orders; Swiss: (May) foreign currency reserves; US: (May) employment report

Franklin Templeton Key risks & Disclaimers:

What Are the Risks?

All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Past performance is not an indicator or guarantee of future performance.

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 1 June 2020, and may vary from the analysis and opinions of other investment teams, platforms, portfolio managers or strategies at Franklin Templeton. Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may change without notice. An assessment of a particular country, market, region, security, investment or strategy is not intended as an investment recommendation, nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. This article does not provide a complete analysis of every material fact regarding any country, region, market, industry or security. Nothing in this document may be relied upon as investment advice or an investment recommendation. The companies named herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. Data from third-party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FT affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction. 

Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML is authorised and regulated by the Financial Conduct Authority.

MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.