Notes from the Trading Desk – Franklin Templeton

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

Last week was mixed for global equities, as the MSCI World Index finished up 1.5% after a late rally on 10 July. It was a relatively quiet week in terms of macro themes, with the market mainly focused on strength in China. Sentiment was boosted at the start of the week after a bullish Chinese state media report on 6 July which spoke of the need for a “healthy” bull market post-pandemic. However, lingering fears of a second spike of COVID-19 infections in the United States and Asia brought concerns of further lockdowns in key states and cities, which dampened market risk sentiment through the majority of the week. Growth stocks outperformed once again with the year-to-date winners coming out on top.

Markets continue to struggle with the two-way pull between the unprecedented monetary and fiscal policy stimulus through this year and any further economic fallout from a second wave of COVID-19 infections. Policy stimulus this year has been huge—US$10.5 trillion of fiscal stimulus and US$8 trillion of monetary stimulus globally in 2020—as governments and central banks fought to keep the global economy stable during the outbreak. And it is unlikely that there will be any tightening of monetary policy in the near-to-medium term.

China Strength

Global equities started strong last week amid a  bullish article in the state-run China Securities Journal, which helped drive retail flows into Chinese equities. The editorial noted that a “healthy” bull market post-pandemic was more important to the broader economy than ever before. It highlighted stock market reforms and an excess amount of global liquidity through policy support as reasons for big gains. This article followed a report the previous week in the same publication which proclaimed a “bull market is coming”. The Shanghai Composite Index finished 6 July up 5.7%, its biggest percentage daily gain since 2015. The move came on good volume too, 1.5 trillion yuan traded on the day, the highest since 2015.

Chinese state media has been known in the past to guide investor sentiment and these latest articles could be seen as an attempt by the Chinese government to boost stock markets and subsequently enhance views on China’s economic resilience. These moves set a bullish tone for markets in Europe and the United States last week and into the start of this one.

US COVID-19 Cases Mute Market Gains

The number of COVID-19 cases continues to rise in the United States. Average new cases last week were just under 56,000, up from the previous week, which averaged just over 46,000. While the number of new COVID-19 cases in earlier hotspots continues to decrease, rising infection rates in the states of  Florida, California, Texas, Arizona and much of the South have bent the infection curve for the country upwards. Moreover, rising mortality growth rates in over half of the states indicate that the spike in cases is not solely due to more testing. Updated estimates show that about 40%-70% of  gross domestic product (GDP) comes from counties that have seen worsening coronavirus trends, demonstrating that continued spread of the virus remains a significant downside risk to the economic outlook.

Florida is in particular focus, reporting 15,300 new cases this past weekend on Sunday, the largest one-day increase since the pandemic began and higher than New York, California or Texas. Despite the new record numbers, markets appear to be shrugging it off, as European equities were up on Monday 13 July  following a strong showing in Asia.

UK Economic Announcements

This week saw the UK Chancellor Rishi Sunak announce a further £30 billion (1.35% GDP) of support for the UK economy as the country tentatively comes out of lockdown.

The largest new announcements were:

  • A max £9 billion grant for the re-hiring of furloughed workers
  • A six-month cut to value-added tax on the hospitality and leisure sector
  • A new package of public investment
  • An eight-month cut to stamp duty
  • A new package of employment support for younger people

Headlines focused on his “eat out to help out” measure, which allows individuals to get up to £10 off per person if they eat out from Monday to Wednesday during August. Sunak said now was the time to be creative in encouraging the public to start consuming again. UK housebuilders had a good week last week, boosted by the stamp duty holiday announced as part of Sunak’s budget. The announcements drove strength in the pound, up 1.1% vs the US dollar  last week, whilst the exporter-heavy FTSE 100 index underperformed, down 1.0%

One example of the strain the COVID-19 crisis will put on national finances is the fact the UK bill for personal protective equipment (PPE) is thought to be around £15 billion, equivalent to the budget for the Home Office, Foreign Office and Treasury. Sunak has been largely praised for his reaction to the COVID-19 crisis, but as the Financial Times notes: “Since becoming chancellor in February, he has only played Santa Claus, but as Christmas approaches, his new role is likely to be Scrooge.”

UK utilities were in focus on 9 July after the local regulator, Ofgem, released draft determinations on price controls in the sector. The proposal suggests that rate of return on grid investments is lowered, which brought dividend sustainability into question for some of the United Kingdom’s big players such as National Grid and SSE. This impacted sentiment across the whole space in Europe last week.

 

Week in Review

 

 

Europe

European equities were mixed last week, with markets in the region taking much of their direction from moves in both Asia and the United States. There were few European macro themes on a week which saw the Stoxx Europe 600 Index open up nearly 2% on Monday before paring most of those gains as the week went on. The strong start was attributed to the strength in the early Asian session on 6 July. In terms of sectors, basic resources were stronger, as investors moved out of more defensive stocks in a selective rotation on Thursday and Friday. Technology stocks rallied in the United States, and this fed through to Europe. Oil and gas stocks underperformed once again in Europe last week, with oil prices falling throughout the week on continued fears of global over-supply. Momentum stocks pushed on in Europe whilst value stocks lagged.

The issue of the EU Recovery Fund is still very much in focus for European equity markets. Dutch Prime Minister Mark Rutte has met with French President Emmanuel Macron, German Chancellor Angela Merkel and now European Council President Charles Michel in recent weeks as they try to convince the “frugal four” alliance on the plan. Michel has proposed that the size of the Fund will remain at €750 billion, with €500 billion in grants and €250 billion in loans. As a concession to get the doubters onside, he also proposed an earlier repayment plan for the loans.

Of course, this bloc of four net-paying member states, led by the Netherlands, want to substantially reduce or eliminate the amount to be distributed in the form of grants. Merkel has pushed for a rapid conclusion of the Recovery Fund by the end of July before the summer recess.

Michel will unveil a compromise proposal this week in an effort to bridge divisions. He will propose offering the wealthier nations rebates that would limit the amount they contribute to the EU budget in an effort to win over their approval for the deal. These new stimulus measures should be supportive for equity markets in Europe. In our view,  any signs of progress in these discussions through this week or in the weeks ahead are likely to be met with strength in risk assets.

United States

It was a quieter week for US markets following the 4th of July holiday, so volumes and news felt quieter, but the S&P 500 Index did grind higher. As discussed, key talking points were the resurgence in COVID-19 cases in Southern states, and attention is also turning to the upcoming second-quarter earnings season.

Once again, it was the technology names leading markets higher last week, with some stand out performers including Tesla, Amazon and Netflix. Why are we seeing this grind higher? As yields across asset classes become harder to find, many investors seem to be looking for growth, which has propelled these “momentum” names. Some of these companies clearly benefit from the “Stay at Home” lockdowns, but other attractions include strong balance sheets and revenue growth.

Asia Pacific (APAC)

It was a very mixed week for equities across Asia, with many markets struggling to find strength outside of China and Hong Kong. Nonetheless, because of the extent of the move in China, the MSCI Asia Pacific Index closed last week up 1.7%. In terms of sectors, consumer discretionary stocks outperformed, helped by the strength in Chinese equities. Similar to the United States and Europe, technology stocks were strong in the region. It was the defensive sectors which lagged in Asia overall, with real estate investment trusts (REITs), utilities and health care all down.

There were some negative headlines at the start of last week with regard to COVID-19 cases in the region. In Australia, Victoria, the country’s second biggest state, reported a new record daily high of 127 new cases, prompting it to close the border with New South Wales. Later in the week, Melbourne went into lockdown, with residents told to stay at home except for essential travel. It was reported that a lockdown in Melbourne would cost the Australian economy AUD$1 billion per week. Tokyo also reported inflated figures through the start of the week, which dampened sentiment there. On the flip side, Beijing reported no new cases on Monday, the first time the city has reported zero new daily cases in a month.

 

Week Ahead

A couple of important events this week.

On Thursday 16 July, we have the European Central Bank (ECB) monetary policy meeting. The market expects interest rates will be kept on hold at 0%. Also, in the June meeting, the ECB decided to expand the Pandemic Emergency Purchase Progamme (PEPP) again by another €750 billion. Many expect the ECB to ease further later on in the year, though the course of the virus will determine the exact form and timing of additional measures. For now, we could see another  €750 billion of PEPP purchases, potentially announced in the fourth quarter of 2020. The ECB will most likely continue to innovate with the TLTRO-IIIs, and we do not expect the ECB to cut rates any further at this stage.

ECB President Christine Lagarde has said the ECB is unlikely to announce fresh easing measures next week, as senior officials said economy performing a little better than expected.

At the end of the week, all eyes will be on the EU Special Council meeting on 17-18 July. EU leaders are tasked with agreeing on a proposal, and also clarifying the link between the recovery fund and the EU’s long-term budget.

Calendar:

Monday 13 July

  • Economic/Political: Bank of England (BoE) Governor Andrew Bailey speaks
  • Data: China: (June) trade balance

Tuesday 14 July

  • Economic/Political: Bank of Japan interest-rate decision, second-quarter earnings season kicks off with US banks
  • Data: United Kingdom: (May) industrial production (IP), (May) trade balance; Eurozone: (May) IP; Germany: (Jul) ZEW; Japan: (May) IP; US: (June) consumer price index (CPI)

Wednesday 15 July   

  • Economic/Political: OPEC+ meeting; US Federal Reserve releases its Beige Book; Bank of Canada interest-rate decision
  • Data: UK: (June) CPI; China: (June) IP, second-quarter GDP; (June) retail sales

Thursday 16 July

  • Economic/Political: ECB interest-rate announcement
  • Data: UK: (June) Claimant count, Jobless claims, (May) ILO UR; Eurozone: (June) EU27 new car registrations; US (June) retail sales

Friday 17 July

  • Economic/Political: EU special council meeting; BoE’s Governor Bailey speaks
  • Data: Eurozone (June) CPI; Italy: (May) industrial orders


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 13th July 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.

BlackRock Commentary: Why we like credit

Mike Pyle, Global Chief Investment Strategist, Scott Thiel, Chief Fixed Income Strategist, Beata Harasim, Senior Investment Strategist and Natalie Gill, 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.


We recently moved to a strategic overweight on credit after being underweight for the past year. Cheaper valuations compensated for the risk of corporate defaults and downgrades in the wake of the Covid-19 pandemic, in our view. We also prefer credit over equities on a tactical basis. Extraordinary central bank easing, including renewed purchases of corporate debt, underpin the asset class.

13.07.20 BlackRock Article image 1

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. Source: BlackRock Investment Institute. Notes: Chart shows 5-year expected returns for credit asset classes as at 31 Dec 2019 (Q4 2019) and as of April14, 2020 (Q1 2020). The total expected return is broken down in to expected loss due to default and downgrades and expected returns due to carry, valuation and rolldown or reinvestments of coupon income. Indexes used: Bloomberg Barclays U.S. Investment Grade Credit index and Bloomberg Barclays U.S. High Yield Index. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. There can be no guarantee any forecasts made will come to pass.

The pandemic has accelerated key structural trends, and calls for a wholesale review of strategic asset allocation. Valuations in investment grade credit had cheapened significantly as of mid-April, and looked set to be less of a drag on future returns than they were in late 2019. See the shrinking yellow bars in the chart above. This effect more than outweighed the negative drag from an expected rise in losses resulting from corporate downgrades and defaults (the orange bars). In high yield, valuations swung to a modest tailwind for expected returns. Valuations have since risen, but still look fair to us.

We maintain a modest pro-risk stance overall on a tactical basis, given our macro assessment of the virus shock and the strong policy response. This is balanced by a preference for assets that are high up the corporate capital structure and have policy backstops in the U.S. and Europe. These backstops go beyond investment grade credit and European peripherals, with the Federal Reserve for the first time purchasing “fallen angels” that have lost investment grade status. We prefer credit over equities as a result and are overweight in investment grade credit, high yield and euro area peripheral debt. These sectors offer attractive income in a world where decently yielding assets are hard to find. Credit (particularly high yield corporate debt) has lagged equities in the comeback rally, making it more attractive on a relative basis, in our view. Credit and equities also offer different sector exposures. Financials have a greater weight in credit, while tech has an outsized weight in equities. We prefer to take financials exposure in credit due to the strong policy backstop. Financial equities face challenges such as low rates and curbs on dividend payouts that could limit upside. And our overweight in the quality factor – even as we stay neutral overall in equities – gives us exposure to large-cap tech stocks riding secular trends.

The Federal Reserve is buying more assets relative to U.S. GDP than in the three rounds of quantitative easing that followed the global financial crisis combined. The Fed and European Central Bank look set to purchase roughly the equivalent of all the net supply across European and U.S. sovereign and corporate debt this year, by our calculations. To date, these purchases have been mostly of government debt, but the credibility of central banks’ corporate debt backstop has helped underpin credit markets. As such, investors have easily digested the highest run rate of new bond issuance since 1980 in global investment grade credit. We see issuance easing over the summer, providing a strong technical backdrop for credit.

Have credit markets already run too far? For now, we do not think so. Investment grade and peripheral bond spreads remain wider than pre-Covid levels. To be sure, the resurgence of Covid-19 cases in the U.S. poses near-term risks. But overall, we see the policy revolution and a strong investor appetite for income underpinning credit markets. Equity markets look more vulnerable to sagging corporate earnings, as well as any deterioration in the key signposts we are watching: how successful economies are at the activity restart while controlling the virus spread; whether stimulus is still  reaching households and businesses in sufficient scale; and whether any signs of lasting economic scarring are emerging.

Market Updates

13.07.20 BlackRock Article image 2

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 , July 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.

Market backdrop

Measures to contain the virus are being gradually eased in many developed economies, and lifted activity and employment in June. A surge of COVID-19 cases in many U.S. states threatens to undermine a recovery in mobility, which we see as closely tied to economic activity. The unprecedented policy response has boosted risk assets, leaving the U.S. resurgence of infections and policy implementation as key market risks. U.S. Congress is headed for a fiscal cliff as jobless benefits, state support and payroll protection measures are expiring soon.

Week Ahead

  • July 14th:  ZEW economic sentiment survey
  • July 15th: Bank of Japan policy decision
  • July 16th: European Central Bank policy decision; U.S. Philly Fed business survey
  • July 17th to 18th: EU Summit; University of Michigan consumer sentiment (prelim)

Leaders of the 27 EU member states are scheduled to hold their first physical summit since the coronavirus lockdown began. The two-day meeting will see leaders discuss an economic recovery package and the EU’s next seven-year budget. Europe has ramped up its stimulus efforts in line with a much needed global policy revolution to cushion the coronavirus shock.


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 July 13th, 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.

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