Day: 13 April 2021

Wei Li, Global Chief Investment Strategist together with Ben Powel, Chief Investment Strategist for APAC, and Axel Christensen, Chief Investment Strategist for LatAm & Iberia, 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.

Oil and industrial metals have rallied since late-2020 on expectations for a swift economic restart, sparking talk of a new commodity “supercycle.” We see a more nuanced outlook – with a divergence across different commodities. The lift for oil from the economic restart is likely to be transitory, while some metals may benefit from structural trends such as the “green” transition for years to come, in our view.

Sources: BlackRock Investment Institute, with data Refinitiv, April 2021. Notes: Crude oil prices are represented by the spot Brent crude oil prices, and copper prices are represented by the London Metal Exchange spot copper prices.

 

Oil and copper are among the best-performing assets so far this year – after divergent performance last year. See the chart above. The post-pandemic restart – not a typical business cycle recovery – suggests the economy’s snapback from the Covid shock will likely be much swifter than the recoveries in the past, in our view. Growth in China – the world’s top commodity consumer – is already back to its pre-Covid trend, and the U.S. is close behind. This dynamic has buoyed commodities in recent months, yet we expect the support to fade once the economy returns to a modest growth trend. We see long-term dynamics at play too. The strength in copper (see the orange bars) partly stems from a supply crunch that is the result of years of underinvestment and increased capital discipline among major miners – and exacerbated by production disruptions caused by the pandemic. In addition, a transition to a low-carbon economy has provided long-term support for copper. In contrast, oil suffered a collapse in demand last year as travel demand dried up. Near-term demand may well return – but peak oil demand looms large.

We see structural dynamics potentially leading to long-lasting – and divergent – impact on two groups of commodities. The first is oil and other fossil fuels. A strong economic restart may still support prices of oil and related assets in the near term. Yet the prospect of peak oil demand is now well accepted, and we see the “green” transition likely to erode oil demand over the long run. The second group – certain industrial metals including copper, nickel and lithium – looks set to enjoy structural demand from that very transition for years to come. Decarbonization of the power system and electrification of the transport sector, for example, will be massive endeavors requiring a large-scale buildout of new infrastructure. At the same time, the increased focus on sustainability could make new mining projects more expensive and time-consuming to build, potentially aggravating the supply shortage and driving prices higher to incentivize greater production.

China’s commodity consumption was the key driver of the last commodities “supercycle” in the early 2000s – but this time may be different. We see more broad-based demand for industrial metals across developed and emerging markets (EM), thanks to a global policy revolution in response to the Covid shock and structural demand due to massive government spending on renewable energy and infrastructure. A remapping of global supply chains could also boost demand for raw materials as companies build facilities in new locations to increase their resilience to disruptions.

The bottom line: The powerful economic restart is likely to support many commodities in the near term, including oil. This should benefit the assets of commodity exporters, including some EMs. But the support from the powerful restart will be transitory, and we do not see a broad-based rise in global demand that buoys all commodities. Instead, we see a divergence story: The “green” transition will eventually erode demand for fossil fuels, potentially cutting short the duration of any price upswing. At the same time it looks likely to create structural demand for many industrial metals that may last for decades to come. Investing in commodities isn’t straightforward for most individual investors. Commodity-related equities is an option, yet there are risks specific to equity markets. Overall, our climate-aware return assumptions place energy and utilities sectors as laggards in long-term performance and expect technology and healthcare to benefit the most from the “green” transition, judging by their exposure to climate risks and opportunities. Over the tactical horizon, we tilt toward cyclicality and maintain a bias for quality. We are overweight U.S., emerging market and UK equities, as well as global high yield credit.

Market Updates

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 as of April 8, 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 USA Index, MSCI Emerging Markets 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.

U.S. stocks hit new record highs and 10-year Treasury yields traded below the 14-month peak. The International Monetary Fund (IMF) raised its forecast for global growth to 6% for this year – the highest since the 1970s – citing unprecedented public spending especially in the U.S.  We expect equities and other risk assets to be supported by the new nominal – a more muted response of government yields to stronger growth and higher inflation than in the past as central banks lean against any sharp yield rises.

Week Ahead

• April 12-19 – China total social financing and new yuan loans
• April 13 – Germany ZEW Indicator of Economic Sentiment
• April 15 – U.S. Philly Fed business survey, retail sales, industrial production
• April 16 – University of Michigan Surveys of Consumers; China industrial output

U.S. retail and consumer sentiment data will be in focus. Retail sales were expected to rise 4.7% in March after falling in the previous month, partly due to cold weather, according to a Reuters poll. The University of Michigan survey could shed light on consumer sentiment, after the lifting of restriction in some states and additional relief payment from the government.

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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 April 12th, 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. 

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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. 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

Equities in the United States and Europe continued their grind higher in a holiday-shortened week, which led to lighter volumes and newflow last week. The STOXX Europe 600 Index closed up 1.2%, whilst the S&P 500 Index outperformed, up 2.7% on the week. There was a mixed picture in the Asia-Pacific (APAC) region, with equities in both mainland China and Hong Kong lower, whilst Australia outperformed, leaving the MSCI APAC Index unchanged on the week.

With a quiet week on the news front, focus fell on the improving macro picture and reopening theme in Europe, although the COVID-19 backdrop remains a significant concern. Eurozone Purchasing Managers’ Index (PMI) data was revised higher, with Services at 49.6 and the Composite rising to 53.2. Investor confidence was also strong, with the Sentix reading at its highest level since August 2018 in April.

UK equities outperformed (the FTSE 100 Index was up 2.7% last week), with housebuilders rising after data showed a surge in house prices (+1.1% in March, the biggest increase in six months). The UK labour market also showed its strongest rebound in hiring since 2015 on anticipation of businesses reopening as lockdown measures ease. A weaker pound also boosted the exporter-heavy index.

We also saw improving jobs data from the United States in the prior week. Finally, the International Monetary Fund (IMF) boosted its growth projection for the world economy to +6% in 2021, up from its +5.5% forecast in January. The ramp-up in vaccine rollouts drove the increase.

Last week, a European Union (EU) memo suggested that the majority of EU member states will have sufficient supplies to vaccinate a significant proportion of citizens by the end of June, hitting targets ahead of schedule. The memo implied that 55% of the total population would have received at least one dose by then, which would show a huge improvement in the second quarter (Q2) from what we saw in the first quarter (Q1).

Despite this positive development, continental Europe is still playing catch up to the United States and United Kingdom in its vaccine campaigns, having severely lagged. The situation now remains precarious as countries battle with the third wave of the pandemic. France remains under a lockdown that includes restrictions on travel and a 7 pm–6 am curfew. Germany also looks set to tighten its restrictions.

Meanwhile, deaths in Italy have continued to rise through the vaccination rollout. Media headlines on Friday suggested that the prior Italian government had made errors leading to a significant portion of the elderly population missing out on their vaccinations earlier in the year.

As the cost of keeping the economy afloat continues to drain state resources and street protests apply pressure on the government, Italian Prime Minister Mario Draghi is reported to have brought forward stimulus plans for as much as €40 billion in new borrowing. This comes after headlines last week that a new stimulus package worth €32 billion+ will fund additional grants to businesses forced to close due to restrictions and extend existing debt moratoriums for small- and mid-sized companies. The measures will likely push the year’s fiscal gap over 10% of gross domestic product (GDP), up from 9.5% in 2020. Draghi has stressed the importance of accompanying families and businesses out of the pandemic and the recession.

Week in Review

United States

It was a quiet week for US equity markets following the Easter holiday weekend, with market volumes drastically lower last week. Despite the low volumes, stocks advanced, with the S&P 500 Index closing the week up 2.7%. The Dow Jones Industrial Average was up 2.0%, whilst the NASDAQ Index was strong, up 3.9% on the week. Technology was the strongest sector on the week, up 4.7%, whilst energy was the only sector to finish in the red, down 4% as oil prices weakened. West Texas Intermediate crude oil closed the week down 3.5% amid a potential return of Iranian supply and a resurgence in COVID-19 infections in Europe.

Treasury yields moved lower last week, helping to drive a rotation to growth and momentum after those groups meaningfully lagged value in Q1. The CBOE VIX Index was lower again, dipping below 17 for the first time since the start of the pandemic.

In terms of market themes, sentiment was better regarding the economic recovery from COVID-19 in the United States following a much stronger-than-expected employment report for March. At the same time, US Federal Reserve (Fed) meeting takeaways have stressed the US economy is still far from the Fed’s employment and inflation goals.

The US government also released its spending plan for the next fiscal year last week. The plan shows an 8% year-on-year increase to US$1.52 trillion. How this gets paid for might not become clear until the full budget hits Congress in May.

The latest Federal Open Market Committee (FOMC) minutes acknowledged it will be some time before the Committee’s goals are met and the bar for tapering and lift-off remains high. The FOMC said that it will ‘likely be some time’ before the economy recovers enough for tapering to begin and that ‘asset purchases would continue at least at the current pace until then’. Fed Chair Jerome Powell acknowledged the Fed could adjust administered rates if there was undue pressure on overnight funding rates. He added that the Fed must see ‘actual progress’ and emphasised that 9-10 million people remain out of work domestically.

In terms of COVID-19 cases in the United States, new cases increased modestly over the week as the UK variant continuing to spread. The UK variant is now the dominant strain in the United States and total infections now stand at 60,000 on a seven-day average, and up from 58,000 the previous week. Hospitalisations remain stalled at around 40,000, while mortalities have dropped below 700 on a seven-day-average basis for the first time since October. The rate of vaccinations continued to ramp up over the past week, with daily doses administered crossing the four million single-day mark. If vaccinations continue at this pace, then 80% of the US population will have been vaccinated by the end of July.

The US trade deficit widened to a record high of US$71.1 billion. For context, the widest level before the pandemic was -US$68.3 billion, recorded in 2006. This time, the deficit is driven by extraordinary demand for consumer goods, which is fueling imports. Meanwhile, exports are lagging as the rest of the world has been generally slower to recover from the pandemic. In February, both imports and exports contracted, but imports (-0.7% month over month) were strong relative to exports (-2.6% month over month). This data predates the latest round of stimulus cheques and the likely surge in consumption following in March-May. On top of that, inventory restocking is fueling imports, so it’s safe to assume that the deficit will continue to widen, at least through the middle of the year.

Europe

It was a holiday-shortened week for European equities, as discussed, with the STOXX Europe 600 Index closing the week +1.2%. The holiday mode was reflected in lighter volumes and in the news. Italy was the week’s underperformer, closing the week lower (the FTSE MIB Index was down 1.2%) as the COVID-19 situation remains precarious despite some improving retail data reported on Friday. The United Kingdom outperformed (the FTSE 100 Index was up 2.7% over-the-week), helped by better data, reopening hopes, and currency impact. From a sector perspective, defensives outperformed (food & beverages were up 3.4%, utilities were up 1.9%), whilst the autos, telecommunications and oil & gas stocks underperformed. Value underperformed vs. momentum on the week, but has still outperformed year-to-date.

With a shorter week, Credit Suisse’s latest losses related to Archegos dominated headlines. On 6 April, Credit Suisse announced an expected loss from Archegos of c. CHF4.4 billion (US$4.7 billion), a little above prior press estimates, but below the possible ‘worst case’. It cut its dividend and suspended its buyback, as widely expected.

At a higher level, debate is now continuing about a potential sale of Credit Suisse’s asset management arm and, if Credit Suisse starts to reduce in scale and loses valuation, speculation of a deal with UBS is likely to increase once again. For the broader industry, the fallout has remained minimal, with consensus view remaining that this incident is isolated and the losses have been concentrated and contained.

On the bright side, the backdrop for investment banks into Q1 reporting looks very healthy—so, not all doom and gloom!

APAC

Australian equities were the standout performer in the region, with the ASX Index making 13-month highs, thanks to commodity strength. In addition, the Reserve Bank of Australia highlighted financial system resilience and sounded upbeat on lending standards.

Chinese mainland equities were a touch lower on the week, -1%, continuing the year-to-date trend of underperformance vs. global equities.

Equities in Hong Kong traded slightly lower last week, with the main talking point being a significant placing in index heavyweight Tencent. Prosus raised HK$114.2 billion (US$14.7 billion) from selling a 2% stake in the world’s second-biggest block trade.

Concerns over rising COVID-19 cases were a concern in a number of countries. In Japan, talk of fresh lockdown measures in Tokyo weighed on sentiment, and India has seen soaring cases with a ‘second wave’ now underway. Earlier this month, the IMF raised its 2021 growth forecast for India to 12.5%, but the IMF commented the fresh COVID-19 wave was ‘quite concerning’.

Week Ahead

Lockdown restrictions in England are set to ease from 12 April, opening up shops, pubs and restaurants. Data on 13 April should show the UK economy grew slightly in February, as consumers became less cautious even with the strict containment measures in place. US Industrial Production will be in focus on Thursday.

Monday 12 April  

• UK Industrial & Manufacturing Production
• UK Trade Balance & Monthly GDP
• Norway GDP
• US Federal budget

Tuesday 13 April   

• UK Monthly GDP
• Germany ZEW Survey
• Sweden PES Unemployment Rate
• Italy Industrial Production
• US consumer price index (CPI)

Wednesday 14 April  

• Netherlands Trade Balance
• Spain CPI
• Sweden CPI
• Eurozone Industrial Production

Thursday 15 April

• Norway Trade Balance
• Germany CPI
• France CPI
• Italy CPI
• Spain Trade Balance
• Italy General Government Debt
• US Jobless claims
• US Industrial production

Friday 16 April  

• Euro-area Final CPI Inflation
• Eurozone EU27 New Car Registrations
• Italy Trade Balance
• Eurozone Trade Balance & CPI
• US state employment

 

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 12th April 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. 

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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. 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.