Day: 27 April 2021

Jean Boivin, Head of the BlackRock Investment Institute together with Wei Li, Global Chief Investment Strategist, Elga Bartsch, Head of Macro Research and Scott Thiel, Chief Fixed Income 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.

A powerful economic restart is underway in the U.S. – with Europe and emerging markets (EMs) set to follow. At the same time our new nominal theme has been playing out, with a hefty jump in inflation expectations but a more muted rise in nominal yields. Against this backdrop, we reiterate our pro-risk stance and refine our tactical views in response to adjustments in market pricing and valuations.

Forward looking estimates may not come to pass. Sources: BlackRock Investment Institute, Federal Reserve, and Reuters News, with data from Haver Analytics, April 2021. The charts show the level and estimates of U.S. GDP over time for the global financial crisis (GFC) and the Covid-19 shock. Both series are rebased to 100 for the year prior to the shock – 2007 and 2019. Estimates are from the Fed’s Federal Open Markets Committee’s Summary of Economic Projections published through 2008 on the left and 2020-21 on the right. The level of GDP is derived from the FOMC’s forecasts of GDP growth from the fourth quarter of the prior year to the fourth quarter of the current year. Early estimates are as of Jan 2008 for GFC (June 2020 for Covid); later estimates as of Nov. 2008 (Mar. 2021 for Covid).

 

We are at an uncertain juncture in markets. Investors are grappling with how to interpret unusual growth dynamics and new central bank frameworks. On the first, U.S. activity looks set to restart strongly this year, powered by pent-up demand across income cohorts and sky-high excess savings. Growth forecasts have been catching up, as the chart above shows, but the magnitude of the restart may still be underappreciated. This is in stark contrast to the repeat growth disappointments seen after the global financial crisis – and reflects the different nature of this shock. We see it as more akin to a natural disaster followed by a rapid “restart” – rather than a traditional business cycle recession followed by a “recovery.” This is why a year ago we warned against extrapolating too much from the steep decline in activity. Now the same is true – but in reverse. U.S. growth will likely peak over the summer but the eye-popping data will be transient: the more activity is restarted now, the less there will be to restart later. We see the rest of the world following the U.S. and reopening as vaccine rollouts pick up pace.

The second dynamic investors are grappling with is new central bank frameworks. Our new nominal theme helps us navigate this environment. The Federal Reserve is building credibility in its new framework and has set a high bar to change its easy policy stance, even in face of higher realized inflation. This has yet to be fully digested by markets, in our view. We see markets still underestimating the potential for the Fed to achieve above-target inflation in the medium term as it looks to make up for persistent undershoots in the past. This is why we think the direction of travel for yields is higher. But we believe the overall adjustment will be much more muted than one would have expected in the past based on growth dynamics – and much adjustment has already taken place.

As a result of these two key dynamics, we maintain our pro-risk tactical view. We remain overweight equities, neutral credit and underweight government bonds on a tactical basis. Yet we have tweaked some of our tactical views given significant moves in market pricing. For example, 10-year Treasury yields have more than tripled from last year’s lows around 0.5%. This leaves less room for further rises in yields on a tactical horizon, in our view. U.S. inflation expectations also have come a long way since we moved to an overweight in U.S. Treasury Protected Securities (TIPS) early last year. As a result, we are trimming our tactical underweight to U.S. Treasuries and closing our overweight in TIPS – even as we see room for yields to push higher and inflationary pressures to build further in the medium term. In a world starved for income, we have upgraded EM local currency debt on attractive valuations and the prospect of a stable dollar as the restart broadens, prefer high yield over investment grade credit and see opportunities in private markets. Within equities we express our pro-cyclical stance through overweights to EM and U.S. small caps as beneficiaries of the vaccine-led restart.

Bottom line: The broadening restart – coupled with our belief that this will not translate into significantly higher rates –  underpins our pro-risk stance. Risks remain, however, on the tactical horizon. One is a market overreaction to exceptional growth data in the months ahead. We may see bouts of volatility as markets test the Fed’s resolve to stay “behind the curve” on inflation. Any temporary spikes in rates may challenge EM assets in particular, but we advocate staying invested and looking through any turbulence as our “new nominal” plays out. Want to know more? BII’s Global Outlook (GO) meeting on April 27 is a chance to hear from us directly and ask questions. Contact your BlackRock relationship manager for details.

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 22, 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 USA Index, MSCI Europe 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.

A decline in U.S. Treasury yields and strong corporate earnings are providing some support to equities. Some 87% of S&P 500 companies have beaten estimates for the first quarter, with just under one-fifth having reported, Refinitiv data showed as of Thursday. The five largest S&P 500 companies report this week. The Bank of Canada last week said it would start to taper down its asset purchases, becoming the first major central bank to signal an exit from quantitative easing. This comes ahead of a Federal Reserve policy meeting where the central bank is likely to reiterate its desire to stay “behind the curve.”

Week Ahead

• April 27 – Bank of Japan policy decision
• April 28 – U.S. GDP (advance)
• April 29 – U.S. FOMC policy decision; President Biden address to joint session of Congress
• April 30 – Japan and China manufacturing PMIs; euro area preliminary GDP

The FOMC policy meeting will be in focus this week. Our new nominal theme that nominal yields will be less sensitive to expectations for higher inflation was confirmed by the Fed in the last policy meeting, a clear reaffirmation of its commitment to be well “behind the curve” on inflation. Elsewhere, U.S. President Joe Biden is expected  to make the case in an address to Congress for a more than $2 trillion infrastructure package as well as accompanying tax reforms that would partly fund it.

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 April 26th, 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. 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 globally were lacklustre last week, with Europe underperforming amidst a position-driven selloff. The STOXX EUROPE 600 Index closed down 0.8% on the week, the S&P 500 was down 0.01%, and the MSCI APAC Index down 0.24%. Outside of the obvious continuing focus on the pandemic and vaccine rollouts, there was little in the way of broad market themes, which in turn saw focus shifting to technical factors and company specifics amidst the first-quarter earnings season.

European Positioning Drives Underperformance

European equities traded lower after a sharp reset earlier in the week, which saw the STOXX EUROPE 600 Index trade down as much as 1.9% on Tuesday, 20 April. Positioning was thought to be behind the move in the absence of other clear market drivers and after seven straight weeks of gains for European equities, valuations were beginning to look stretched.

Subdued market volumes also likely exacerbated the move. The reopening trade came under pressure again as COVID-19 cases exploded in India and and there was little sign of any dramatic improvement in Europe, although the vaccine rollout is picking up pace with Germany nearly doubling its efforts. With focus on the risks, the Goldman Sachs ‘Going Out’ basket was down 2.4%—representing 20% of its year-to-date gains.2 UK reopening stocks were also weaker but did outperform their global peers, still pricing in better vaccine progress. The reflation trade was heavy, whilst it appears the bond selloff may have run out of steam.

Defensives outperformed, with the move again likely driven by a reversal of the overextended positioning in the cyclicals. The more technical nature of the selloff was clear to us, as the move was largely contained to Europe equities and markets subsequently stabilised throughout the week.

Data Point to Recovery

Despite the lacklustre equity performance, the macro picture was encouraging last week. Eurozone Purchasing Managers’ Index (PMI) data showed a return to expansion in the services sector for the first time since July 2020. New orders and employment also improved, according to the composite reading.

We can expect a further boost to Europe soon after Germany removed its opposition to the EU Recovery Fund package last week. This should mean we see the first payments as early as July. Earnings in Europe have generally been supportive so far, with the pace of releases picking up this week. Refinitiv IBES data highlighted that European earnings are expected to have risen a record 61% on aggregate in the first quarter of 2021. The US composite PMI reading was the highest since records began in 2009.

It was a busy week for UK data, with signs pointing towards a strong economic recovery as the vaccine rollout progresses and lockdown restrictions begin to lift. The high level of excess savings and record household net wealth set the stage for this recovery to continue at pace. Retail sales rose 5.4% in March, well ahead of the 1.5% expected and 1.6% above pre-pandemic levels.

Hiring also accelerated at the fastest rate since 2017, driven largely by new recruitment (not just workers returning from furlough). Consumer demand surged in April, pushing the services PMI comfortably into expansionary territory at 60.1, the highest level in almost seven years.

The manufacturing PMI reading was also close to a record high at 60.7. Consumer confidence rose to its highest level since the first lockdown and industrial production was ahead of expectations. Headline inflation rose to 0.7% in March vs. 0.4% in February. While slightly lower than expected, it is still welcome after the value-added tax cut in the hospitality sector and as depressed oil prices pushed inflation towards zero in 2020.

It’s worth noting that the UK’s response to the pandemic has pushed UK borrowing to the highest level seen since the Second World War. The UK borrowed £303.1 billion in the 12 months ending this March, an increase from £57.1 billion the prior year. That said, the figures published last Friday were not as bad as had been anticipated.

Week in Review

Europe

As we’ve discussed, European equities were broadly lower, with just Spain holding up and managing to close the week near flat. Equities in Italy underperformed, with the FTSE MIB Index down 1.5%.  Germany’s market closed down 1.2% and the UK FTSE 100 declined 1.2% as the pound gained 0.32% vs. the US dollar.

Renewables stocks finished the week on a positive note, bouncing back on Earth Day (22 April), but the sector performance remains very choppy. Sector divergence widened again after being tight the prior week, with the defensives outperforming the cyclicals. Food & beverage and health care were among the outperformers, trading higher. Technology stocks also rose as the week went on, and finished with mild gains. At the other end of the spectrum, autos declined, not helped by the cyclical underperformance and some single-stock weakness following strong runs into earnings releases. The financial services and banks also weakened.

The European Central Bank (ECB) meeting was a ‘nothing done’ event and provided little insight regarding any change to purchase pacing in June. ECB President Christine Lagarde did say she felt European and US economies are ‘not on the same page’, explaining that she did not see the ECB and The Federal Reserve (Fed) acting in unison.

United States

US equities closed lower last week despite a late rally on Friday, with the S&P 500 Index and Dow Jones Industrial Average both closing down. The tech-heavy NASDAQ Index also closed lower on the week. For the first time since December, the US dollar was weaker for the third straight week. Earnings were firmly in focus for investors as first-quarter reporting continues apace.

Like Europe, positioning was a key talking point last week in the United States, which saw choppy trading patterns. The CBOE VIX Index was up 6.6% on the week. The climate agenda was also in focus as the US pledged new, stronger targets. Potential tax increases were also a talking point stateside, with President Joe Biden’s infrastructure plan to be funded partly by near-doubling of the capital gains tax for Americans earning over US$1 million.

Momentum stocks sold off last week, and in terms of sectors, the year’s outperformer, energy, lagged (down 1.8% on the week), but is still up 25.4% year-to-date. Meanwhile, defensive plays outperformed on the week, with real estate investment trusts (REITS), and health care closing higher.

US economic data was strong last week as sentiment continues to improve around a successful vaccine rollout and as the economy picks up steam as a result. The US Composite PMI report came in at 62.2 for April (vs. 59.7 prior), marking the highest reading since records for the data series began in 2009. The components were also stronger, with services at 63.1 and manufacturing at 60.6. Sentiment was helped further at the end of the week after the US Food and Drug Administration (FDA) said on Friday that the Johnson & Johnson vaccine could resume being administered in the United States, as the benefits outweigh the risks.

US markets sold off last week on Thursday following a rise in fears over tax hikes, as noted. Biden is considering several tax increases on wealthy Americans, including the significant hike in the capital gains tax for those earning over US$1 million, to pay for an increase in funding for childcare and education. The economic package, which is worth more than US$1 trillion, could be announced this week, when Biden is scheduled to address a joint session of Congress for the first time since becoming president. The tax increases would reverse some of the tax cuts made by Biden’s predecessor back in 2017 and are in line with campaign pledges made, which targeted Americans earnings over US$400,000 per year.

Approximately 25% of S&P 500 companies have now reported first-quarter earnings, and have shown earnings growth of 33.8%, which would be the highest since the third quarter of 2010. Earnings are running 23.6% above estimates with 94% of companies beating expectations; both metrics are at new highs since FactSet records began in 2008. Blended revenue growth is at 7.5%, which is the highest since the third quarter of 2018. It’s another big week of earnings this week, with 179 companies in the S&P 500 reporting.

APAC

Last week was mixed for Asian equities, with COVID-19-related headlines in the region dominating. Chinese equities did outperform, although they have been somewhat rangebound in recent weeks and trading volumes have been lacklustre), so conviction seems muted for now.

Meanwhile, Japan’s Nikkei fell -2.2%, as Japanese Prime Minister Yosihide Suga recommended a State of Emergency for Tokyo and some other regions due to COVID-19 numbers. With this news, questions over viability of the Olympics going ahead this summer inevitably become a focus.

Clearly, the desperate COVID-19 situation in India also dominated and the Indian equity market was down 1.9%. With India setting new records for daily cases and the health care system at breaking point in the worst-affected regions, it’s inevitable that lockdown measures will continue to be extended, and hopes for economic growth will be revised lower.

There was some positive news regarding the fight against COVID-19 in Asia, however, with a quarantine-free air travel bubble between Hong Kong and Singapore starting on May 26, following setbacks that led to the plan being delayed last November.

Tensions with China and Australia continue to simmer, after Australia scrapped Victoria’s ‘Belt and Road’ agreements with China, prompting harsh words from Beijing. The Chinese Belt and Road initiative invests in infrastructure projects globally.

Finally, it was interesting to see the Financial Times highlight that retail investors in South Korea are becoming an increasingly important factor for the equity market, suggesting they account for almost 60% of flows there. In addition, the article suggests the retail investing lobbying group had convinced the regulator to maintain the short selling ban which has been in place since 2019, something that is seen as another factor behind the strong gains for Korean equities. However, this short selling ban is now due to end in May, so any impact from that will be closely watched.

Week Ahead

In Europe, earnings season will continue to be in focus alongside a number of macro releases including the eurozone economic survey on Thursday and eurozone inflation and Gross Domestic Product (GDP) data on Friday. In the United States, the focus will be Wednesday’s Federal Open Market Committee meeting and subsequent press conference. Note: Fed Chair Jerome Powell has said policymakers are in no hurry to withdraw support even as the US economy rebounds. We get US GDP data on Thursday.

In the APAC region, we get the Bank of Japan (BoJ) interest-rate announcement on Tuesday as well as China PMI data on Thursday and Japan industrial production data on Friday. The dire COVID-19 situation in India will of course continue to dominate headlines in the region.

It’s also a busy week for earnings in the United States, with a number of heavyweights reporting. Tesla kicks off the week, then tech takes over tomorrow with Alphabet, Microsoft and AMD posting results; Facebook and Apple follow on Wednesday. Twitter, Amazon and Samsung Electronics close out the week.

Monday 26 April:

• German Ifo Survey
• Spain PPI
• ECB Chief Economist Philip Lane is due to make a keynote speech at the European Statistical Forum
• US: March preliminary Durable Goods, April Dallas Fed

Tuesday 27 April:

• Riksbank interest-rate decision
• Sweden unemployment rate
• Italy: (April) Consumer Confidence, Manufacturing confidence, Economic Sentiment
• Riksbank’s Deputy Governor Anna Breman speaks
• Switzerland Credit Suisse Survey Expectations
• US: April Conference Board Consumer Confidence, April Richmond Fed Manufacturing

Wednesday 28 April:

• Germany: May Gfk Consumer Confidence
• France: April Consumer Confidence
• US: March preliminary Wholesale Inventories
• FOMC meeting; interest-rate announcement & Jerome Powell press conference

Thursday 29 April:

• Spain Harmonised Index of Consumer Price (HICP) inflation
• Sweden first-quarter GDP Indicator
• Germany HICP Inflation
• Turkey Inflation Report
• ECB’s Holzmann speaks
• US: first-quarter, advance GDP, PCE, Personal Consumption, April 24 Initial Jobless Claims, March Pending Home Sales

Friday 30 April:

• France/Spain/Germany/Italy/Euro-area first-quarter GDP
• France Consumer Price Index (CPI) inflation
• Euro-area Flash CPI inflation
• Italy CPI inflation
• US: March Personal Income & Spending, March PCE Deflator, April MNI Chicago PMI

 

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 26th 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. 

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. 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.