Day: 9 June 2020

Jean Boivin, Head of the BlackRock Investment Institute together with Mike Pyle, Global Chief Investment Strategist, and Elsa Bartsch, Head of Macro Research, also 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.

Macroeconomic policy has gone through a needed revolution to cushion the coronavirus shock. It essentially aims to “go direct” and is blurring fiscal and monetary policies. Yet this policy shift has opened the door to unprecedented government intervention in markets and companies, and we see it as a slippery slope – unless it comes with proper guardrails and a clear exit strategy.

Sources: BlackRock Investment Institute, with data from the Federal Reserve, European Central Bank, Bank of Japan, Bank of England, and Haver Analytics, June 2020. Notes: We use estimated targets for the total size of the U.S. and euro area corporate purchases and lending schemes for 2020. For the euro area we include TLTRO funding, and for the UK we include central bank support for the TFS bank lending scheme. The euro area numbers are averages of the four largest economies in the bloc, Germany, France, Italy and Spain.

The scale and speed of the policy response has been greater than at any moment in peacetime history, fundamentally transforming the core tenets of global policy frameworks and financial markets. We view the economic impact and policy response as two key signposts for gauging the virus shock, and compare our assessment of the lost national income across major economies with policy measures announced to date. The orange bars show the full-year hit to GDP from our sector-level bottom-up analysis, including the initial impact on the most affected sectors (such as travel and leisure) and the broader impact on the whole economy due to spillover effects (light orange). The fiscal response more than covers the initial impact in the U.S. Once we factor in the spillover to the full economy, the fiscal policy response (dark yellow) globally falls short. Yet the situation improves when monetary policies (light yellow) are accounted for. This is especially striking in the U.S., as the chart shows.

Major economies may still struggle to entirely bridge the gap left by the plunge in demand, income and cash flow, despite the unprecedented policy measures, in our view. We see a risk of policy fatigue leading to an exit or a retrenchment too soon, especially in the U.S. The U.S. labor market unexpectedly improved in May, showing signs that policy interventions were cushioning the blow from the shock – and highlighting the risk that policymakers may give up on relief measures sooner than necessary.

The uncharted territory that policymakers have entered makes policy execution particularly important. The new policies explicitly attempt to “go direct” – bypassing financial sector transmission and delivering liquidity to individuals and businesses. Another aspect of this policy revolution is the explicit blurring of fiscal and monetary policies, including central banks absorbing new government debt to maintain low bond yields. In addition, some government support comes with strings attached, including conditions around dividend payouts and share buybacks.

We wrote about the necessity for monetary and fiscal coordination to deal with the next downturn last August. Effective coordination would reduce lost output in a major shock, and could lessen other risks, such as rising inequality, that were seen as arising from the unbalanced policy response to the financial crisis. We warned it needed proper guardrails and a clear exit strategy to mitigate a risk of uncontrolled deficit spending with commensurate monetary expansion and, ultimately, inflation. One approach we laid out is a Standing Emergency Financing Facility (SEFF), a framework in which the exit from the joint monetary-fiscal policy effort is explicitly determined by the inflation outlook. To be credible, this exit decision must be independently controlled by the central bank. And even a well-designed monetary strategy may not prevent a change toward a higher inflation regime in the medium term because of deglobalization and re-regulation trends.

The bottom line: The policy revolution is a near-term positive for markets but, in the absence of guardrails, might not be in the medium term. One key investment implication is the reduced ballast properties of nominal government bonds over a strategic horizon, as interest rates are near or at their effective lower bounds and we see greater inflation risks in coming years. We think increased strategic allocations to inflation-linked bonds are sensible amid this shifting balance of risk.

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, June 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

• Wednesday: China consumer price index and producer price index; Federal Reserve policy meeting.
• Friday: University of Michigan Survey of Consumers June preliminary.

The Fed’s policy meeting and the preliminary release of the University of Michigan Sentiment for June will be the focus this week. The Fed is expected to reiterate the whatever-it-takes approach, and keep its interest rate guidance unchanged. Its Summary of Economic Projections is likely to describe a slow economic rebound. The University of Michigan survey will show where consumer sentiment stood after U.S. consumers cut spending by the most on record for two straight months.

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 8th, 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

Global equity markets were buoyant last week, as news of further economic stimulus in Europe, better-than-expected US employment data and a continued easing of lockdown measures all helped boost market sentiment. With that, we saw a continued rotation into beaten up cyclical/value names. As the week closed, the MSCI World index gained 5.5%, the US S&P 500 Index was up 5%, the Stoxx Europe Index 600 was up 7% and markets in the Asia Pacific (APAC) region was up 5.5%.

“Rocket Ship”: US Jobs Data Better Than Expected

Friday’s US employment report for May aided the strong equity market finish last week. The non-farm payrolls component came in significantly better than analysts had been forecasting, with 2.5 million jobs added vs. an expected 7.5 million in job losses. In addition, the US unemployment rate was far better than anticipated, coming in at 13.3%. The better-than-expected numbers  were due to the economy’s reopening, with the majority of jobs added in the leisure & hospitality, transport and retail sectors.

This data is fueling hopes that the US economy may see a more V-shaped recovery, with a swift rebound in growth. On the back of this news, US President Donald Trump was exuberant, stating that the jobs report was a “rocket ship” and “a big step in our comeback”. He also tweeted he had “built the greatest economy in the world”.

With this data in mind, it will be interesting to see what comes from the Federal Reserve (Fed) meeting this Wednesday. Major policy changes are unlikely at the June meeting, but a new Summary of Economic Projections and Chair Jerome Powell’s press conference should provide additional insight in regard to the outlook for policy, particularly in light of last Friday’s jobs data.

Further European Stimulus

Last week saw some notable increases in support for the European economy from the European Central Bank (ECB) and German government, both of which were larger than expected.

ECB Headline Policy Update Constructive: Last Thursday, the ECB did not disappoint as the Pandemic Emergency Protection Package (PEPP) was increased by €600 billion (vs. the €500 billion widely expected) to €1.35 trillion and extended to June 2021 (from end 2020). The ECB also specified that maturing PEPP assets will be reinvested (previously it was unclear whether this would be the case or whether the ECB’s balance sheet would wind down as assets matured).

German Fiscal Stimulus Agreed: In addition to the ECB announcement, we also had news of an €130 billion stimulus package from the German government. The aim of the package is to stimulate consumer demand as Germany comes out of the coronavirus-related lockdown and public life gradually returns to normal. The package of extra spending and tax cuts is equivalent to approximately 4% of expected 2020 gross domestic product (GDP).

One of the main measures are value-added tax (VAT) cuts. From 1 July until the end of 2020, the standard rate of VAT will be reduced from 19% to 16% and the lower band cut from 7% to 5%—a measure that will cost €20 billion.

Rotation into Value Continues Apace

In recent weeks, we have seen aggressive rotation out of well-held growth names into beaten up cyclical and value names, both in the United States and Europe.

The aggressive rotation from European momentum names into European value names continued this past week. Value’s year-to-date underperformance had been extreme, so value was certainly due some respite, but it’s interesting to look at the numerous possible drivers we have seen suggested as reasons for the recent rotation.

Reasons cited for moves in Europe include:

• Additional fiscal stimulus: Larger-than-expected ECB measures, German stimulus, European Union (EU) green recovery package. The German stimulus package adds approximately 350 basis points to domestic GDP over 2020-2021 as well.
• Signs of economic recovery as lockdowns end: A sharper-than-expected recovery in data as economies have reopened. For example, air cargo volume decline rates improved in May (Frankfurt, the largest EU cargo hub).
• No second wave of infection across Europe: Spain saw its first day without a COVID-19 fatality for months. Even in hard-hit United Kingdom, new cases and death continue to creep lower. This has fuelled dramatic gains in the travel & leisure sector.
• Political picture improving in Europe: With unity on bailout, contrasting the divisive picture in United States. Europe is benefitting from a perception of relative stability (first time ever?!).
• Credit markets continue to improve, thanks to swift action by the ECB, etc.

The energy market is more constructive, with West Texas Intermediate crude oil (WTI) up 10% last week.

What next: We have been here before with value rebounds, and recent history suggests these moves tend to run out of steam. However, there does seem to be some momentum to the recent move, and the longer-term underperformance is extreme in our view.

Key risks are obvious: a second wave of infection, macro data disappointing, a drawn-out recovery rather than a sharp V-shaped one, a fresh US/China trade war or a hard Brexit at the end of 2020. Furthermore, it feels like this is some way off, but if the picture continues to improve, how central banks adapt their stance will be crucial as markets have been consistently twitchy around any tightening.

Crude Oil in Focus

Oil prices were on a slow march higher as last week went on, helped by hopes of an OPEC+ production cut extension as well as more supportive macroeconomic data. Brent crude oil traded up 19% on the week, at US$42, whilst WTI was up a more modest 9.5%, trading at US$39. The OPEC+ meeting was in focus through most of the week and it hit a snag last Wednesday after it was reported that Saudi Arabia and Russia were demanding tighter compliance to production cuts by other members.

The Kremlin announced that Russian President Vladimir Putin had no intentions of meeting OPEC+ counterparts whilst this question was outstanding. Naturally, this created some uncertainty around whether an extension could be agreed upon, and oil prices sold off temporarily on the back of these headlines. With Saudi Arabia and Russia receiving the assurances they needed, the meeting was arranged for 6 June. Market expectations for a 1-month extension to existing cuts until the end of July and a promise of tighter adherence to these restrictions by existing members were realised at the meeting. OPEC+ agreed to a one-month extension to their (now) 9.6 mbpd supply cut.

Elsewhere, oil inventories continue to rise. Nonetheless, the US employment report on Friday of last week brought hope of continued return of demand, and oil prices peaked into the European close that day.

Last Week in Review  

Europe

European equity markets were broadly stronger last week, with a number of risk-on themes at play. ECB stimulus, economic data surprising to the upside, as well as improving data around the management of COVID-19 all helped push equities higher through the week. The rotation was stark, with value significantly outperforming momentum. This led to some interesting sector moves with the year’s underperformers—banks, insurers, oil & gas and travel & leisure—leading the way. At the other end it was those sectors which had fared well year-to-date which lagged. These included health care, food & beverage and personal & household goods.

Lockdowns continue to be eased across Europe without any obvious uptick in infection or death rates. In Germany, shops reopened with social distancing applied, schools are now open for young children and those with exams, whilst border controls are expected to be lifted on 15 June.

In Italy, borders were re-opened last week. In France, nearly all of the country is now classified as a “green zone”, with phase two beginning last week in these zones, allowing bars and restaurants to reopen. The United Kingdom remains fragmented, with lockdown measures devolved to each country’s respective government. However, data does continue to improve, with Scotland and Northern Ireland reporting no new COVID-19 deaths on Saturday.

Brexit was back in focus, with the latest round of talks taking place through last week. Recall, June is a pivotal month in negotiations as 1 July represents the deadline for mutually agreeing to an extension to the transition period. The EU remains “open” to an extension; however, the United Kingdom has previously stated that there will not be one. Thus, by the end of the month we should be clearer on whether a free trade agreement will be in place or whether we begin to prepare for a “no deal” exit.

On Friday, we heard from the EU’s Chief Negotiator Michel Barnier, who said no material progress had been made in last week’s talks. Barnier stated that the United Kingdom had continued to “backtrack under commitments undertaken in the political declaration”. He went on to say that a deal must be signed off by 31 October at the latest, and that the next round of talks will likely be the end of June/start of July. Before then, there will be a meeting between UK Prime Minister Boris Johnson and the presidents of both the European Commission and the EU Council.

In terms of markets, UK sterling continues to find some strength, closing the week up 2.6% vs the US dollar. The exporter-heavy Financial Times Stock Exchange (FTSE) 100 Index defied those moves in sterling to trade up 6.3% on the week; however, it was still the key underperformer vs. the broader market in Europe. Meanwhile, the more domestically exposed FTSE 250 Index was also strong, up 6.8%. Hopes of a swift easing of lock-down measures is overshadowing Brexit fears for now.

In terms of data, the focus was primarily open the purchasing managers indexes (PMIs) last Monday and Wednesday. The reports were supportive and showed slight improvements with the Eurozone June Composite PMI revised upwards to 31.9 from the flash estimate of 30.5. This turning in economic data will of course be closely watched in weeks to come as hope builds of a turn to an upward trajectory.

United States

US markets continued on their positive streak, with the S&P 500 Index gaining 4.9%. This is the third week running we have seen gains of over 3%, which hasn’t happened for 38 years!

Continued easing of lockdowns and further stimulus hopes helped risk-on sentiment, whilst the market largely ignored the social unrest as Black Lives Matter protests continued throughout the United States. The energy sector was the week’s outperformer following hopes of an extension to production cuts, but not far behind were the financials and industrials. These moves came as the impressive rotation into value and cyclical names continued, similar to what we had seen in Europe. The health care sector was the week’s clear underperformer following recent strength.

Data continued to suggest that the economy has likely bottomed, with the employment data a positive surprise, as discussed. Automobile sales in the United States also rebounded more than expected in May. The Citi Global Economic Surprise Index saw a sharp jump last week and is now back in positive territory. The index measures the number of data releases that beat expectations vs. the number of negative surprises.

Asia Pacific

Markets in the APAC region also took part in the global rally, with the MSCI APAC closing the week up 5.5%. Hong Kong was the standout performer, up almost 8%, although this does follow a lacklustre performance the prior week and comes as the offshore yuan approached May highs.

Improving economic data from China helped the Shanghai Composite gain almost 3%. Purchasing Manager Index data was surprisingly strong and returned to expansion five months from the point of lockdown. This may also give some hope elsewhere of economic bounce following the easing of lockdowns across the globe. The South Korean equity market was the other standout performer as the government announced further stimulus.

The impressive equity performance came despite continuing tensions between the United States and China. Last week the United States limited Chinese airlines to just two weekly flights, which cuts the current number from China in half. The Trump administration has complained that China has violated the rights of US airlines by restricting flights.

The United States also announced it will impose restrictions on additional Chinese media outlets. There was some positivity, however, as Trump said he was not considering sanctions on China’s President Xi Jinping over actions in Hong Kong.

Tensions have also risen between China and Australia, as the latter called for an investigation into the outbreak of COVID-19. The Chinese Ministry of Culture and Tourism issued a warning to its citizens not to travel to Australia, citing safety concerns. The warning follows the imposition of tariffs on Australian barley and beef. Australia had announced severe screening measures on foreign takeovers, affecting the telecoms, energy, technology and defence sectors, which prompted fears of asset sales from a potential sharp reaction from Beijing. This ongoing dispute will be something to keep an eye on in the coming weeks and months.

Week Ahead

The focus at the start of the week in Europe is the German industrial production figure for April. The report showed production was down 17.9% on the month, which was a bit lower than expected. However, we think this to mark the bottom of the trough, as the report is based on the time of the peak of lockdown measures.

Monday 8 June:

• Economic / Political: ECB’s Christine Lagarde in European Parliament hearing
• Data: Germany: (April) Industrial Production (IP)

Tuesday 9 June:

• Economical/Political: OPEC Meeting, ECB’s Olli Rehn speaks
• Data: Germany: (April) Trade Balance; US: (April) Job Openings and Labor Turnover Survey (JOLTS); Japan: (April) Machine Orders; China: (May) Consumer Price Index (CPI)

Wednesday 10 June:

• Economic/Political: US Federal Open Market Committee (FOMC) meeting and interest-rate decision, OPEC/non-OPEC Meeting, OECD Publishes Economic Outlook, ECB’s Isabel Schnabel and Luis de Guindos speak
• Data: France: (April) IP; US: (May) CPI

Thursday 11 July:

• Economic/Political: Eurogroup meeting to discuss recovery package
• Data: Italy: (April) IP; US: (6 June) Jobless Claims

Friday 12 June:

• Economical/Political: UK Sovereign debt to be rated by DBRS Morningstar, Germany sovereign debt to be rated by Fitch Ratings
• Data: Eurozone: (April) IP, UK: (April) IP & Manufacturing Production, (April) Trade Balance; Japan: (April) IP

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 8 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. 

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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.