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

Global equities were mixed last week, with the STOXX 600 Index closing the week up a muted 0.1%, whilst US markets underperformed (S&P 500 Index down -0.8%), despite a dovish tone from the US Federal Reserve (Fed) on Wednesday. The MSCI APAC Index closed up 0.35%, with mixed regional performance. Wednesday’s Federal Open Market Committee (FOMC) meeting and rising COVID-19 cases in continental Europe were key areas of focus.

The Fed: Dovish Signals

Overall, the takeaways from the FOMC meeting were dovish, with the Fed keeping its median interest-rate projections unchanged despite a strong outlook for the labour market, growth and inflation. A few participants raised their rate expectations for 2022 and 2023, likely skewed towards regional bank presidents, but Chair Jerome Powell was clear that he would ‘not read too much’ into this. Powell was also reluctant to discuss the possibility for future tightening, and noted that ‘a strong bulk of the committee’ kept their rate projections at zero, which was actually an 11-7 split.

In terms of inflation forecasts, 11 out of 18 participants saw inflation at 2.1% or above in 2023. With only seven members predicting one or more interest-rate hikes, a decent portion of the Fed (likely including the leadership) would seemingly prefer to let the economy run hot despite also expecting inflation to run above their target. This detail tilts us further towards the dovish side. Of course, this is all about forecasts, not actual data points, so if we do begin to see more evidence of a cyclical rebound, we are also likely to see upgrades to individual forecasts and a corresponding move in the Fed’s ‘dot plot’ projections of expected hikes.

The market reaction was positive on the day of the meeting, with the S&P 500 Index closing on Wednesday near new all-time highs as cyclical and value stocks rallied in the United States, whilst defensive names underperformed. The Dow Jones Industrial Average also made a new record high, trading above 33,000 for the first time. The CBOE VIX (volatility index) had a knee-jerk move higher, but then settled at its lowest level since the pandemic hit markets.

The US dollar moved lower following the release, alongside US Treasury yields, which also helped commodities. These moves were not sustained, however, with some choppy trading around rebalancing flows towards the end of the week and US yields ultimately continuing their recent rally.

Europe’s ‘Third Wave’

Talk of a third wave of new COVID-19 cases increased across the European Union (EU) last week, with France reimposing lockdown in Paris, and German health officials stating cases are accelerating ‘exponentially’. In France, new daily cases increased to above 30,000 (a 20% increase), while Germany saw new daily cases rising to 17,5000 on Friday. Central European countries are also seeing sharp rises, with an increase of 38% in new cases week-over-week in Poland. These increases are due to more infectious new variants taking hold and highlight the pitfalls for European economies coming out of lockdown. The German health minister said it was unlikely that Germany would be looking at easing lockdown measures and if anything, it was more likely to tighten them.

Europe’s Vaccine Confusion

In the context of the ‘third wave’, it is important to keep an eye on the ongoing confusion over the EU vaccination programme, as further delays risk delaying the reopening of the economy.

This week we saw 16 EU nations pause the use of the AstraZeneca vaccine due to concerns over a handful of clotting cases. Subsequently, the World Health Organisation (WHO) and the European Medicine Agency (EMA) confirmed they saw no association with an increase in overall risk of blood clots. Many countries are now restarting the use of AZN vaccine, but it will have further delayed the already slow vaccine rollout and undermined public confidence. This could lead to damaging delays to the restarting EU economies. We would also note that a US AZN trial just concluded, with results showing 79% efficacy against COVID-19, 100% efficacy against severe or critical disease, and no increased risk of blood clots.

Alongside this flip-flopping on the AZN vaccine, the politisation of the global vaccine rollout continues to ramp up. Last week, EU President Ursula von der Leyen stepped up the rhetoric about Astra vaccines being exported from the EU, stating: ‘If the situation does not change, we will have to reflect on how to make exports to vaccine-producing countries dependent on their level of openness’.

Over the weekend, the UK press has focused on asking what EU are doing with an alleged 14 million Astra vaccines sitting in storage, pointing the finger at French President Emmanuel Macron and other leaders for creating uncertainty over the vaccine. The EU has said that it will review all requests to export AstraZeneca vaccines to the UK ‘very severely’ and will likely reject them until the drug-maker fulfils its delivery obligations to the bloc, accusing London of hoarding supplies.

We can expect further vaccine-related headlines this week, with the EU heads set to decide at a summit on Thursday whether to make good on their threat to block exports of 1 million doses produced at a Dutch factory. The post-Brexit political impact of all of this has the potential to be far- reaching and long-lasting.

UK Picture More Promising

In contrast, the picture for the UK economy looks more encouraging. New cases remain far below January highs and hospital numbers continue to fall sharply. Crucially, the vaccination programme continues at pace, and hopes of reopening in April remain high. UK consumer confidence is its highest level since the start of the crisis. On the back of this, stocks tied to UK re-opening outperformed similar EU stocks last week, a trend we have seen a number of times on relative vaccine rollout success.

Week in Review

Europe

European equities were little changed on the week overall, but within that there was some choppy sector and country dispersion. In terms of factors, value outperformed momentum, no doubt helped by the Fed and outperformance in the European autos. The energy sector (oil and gas) was the notable outlier as oil had its worst week in five months, and long positions were unwound. The sector closed last week down 4.8%. The winner last week was the autos, as solid earnings and US retail impact offered a boost. The sector finished up 5.3%, which is the widest dispersion in two months between top and bottom sectors on the week.

Regional performance reflected sector weightings once again this week with Germany’s DAX Index outperforming, up 0.8%, on the strength in autos. Spain’s IBEX lagged, down 1.8% amid strong sector biases towards oil and gas and the financials. Other basket themes included the stay-at-home theme, down 2.3%, as investors trimmed some profits here again.

European cyclicals came under pressure vs. defensives, with the COVID-19 backdrop weighing on sentiment. Last week was the first week of underperformance for the EU cyclicals vs. defensives in seven weeks, as weakness in underlying commodities also added bearishness. Finally, there was a continuation of the weakness in European renewables, with the basket down 4.8% on the week.

Finally, it is worth noting the Dutch election took place this week and saw a market-friendly outcome, with Marke Rutte on course to win a fourth term and right-wing populists falling to third place. The last Dutch election four years ago garnered a lot of attention over feared gains by anti-EU populists, so it is notable how this election passed by with so little attention.

United States

Last week was choppy for US equities, with the mid-week Fed meeting the main talking point (as discussed). With that, the S&P 500 Index ended the week down 0.8%, the Dow Jones Industrial Average down 0.5% and the Russell 2000 Index down 2.8%. As in recent weeks, moves in Treasury yields were a key driver, and the US 10-year yield continued its rally, up 9.6 basis points (bps) to 1.72%. The 10-year yield has now risen for seven straight weeks.

Another notable mover last week was West Texas Intermediate (WTI) crude oil, down 6.4% on a continued rise in US inventories and demand concerns coming from fresh EU lockdowns. With that, the energy sector was a clear loser, while telecommunications services and health care were the best-performing sectors.

Interestingly, reports show global equities continued to attract record asset flows, with investors showing a preference for the US equities over European equities given economic recovery/reopening concerns.

The US economy’s reopening prospects remain good as new COVID-19 fell to a four-month low and President Joe Biden wants all US states to offer vaccines to all adults beginning May 1. However, these positive trends will likely feed into fears over inflationary pressures and how this may impact the Fed’s thinking.

There was further noise around the potential for fresh retail investing, as stimulus cheques were sent out last week to individuals in the United States. Younger and higher-income investors in particular seem more likely to investing more in the market with these new funds, according to a Financial Times poll.

Asia

Asian markets saw lacklustre performance last week, with the MSCI Asia Pacific up 0.3% last week. Equity markets in Hong Kong and Japan closed higher, while Shanghai’s benchmark ended the week lower. In terms of themes, central bank action was a major focus in Asia too last week, with a two-day Bank of Japan (BoJ) meeting concluding on Friday. The BoJ kept interest rates unchanged as expected, but did widen the band at which it allows long-term interest rates to move around its target, one of several measures to make its policy more sustainable amid a prolonged battle to boost inflation.

In addition, it removed its explicit guidance to buy exchange-traded funds (ETFs) at an annual pace of roughly ¥6 trillion (US$55 billion), which gives it more flexibility. BoJ Governor Haruhiko Kuroda confirmed that these changes are to aid the deployment of monetary stimulus rather than any sign of tightening.

Japan was also in focus as Prime Minister Yoshihide Suga said the state of emergency for Tokyo area will end. However, this positive was offset by news that the Tokyo Olympics will take place without overseas spectators.

Elsewhere, any notion of a thaw in US/China relations in the wake of the new US administration can be put to one side after a frosty summit in the US state of Alaska.

The Week Ahead

The chaotic vaccine rollout programme in the region seems likel to dominate the European Council summit in Brussels this week. In the United States, we have a slew of Fed speakers, which will be of interest given last week’s meeting. Notably on Tuesday, the Fed’s Powell and Treasury Secretary Janet Yellen are scheduled to make their first joint appearance before the US House Financial Services committee to testify on Fed and Treasury pandemic policies.

It’s also a busy week for European central bank speakers, and the German cabinet is set to sign off a 2022 budget plan on Wednesday.

Tuesday 23 March:            

UK employment report

Wednesday 24 March:      

UK consumer price index inflation (year-over-year)
Euro-area Flash Composite Purchasing Managers Index (PMI); March UK Flash Composite PMI; Markit US PMIs

Thursday 25 March:          

US gross domestic product (quarter-over-quarter)

Friday 26 March:             

UK retail sales (month-over-month)
Germany IFO Survey

 


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 23rd March 2021, 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: Our views on Chinese assets

Wei Li, Global Chief Investment Strategist together with Elga Bartsch, Head of Macro Research, Yu Song, Chief China Economist and Ben Powell, Chief Investment Strategist for APAC, 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.


Chinese stocks have sold off on concerns that China could tighten monetary and fiscal policy more aggressively – after having led the global restart and policy normalization. This took place as rising U.S. Treasury yields have pressured global risk assets. We see moderately reduced tightening risk after China’s parliament meeting, and keep an above-benchmark strategic allocation to China exposures.

Article Image 1

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv, March 2021. Notes: The chart shows the correlation of weekly returns between each market and the MSCI World Index, on a U.S. dollar basis. The indexes used, in descending order, are the MSCI USA, MSCI EMU, MSCI Emerging Markets, MSCI Japan, MSCI China and MSCI China A Onshore Indexes.

 

The pandemic has accelerated the rewiring of globalization – with a bipolar U.S.-China world order at its center. We believe it’s key for investors to have exposures to both engines of global growth, and Chinese assets warrant greater than index weight allocations in strategic portfolios. China is still under-represented in global indexes – accounting for less than 10% of both the MSCI ACWI Index (including offshore shares) and Bloomberg Barclays Global Aggregate Bond Index. The relatively low correlation of Chinese assets with global peers offers attractive diversification benefits, in our view. Returns on China A-shares, for example, show a low correlation with developed market (DM) equities, as the chart above shows. The dynamic between Chinese government bonds and their global peers tells a similar story. Chinese government bond have held firm amid a sharp rise in global yields recently. Inflation-adjusted 10-year yields stand above 3%, still way above DM peers.

China has recently lifted most domestic virus restrictions, paving the way for stronger growth – and further policy tightening. Recent better-than-expected Chinese data suggest markets may be underestimating the resilience of the economy. With a focus on improving the quality of economic growth, policymakers have shown a clear willingness to keep liquidity under control and allow occasional spikes in short-term rates – effectively moving in the opposite direction to the rest of the world. This hawkish policy bias has spooked markets, but it may have been largely reflected in pricing, in our view.

China’s leadership set a policy tone that was slightly more dovish than expected at the National People’s Congress (NPC) meeting earlier this month. This moderately reduces the risk of an over-tightening of both monetary and fiscal policy, in our view. The government also set a conservative GDP growth target of “above 6%” for 2021, suggesting it is not trying to maximize short-term growth but still believes a minimum level of growth is needed even as the focus shifts to quality growth. This conservative target also reflects two main uncertainties – the pandemic and U.S.-China tensions, in our view. The Biden administration is engaging in strategic competition with China, particularly on technology, and has criticized Beijing on human rights issues. The tensions were on display in a bilateral diplomatic meeting last week in Alaska.

The more confident Chinese policymakers appear on the macro outlook, the more risks could emerge on the micro level. China’s corporate default rates are lower than global averages, but a higher tolerance for market forces could shutter more “zombie firms” in credit markets; dominant companies in certain industries face risks due to an anti-monopoly campaign.

Even with these risks we see China exposures as core strategic holdings that are distinct from EM exposures. The recent market correction presents a better entry point and more attractive valuations, in our view. We see Chinese government bonds as attractive strategically despite narrowing spreads versus DM peers, and the country’s focus on quality growth should help produce higher-quality companies in the long run. Many Chinese industries are set to benefit from a climate transition as the country pursues its ambitious climate goal. Tactically our preference for Chinese assets is expressed via overweights to Asia ex-Japan equities and Asia fixed income – both heavily skewed toward China exposures. We see a repeat of last year’s strong performance as unlikely this year, yet the accelerated restart still bodes well for Chinese assets.

Market Updates

Article image 2

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, March 2021. Notes: The two ends of the bars show the lowest and highest returns at any point this year to date, and the dots represent current 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, in descending order: spot Brent crude, MSCI Europe Index, MSCI Emerging Markets Index, MSCI USA Index ,the ICE U.S. Dollar Index (DXY), Bank of America Merrill Lynch Global High Yield Index, Refinitiv Datastream Italy 10-year benchmark government bond index, Refinitiv Datastream Germany 10-year benchmark government bond index, Bank of America Merrill Lynch Global Broad Corporate Index, J.P. Morgan EMBI index, Refinitiv Datastream U.S. 10-year benchmark government bond index and spot gold.

Market backdrop

The Federal Reserve embraced a material improvement in its outlook, while making clear that the bar for reassessing the policy rate path was not met and that it was too soon to talk about tapering bond purchases. This was a clear reaffirmation of its commitment to be well “behind the curve” on inflation and wait to see it to materialize. The rise in Treasury yields in recent months – while quick – is so far much more muted than we would have typically seen in the past. This is in line with our new nominal theme, which we expect to support equities and risk assets on the tactical horizon.

Week Ahead

  • March 24 – Flash composite purchasing managers’ index (PMI) for Japan, the euro area, UK and the U.S.
  • March 26 – ifo Business Climate Index for Germany

This week’s flash PMI data for key developed economies will be in focus. Investors are eager to gauge the level of activity restart, especially in the services sector that is most sensitive to virus dynamics. We expect the economic restart to re-accelerate significantly this year, as pent-up demand is unleashed and the vaccine rollout eventually enables activity to return to pre-pandemic levels.


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 March 22nd, 2021 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.

Login

We strive to ensure a streamlined account opening process, via a structured and clear set of requirements and personalised assistance during the initial communication stages. If you are interested in opening a corporate account with MeDirect, please complete an Account Opening Information Questionnaire and send it to corporate@medirect.com.mt.

For a comprehensive list of documentation required to open a corporate account please contact us by email at corporate@medirect.com.mt or by phone on (+356) 2557 4444.