Day: 21 July 2020

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

Sentiment across global equity markets was broadly risk-on last week, with COVID-19 vaccine hopes driving moves higher midweek. This helped the STOXX Europe Index 600 close the week up 1.6%, whilst the S&P 500 Index gained 1.2%. The MSCI Asia Pacific was the underperformer, closing the week flat, as  weakness in Mainland China and Hong Kong was a drag.

Results published in the New England Journal of Medicine showed that a potential vaccine (mRNA-1273), produced antibodies in all patients tested within an initial safety trial. The UK press also came out with a positive report on the potential for Oxford University and AstraZeneca’s vaccine. Outside of this, it was fairly quiet on the macro front.

In Europe, the focus fell on European Union (EU) Recovery Fund negotiations.

EU Summit: Is an Agreement on the Horizon?

The latest EU summit began last Friday and has continued through the weekend into the start of this week (despite being scheduled to end on Saturday) with deep ideological differences forcing the continuation. Equity volumes were subdued on Friday of last week as investors waited to see the outcome of the talks. Member states are working towards an agreement on the €750 billion recovery fund and €1 trillion budget. As we would expect with the EU, things are never smooth, and there have been a number of headlines about discord within the group. Germany, France and Italy are all behind the plan as it stands (which is clearly positive), whilst the so-called “frugal four” (Austria, Netherlands, Denmark, and Sweden) have been dragging their feet; they are pushing for downsizing of the fund, a different allocation of grants and loans and more conditionality.

Ahead of the meeting, German Chancellor Angela Merkel warned the four that Germany (backed by Italy) would vehemently oppose any sizable cuts to the plans and that continued opposition puts the recovery (and potentially even the single market) at risk—strong words from Merkel, clearly assigning blame if agreement cannot be reached.

The headlines over the weekend suggested that divisions remain, with a marathon round of negotiations breaking up in the early hours of Monday and to resume later in the afternoon. Finland joined the initial frugal four over the weekend in suggesting a reduced €350 billion in grants (vs. loans), whilst Germany and France were sticking with their demands for €400 billion.

However, there are reports this morning that the hardliners are willing to accept €390 billion in grants (vs. an initial €500 billion) alongside suggestions that this is what European Commission President Charles Michel is planning to propose. This does sound like it could be a workable compromise, although Dutch Prime Minister Mark Rutte warned that discussion could still fall apart despite this progress.

Ahead of the event, investment-bank analysts thought there was a small chance of agreement at the summit, but that it was likely too early and another extraordinary summit may be needed (something Merkel also echoed at the beginning of the week). This would likely take place at the end of the month.

The euro pushed on in early trade today, after making four-month highs last week. The currency has moved towards testing year-to-date highs, suggesting that investors see an agreement likely to be  reached and that risks are skewed heavily towards the downside should one not materialise. Chances of an agreement not being reached this month do seem low, especially given the message of solidarity tied up within the joint recovery fund and the implications for the long- term health of the euro area should member states not manage to come together.

There were a couple of snippets on investor sentiment around this in last week’s Bank of America Merrill Lynch Fund Manager Survey as eight out of 10 participants think the European Recovery fund is positive for European assets, again suggesting that risks are heavily skewed to the downside if nothing is agreed upon.

We’d also note that although it marks a step forward, the recovery fund would amount to increasing jointly guaranteed debt from 7.5% of total eurozone sovereign debt to just over 14% in 2024. Not as significant as some of the excitement suggests?

Week in Review

 

Europe

After struggling earlier in the week, European equities got a boost on Wednesday after a UK journalist reported positive news was forthcoming on initial trials of a vaccine at Oxford University. Data to be released this week from the university are expected to show the initial trials of the vaccine seem to be producing the correct antibodies and T-cells required to fight the virus. This headline also came on the back of positive vaccine data from Moderna in the United States. With this positive news in the COVID-19 fight, the STOXX Europe Index 600 rallied to close Wednesday higher.

Airlines outperformed as part of the aforementioned move, with travel and leisure the leading sector on the day. Looking at other sectors, chemicals outperformed, with a number of positive pre-announcements in the space. Real estate was the underperformer as landlords have struggled to collect rent in the current climate. Technology was the other sector in the red, in sympathy with the pause for breath seen in the big US technology names.

Hopes for an agreement on the EU Recovery Fund also helped, pushing the euro to four-month highs.

Last was a quiet week on the macro data front, but we did see eurozone industrial production for May come in ahead of expectations. Whilst this is backward looking data, seeing the  reading +12.4% month-on-month does suggest we are seeing a reasonably solid rebound. It’s also worth noting that the Citi economic surprise index is continuing to move higher, now at just -7 and almost back to pre-pandemic levels.

European Central Bank (ECB): No Change, Lagarde Reassures

We also heard from the ECB last week, but there was little of interest and no change in policy. The focus fell on the press conference, where ECB President Christine Lagarde pushed back against commentary from ECB board members that the central bank “doesn’t necessarily need to use the full Pandemic Emergency Purchase Programme (PEPP) envelope”. Lagarde said that the ECB will use the full PEPP package unless there are significant upside surprises.

She also highlighted the importance of “flexibility” in the PEPP programme and whilst convergence to the capital key will take place “at some stage”, the ECB will not let this get in the way of its policy objective. On economic outlook, Lagarde highlighted the sharp recovery in May/June data, signaling that the contraction in this year’s second quarter should be broadly in line with the central forecast.

United States

In the United States last week, we saw both the S&P 500 Index and the Dow Jones Industrial Average (DJIA) edge higher, as the aforementioned positive news on  potential COVID-19 vaccines boosted sentiment midweek.

Another interesting dynamic last week was the underperformance of technology stocks. For the first time since 2018, on a weekly basis the Nasdaq closed in negative territory while the S&P 500 and DJIA gained on the week. This is a timely reminder that with so much concentration risk in the tech juggernauts, it is important to keep a close eye on upcoming earnings. Microsoft will report quarterly earnings this week and 30 July is a huge day as we get earnings from Amazon, Apple and Google.

Last week the United States saw an average of over 63,000 new COVID-19 cases a day, with Florida, Texas and California among the worst hit. However, markets for now seem to be shrugging off the surges.

In terms of macro data, both June retail sales (excluding automobiles and gasoline) and industrial production stood out as better than expected.

Asia Pacific (APAC)

Equities in the APAC region put in a mixed performance last week, with both Hong Kong  and Mainland China  underperforming. Other markets managed to gain, including the Japanese Nikkei Index. The selloff in China came despite better macro data, with second quarter 2020 gross domestic product (GDP) rising 3.2%. The main market selloff came after reports midweek that China may slow its fiscal stimulus in the second half of the year as the economy grows and as government revenues come under pressure.

Last week the UK banned Chinese telecoms company Huawei as a long-term supplier for 5G networks over security concerns, which likely didn’t help sentiment. US/China tensions also remain an overhang, with headlines last week stating the United States may ban visas for Chinese Communist Party Members.

Meanwhile, the Bank of Japan meeting was largely uneventful, with no change as expected.

One final thing to note is that over the weekend the United Kingdom signalled that it would join allies in suspending its extradition treaty with Hong Kong. An update will be provided on arrangements this week.

Week Ahead

Although many market participants are taking summer holidays, there is still a lot of noise expected this week as quarterly earnings in United States and Europe continue to be a focus. In terms of macro data, Global Flash purchasing managers indexes (PMIs) for July will be the main talking point on Friday. News on the EU COVID-19 bailout will be a key driver for the region. Brexit talks also resume this week.

Calendar:

Market holidays: None this week.

Monday 20 July

• Economic/Political: US Secretary of State Mike Pompeo meets UK Prime Minister Boris Johnson and British Foreign Secretary Dominic Raab; EU-UK Brexit talks resume.
• Data: Germany producer price index (PPI), Italy current account balance, eurozone ECB Current Account; Japan June consumer price index (CPI); Reserve Bank of Australia meeting minutes.

Tuesday 21 July  

• Data: Chicago Fed National Activity Index.

Wednesday 22 July    

• Data: US existing home sales (June); South Korea GDP (second quarter).

Thursday 23 July 

• Economic/Political: Central Bank of the Republic of Turkey Meeting; Bank of England’s Jonathan Haskel speaks.
• Data: Germany consumer confidence, Norway unemployment rate and industrial confidence, France business and manufacturing confidence, Sweden unemployment rate, eurozone consumer confidence, UK consumer confidence.

Friday 24 July

• Economic/Political: Russia central bank meeting; Greece sovereign debt to be rated by Fitch.
• Data: UK retail sales (excluding autos and fuel), Spain PPI, France manufacturing PMI, Germany manufacturing PMI, Italy consumer and manufacturing confidence, eurozone manufacturing PMI, UK manufacturing PMI; US Markit PMI (July), new home sales month-on-month.

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This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 20th 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. 

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Mike Pyle, Global Chief Investment Strategist, together with Elga Bartsch, Head of Marco Research, Scott Thiel, Chief Fixed Income Strategist, and Beata Harasim, Senior Investment 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.

As economies start to normalize, we see European equities as the most attractive regional exposure to a differentiated global reopening. The region sports a robust health infrastructure, exposure to a pickup in global growth, and galvanized policy response with room for more stimulus. As a result, we see it offering better risk-reward than traditional beneficiaries of a growth pickup: emerging markets (EMs).

Source: BlackRock Investment Institute, with data from European Centre for Disease Prevention and Control. Notes: . The chart shows the 7-day rolling average of new confirmed cases as a share of population. Regional aggregates are based on countries within the MSCI Europe, Emerging and Frontier Market indexes.

The pace of the activity restart depends on how successful countries are in suppressing the virus as they reopen. This gives Europe a leg up versus much of the emerging world. Many EM countries have less robust public health systems, and the pandemic has not yet peaked. Infections have jumped in Latin America after an initial lag, as the chart shows, and are steadily rising in emerging Europe, Middle East and Africa (EMEA), and South Asia. By contrast, infections in developed Europe have been on a downward trajectory since peaking in April.

To be sure, EMs are heterogenous. The virus outbreak – and ability to withstand it – varies greatly by country. Many north Asian economies, for example, appear to have gained control of the epidemic – and have relatively strong balance sheets and the policy space to weather the downturn.

Europe’s health capabilities and containment measures position the region well for a domestic recovery. European companies also are highly geared to an improvement in global trade and recovering Chinese economy. Some EM economies are likely to benefit, too, and tech-focused Asian countries are showing early signs of a pickup in trade. Escalating U.S.-China trade tensions are a risk to market sentiment toward EM, European and Japanese equities alike in that respect. Europe, however, is less vulnerable to any renewed downturn in commodity prices than EM economies that are heavily exposed to commodities and natural resources, such as Russia and Brazil.   

Importantly, the monetary and fiscal support to cushion the virus shock is stronger in Europe than in EM countries and Japan – and there is space and appetite for additional stimulus. After an initially slow start, the euro area has galvanized its policy response. The European Central Bank has made clear that it stands ready to add more monetary stimulus. Leaders of the 27 EU member states last week discussed a groundbreaking, joint economic recovery package at their first physical summit since the start of the coronavirus lockdown. Importantly, unprecedented coordination between fiscal and monetary authorities is allowing the region to unleash stimulus and bring down peripheral borrowing costs at the same time. By contrast, we see the policy space in many EM countries as much more limited, as many risk spiking interest rates and sliding currencies in response to more fiscal or monetary stimulus.

What are the risks in preferring Europe over EM?  First, a surprise in the pandemic’s trajectory. This could range from a drop in EM infection rates to a virus resurgence in Europe. Second, EM equities could further outperform European peers if the U.S. dollar weakens against EM currencies or if the global growth upswing is much larger than we expect.

Bottom line: We are overweight European stocks due to the region’s strong public health systems and ramped-up policy response. We are underweight EM equities outside North Asia due to the pandemic’s spread and limited policy space. North Asia has the virus under control for now and has the capacity for more stimulus, keeping us neutral on both Japanese and Asia ex-Japan equities. We like U.S. equities for their quality bias, but the risk of fading fiscal stimulus and election uncertainty keep us neutral.

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, 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.

Measures to contain the virus are being gradually eased in many developed economies, and lifted activity and employment in June. The unprecedented policy response has boosted risk assets, leaving the U.S. resurgence of infections in Sunbelt states and the possibility of fading fiscal stimulus as key market risks. U.S. Congress is headed for a fiscal cliff as additional jobless benefits and small business support are set to expire, and states face huge budget shortfalls. We could see a $1-1.5 trillion fiscal package that extends some (but not all) federal stimulus measures through late-2020.

Week Ahead

• July 19th: Japan trade data
• July 22nd: Japan flash PMI
• July 23rd: Euro area flash  consumer confidence
• July 24th: Flash PMIs for U.S., euro area and UK

A slew of early estimates of Purchasing Managers’ Indexes (PMIs) will be in focus to gauge business sentiment as economies show signs of rebounding. Activity normalization may take time, and the key will be restarting economies without restarting a virus outbreak. We track the interplay between virus outbreaks and mobility changes as a signpost for the pace of activity restarts around the world.

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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 20th, 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. 

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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.