Day: 25 May 2021

Wei Li, Global Chief Investment Strategist together with Teddy Bunzel, Director of External Affairs, Elga Bartsch, Head of Macro Research and Catherine Kress, Advisor to the Chairman, 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.

Market attention to geopolitical risks has fallen to four-year lows. We believe this is justified, as investors appear more focused on the economic restart and inflation outlook and less concerned about geopolitics since the change in U.S. administration. Yet it’s worth watching specific risks as flareups can catch investors off guard when attention is low.

Forward-looking estimates may not come to pass. Source: BlackRock Investment Institute, May 2021. Notes: The BlackRock Geopolitical Risk Indicator (BGRI) tracks the relative frequency of brokerage reports (via Refinitiv) and financial news stories (Dow Jones News) associated with specific geopolitical risks. We adjust for whether the sentiment in the text of articles is positive or negative, and then assign a score. This score reflects the level of market attention to each risk versus a 5-year history. We use a shorter historical window for our COVID risk due to its limited age. We assign a heavier weight to brokerage reports than other media sources since we want to measure the market’s attention to any particular risk, not the public’s.

 

Our dashboard gauges market attention to overall geopolitics and to each of our top-10 risks by tracking the relative frequency of brokerage reports and financial news stories associated with the risks through BlackRock Geopolitical Risk Indicators (BGRIs). The global BGRI score has been trending down in the past year because of fading attention to risks such as U.S.-China strategic competition, Covid-19 resurgence and Gulf tensions. It has hovered in negative territory this year, as the chart shows, meaning market attention to geopolitical risks is below the average of recent years. Overall, this indicates a significant reduction in concern about geopolitical risk since the change in U.S. administration. Our dashboard also provides BlackRock’s fundamental assessment of the likelihood of each risk materializing in the near term. We also introduce a new quantitative measure that seeks to gauge how similar the current market environment is to our estimate of market movement in the event the risk materialized.

We introduce four new risks in the dashboard: Covid-19 resurgence, Emerging market political crisis, Global technology decoupling and Climate policy gridlock. Market attention to Covid-19 resurgence appears low, but we assign medium likelihood to this risk; attention to Emerging market political crisis is relatively elevated, yet we see a low likelihood. We see a  high likelihood that decoupling of the U.S. and Chinese tech sectors accelerates in scale and scope, despite the relatively low attention to the Global technology decoupling risk. The pace of global reshoring of technological supply chains has sped up, potentially increasing production costs. This supports our view that markets are underpricing medium-term inflation risks. The Biden administration is continuing its predecessor’s posture of intense rivalry with China, with a focus on critical technologies, and China has made tech self-reliance a top priority. We believe it’s key to invest in both these poles of global growth, as detailed in The role of Chinese assets. U.S.-China tensions over Taiwan have been rising. We do not see near-term risks of military showdown but believe there is a significant medium- and long-term threat.

Climate policy gridlock refers to the risk that developed economies fail to increase public investment and regulatory action to achieve their goals to reduce carbon emissions. Attention to this risk appears low, as reflected in our BGRI, in line with our assessment of a low likelihood. We believe avoiding climate-related damages will help drive growth and improve risk asset returns, and have included the effects of climate change – and a climate transition – in our long-term return assumptions.

In some cases our dashboard reveals a disconnect between market attention and our fundamental analysis. Two examples: First, attention to Major cyberattack(s) risk has receded from a 2020 peak yet we see a high likelihood of this risk occurring. The recent hacking of a U.S. oil pipeline – and its impact on energy markets – highlights the risk. Second, market attention to a potential North Korea conflict is well below the historical average, but we rate the likelihood of the risk as “medium” – and see tensions as likely to increase heading into 2022. North Korean provocations, including long-range missile tests and potential for a nuclear test, could trigger a possible escalation.

The bottom line: We see a relative decrease in market attention to geopolitical risks as justified, particularly in light of powerful key near-term market drivers such as the economic restart and inflation outlook. We remain pro-risk, but note that geopolitical risk flareups could have an outsize impact when markets least expect it.

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 May 20, 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, Bank of America Merrill Lynch Global High Yield Index, ICE U.S. Dollar Index (DXY), spot gold, J.P. Morgan EMBI index, Bank of America Merrill Lynch Global Broad Corporate Index, Refinitiv Datastream Italy 10-year benchmark government bond index, Refinitiv Datastream Germany 10-year benchmark government bond index and Refinitiv Datastream U.S. 10-year benchmark government bond index.

Market inflation expectations eased last week, driven partly by a sharp drop in crude oil and broad commodity prices – after the U.S. consumer price index (CPI) surged by more than expected in April. Economic data have been erratic, and we expect more of the same as economies restart amid pent-up consumer demand and supply shortages. We advocate looking through near-term market volatility and remain pro-risk, predicated on our belief that the Federal Reserve faces a very high bar to divert from its new policy framework to keep yields low.

Week Ahead

• May 25  – Germany ifo business climate survey; U.S. consumer confidence
• May 27 – Japan consumer price index, jobs report
• May 28 – U.S. personal income and outlays, including PCE inflation

U.S. consumer data and PCE inflation will be in focus this week. PCE inflation, the Fed’s preferred inflation gauge, is expected to increase 2.8% in April – above the Fed’s 2% inflation target. Personal consumption expenditures will provide clues on household spending and saving decisions after the last round of stimulus checks.

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 May 24th, 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

The MSCI World Index traded up 0.2% last week, but this doesn’t tell the full story of what was an unsteady week for equity markets. Angst over familiar themes of inflation and central bank policy remains a key focus, thanks to the mid-week release of the Federal Reserve (Fed) minutes. Volatility in a number of asset classes, including cryptocurrencies, also unsettled investors at times. Looking at the regions, the S&P 500 Index lagged, down 0.4%, while Europe’s STOXX Index traded up 0.4% and the MSCI Asia Pacific Index outperformed, up 1.6%.

Transitory Inflation?

The debate around rising inflation and the potential impact on central bank policy has been the key driver for financial markets of late, and last week was no exception.

In the United States, the latest Federal Reserve (Fed) meeting minutes showed members felt the economy remained far from the committee’s maximum employment and price stability goals to make any policy changes. Risks to the outlook were no longer elevated as in previous months. On inflation specifically, policymakers said that after the current transitory effects of factors fade, generally expected measured inflation would ease.

Looking further ahead, the Fed expected inflation to be at levels consistent with achieving the Committee’s objectives over time. A number of members suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases. Some felt concerned about the upside risk to inflation should underlying drivers be more “persistent than expected”.

In Europe, European Central Bank (ECB) President Christine Lagarde played down talk of the ECB tapering its asset purchasing programme, stating it was “far too early and it’s actually unnecessary to debate longer term issues….policymakers need to provide the right bridge across the pandemic, well into the recovery”. She also played down current inflationary pressures, saying they are “of a temporary nature” and she feels inflation will “return to lower levels” next year.

Aside from central bank commentary, there was some inflation data last week, which saw increases. These included the Japanese April Producer Price Index (PPI) +3.6%; US Empire manufacturing prices paid hit 83.5 month-over-month (M/M) (record level); the Philadelphia Fed Index’s prices paid index hit the highest in 41 years; UK Consumer Price Index (CPI) +1.5% M/M, and house prices +10.2% year-over-year (Y/Y); Canadian April CPI +3.4% Y/Y.

Commodity prices declined last week (iron ore -5%, copper -3.7%, aluminium -4%, wheat -4.7%, soy -3.8%) with China vowing to curb “unreasonable” price increases. This helped ease some fears over input costs and with that, we did see some respite for growth stocks, which started to see some outperformance versus value, also a sign of easing inflation concerns.

Europe in Focus

It was quite interesting to see Europe’s equity benchmark (STOXX Europe 600 Index) has now sneaked ahead of the US S&P 500 Index, as well as the MSCI Asia Pacific and MSCI Emerging Markets Indexes as the best-performing year to date; this is the first time European equities have outperformed US equities over the first five months of a year since 2017. Signs of easing lockdowns, economic reopenings and a ramp-up in vaccination programmes have all helped boost sentiment for European equities.

The monthly Bank of America (BofA) Global Fund Manager Survey came out last week, and amid some decent performance vs. other regions, investors remain positive on European outlook. Of the respondents, 93% expect European growth to improve over the next 12 months, with fiscal policy deemed the most stimulative since 2010.

Inflation is seen as the biggest tail risk: inflation expectations remain elevated, with 82% of respondents believing inflation is set to rise over the coming 12 months, only moderately below the record 94% reached in March.

Investors polled in the BofA survey do not expect a peak for European equities until next year: only one out of 10 investors expect European equities to reach a peak this quarter, with a plurality thinking a peak is unlikely to be reached until next year.

We also saw some investment banks pushing European equities again, with drivers including positive economic momentum, more attractive valuations, stronger earnings growth and economic support from the EU Recovery Fund.

Week in Review

European Markets

A choppy week for European equity markets as the STOXX Europe 600 Index stalled after making all-time highs at the start of the month. As has been the way recently, it felt like we really took our lead from events in the United States rather than European- specific catalysts. Focus remains on inflation after the US data last week—last week, we had inflation data points from the European Union (EU) (CPI at 1.6% YoY) and the United Kingdom (CPI at 1.5% YoY).

With investor nerves rattled on Wednesday (19 May) after a global de-risking and a meltdown in cryptocurrency, it’s not surprising to see defensive names outperform in Europe (health care +1.7%, utilities +1.4%). Automobiles also fared well after positive commentary from Daimler.

The laggards were the basic resources (down 3.6% on the week) amid comments out of China on stabilising the market. Crude oil declined a bit as easing restrictions bring Iran came back on tap. Having said that, the sector is still a strong year-to-date performer.

European Data: Another Upside Surprise

Monetary stimulus, fiscal measures, and a pickup in demand globally continue to drive the recovery from the COVID-19 recession in Europe.  Outside of the inflation data, which was less exciting from Europe, the Purchasing Managers’ Index (PMI) for May were the focal point last week. Readings in the eurozone showed a speedy recovery in the services sector as well as impressive growth in manufacturing, with the manufacturing PMI remaining close to the record level hit in April.

Services hit a new 35-month high of 55.1, and as the vaccination effort continues to ramp up, we would anticipate further gains in the coming months. Demand is strong, with the increase in new orders accelerating to its highest reading since June 2006. The employment index was also better for the fourth consecutive month. The flash composite output PMI for the region came in well ahead of consensus, hitting a 39-month high at 56.9.

The UK picture was even better, with the composite output PMI for May hitting 62.0, its highest level since January 1998. This was from an already-elevated 60.7 in April and has benefited from a huge gain in the Manufacturing PMI, which hit a record 66.1 in May.

We also saw an impressive bounce in UK April retail sales. It will be interesting to see how central banks react, especially since there are signs that the recovery is creating capacity issues and causing disruption to supply chains, adding to pricing pressures. However, inflation pressures in the eurozone remain less severe than in the United States, meaning the ECB should still be able to move cautiously. As mentioned above, Lagarde again dismissed concerns over inflation, saying that inflationary pressures driven by the economic rebound were of a “temporary nature”.

United States

Volatility crept back into US equity markets last week with a variety of factors providing the push and pull. Inflation, COVID-19 case trends, economic reopenings, commodity price moves and the infrastructure bill have all been cited as drivers of market moves.

April Federal Open Market Committee (FOMC) minutes showed the Fed talked about tapering, though economists don’t seem to be changing their tapering timeline. Despite the volatility, the S&P 500 Index closed last week down just 0.4% after rallying in the latter half of the week and recovering most of its losses.

The CBOE VIX Index, a measure of market volatility, nearly hit 26 on Wednesday (19 May). US equities saw their smallest inflow in seven weeks of US$1.2 billion. On a sector basis, the defensives were among the outperformers last week with real estate investment trusts (REITs) up 0.9%, health care up 0.7% and utilities up 0.3%. At the other end, industrials and energy lagged, down 1.7% and 2.8% respectively, as commodity prices dipped.

The selloff in cryptocurrency also garnered attention, with Bitcoin -23% last week.

Potential tax increases to pay for US President Joe Biden’s US infrastructure plan remain a point of contention in the United States, with gaps between corporate rates across the globe also causing some friction.

The US Treasury Department stressed importance of multilateral cooperation to end the pressures of global corporate tax competition and corporate tax base erosion, underscored that 15% is a floor and that discussions should continue to be ambitious and push that rate higher.

Looking at the CNN Fear & Greed index as of 21 May, it suggests underlying market sentiment is not great and deteriorating, with a stronger FEAR reading versus the prior week.

Asia and Pacific

Asian equities were higher last week, with the MSIC Asia Pacific Index closing up 1.7%. Cryptocurrency, commodity prices and COVID-19 cases were the key themes for investors. In terms of sectors, consumer discretionary stocks were strong, up 3%, followed by technology, up 2.7%. Like in the United States and Europe, basic materials were weak and the only sector to close in the red in Asia, down 0.7% as commodity prices fell.

On Wednesday (19 May), the People’s Bank of China’s (PBOC) comments around the use of cryptocurrency garnered attention, sending the crypto market into a spiral. The PBOC issued a statement on its WeChat account reiterating digital tokens cannot be used as a form of payment. The Chinese government also warned financial institutions and payment providers against offering cryptocurrency services such as registration, trading and settlement. This marks the latest attempt by China to crack down on cryptocurrencies after shutting down its local exchange in 2017, and in 2019 blocking access to all domestic and foreign crypto exchanges.

Iron ore prices fell last week as China intensified efforts to rein in surging raw material prices. Chinese steel prices extended declines amid further government curbs.

The Week Ahead

Monday 24 May:

• Bank holidays in a number of European markets (including Germany and Switzerland).
• European Council leaders’ summit in Brussels
• Key speakers: Fed’s Loretta Mester, George and Raphael Bostic; Lael Brainard

Tuesday 25 May:

• German gross domestic product (GDP) and Institute for Economic Research (IFO) Survey
• Key speakers: Fed’s Randal Quarles gives semi-annual testimony before the US Senate Banking Committee; Bank of England’s (BOE) Silvana Tenreyro; Bank of Japan’s (BoJ) Haruhiko Kuroda; ECB’s Philip Lane

Wednesday 26 May:

• French Consumer Confidence

Thursday 27 May:

• US GDP
• Bank of Korea policy decision
• Chinese Industrial Profits

Friday 28 May:

• French CPI, PPI and GDP
• G7 finance ministers and central bank governors meet
• US President Joe Biden’s fiscal year 2022 budget request is scheduled for release

 

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 24th May 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.