Day: 8 June 2021

Elga Bartsch, Head of Macro Research together with Wei Li, Global Chief Investment Strategist, Scott Thiel, Chief Fixed Income Strategist and Nicholas Fawcett, Member of the Economic and Markets Research Group, 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.

We expect the ECB to maintain its current pace of asset purchases even as the economic restart gains traction. We wouldn’t view a decision to slow purchases as a hawkish policy signal, as the ECB is focused on keeping financing conditions easy. This, and a Federal Reserve that we see keeping policy easy, provides a positive backdrop for risk assets including European equities, in our view.

Sources: BlackRock Investment Institute, the Federal Reserve Board and Bureau of Economic Analysis, with data from Refinitiv, June 2021. Notes: The orange dots represent consensus expectations for ECB staff inflation projections due this month. Fed projections refer to the Fed’s Summary of Economic Projections from March 2021. Euro area headline inflation refers to the Harmonized Index of Consumer Prices (HICP).  U.S. core PCE inflation refers to the personal consumption expenditures price index, excluding food and energy.

 

Financing conditions in the euro area tightened late last year and in the first quarter of 2021, but have since stabilized and still appear supportive of growth. Yet the region’s inflation outlook – the primary consideration in the ECB’s policy decisions – remains weak. Consensus expectations see ECB staff projections due this week showing 2023 inflation still materially undershooting the bank’s target of below but close to 2%. In contrast, the U.S. core personal consumption expenditures (PCE) inflation – the Fed’s preferred inflation measure – has shot up above the 2% target. It will likely hover at or just above target over the next two years, according to the Fed’s latest Summary of Economic Projections. See the chart above. This underpins our expectation for the ECB’s policy support to stay put – regardless of its decision on the pace of asset purchases this week. In addition, we caution against reading too much into strong near-term growth data. We are experiencing an economic restart rather than a typical business cycle recovery; the usual business cycle playbook doesn’t apply, in our view.

We expect the ECB to maintain its current pace of asset purchases under the pandemic emergency purchase program (PEPP) this week, despite a likely upgrade to its growth projections. The central bank is squarely focused on maintaining easy financing conditions. An unwarranted tightening in financing conditions, partly as a result of rising U.S. bond yields earlier in the year, prompted the ECB to quicken the pace of its asset purchases in March. Since then, the euro area has been catching up on activity restart, amid still supportive financing conditions. 

Even if the ECB were to reduce its pace of asset purchases, we would view this as an operational decision rather than a policy decision. The ECB has committed to maintain its policy support for the duration of the pandemic crisis – at least until early 2022. Beyond that, we expect policy support to remain in place given an outlook that points to inflation staying far below target, with further asset purchases likely conducted through the extension of other asset purchase programs.

We see both the Fed and ECB likely upholding their accommodative policy stances. Inflation – not the near-term growth outlook – is key to the Fed’s rate outlook under its new policy framework, in our view. The strong activity restart in the U.S. has led to unusual supply and demand dynamics, and volatile near-term growth and inflation data. Long-term U.S. government bond yields have risen this year, but the rise has been more muted than typically seen in response to rising inflation and growth expectations in the past – in line with our new nominal investment theme that sees a lower future path of short-term interest rates than markets are pricing in even amid rising inflation. We don’t see the Fed discussing a tapering of asset purchases imminently – and a discussion later this year doesn’t mean a liftoff from near-zero policy rates is close, in our view. The case for tapering – or monetary policy normalization – in the euro area is even weaker, in our view.

The bottom line: We see the ECB’s commitment to accommodative policy as supporting our pro-risk stance over the tactical horizon as the reopening broadens out. We upgraded our tactical view on European equities to neutral in February, and are seeing more reasons to be optimistic about this asset class for the next six to 12 months. Yet we see a risk that markets could misinterpret an operational decision to slow the pace of purchases as a more hawkish view on policy stimulus, and we would view any spread widening in euro area peripheral bonds in such an event as a buying opportunity.

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 June 3, 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.

U.S nonfarm payrolls growth picked up in May, albeit by less than expected. 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 Fed faces a very high bar to change its easy monetary policy stance.

Week Ahead

• June 9  – China inflation
• June 10 – ECB monetary policy meeting; U.S. consumer price index
• June 10-17 – China total social financing and new yuan loans
• June 11 – University of Michigan Surveys of Consumers

Markets will focus on U.S. inflation data, in addition to the ECB’s policy meeting. A high core CPI number – after a much stronger-than-expected 3% reading in April – could fuel more talk of the Fed tapering asset purchases, though we don’t see the Fed discussing a potential tapering imminently.

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 June 7th, 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

Global equities traded higher again last week with both the STOXX Europe 600 Index and the S&P 500 Index making new all-time highs. Improving macro data and continuously dovish central banks have kept equity markets well supported. However, volumes were poor last week with the US and UK market holidays last Monday setting the tone. For example, STOXX Europe 600 Index volumes were down 25% on the week.

There was a general lack of market catalysts out there, allowing markets to grind higher, following the same path they have set in recent months. The MSCI World Index closed the week up 0.6%; regionally, the STOXX Europe 600 Index closed up 0.8%, the S&P 500 Index closed up 0.6%, whilst the MSCI Asia Pacific Index closed up 1%. Cyclicals did well overall, with macro data supportive following upward revisions in the Eurozone Purchasing Managers’ Index (PMI) and further acceleration in the US Institute for Supply Management (ISM) indices. Oil prices rallied with focus on falling inventories and with the Organization of the Petroleum Exporting Countries (OPEC) bullish on demand while maintaining discipline on increasing supply.

COVID-19:  Positive Signs, but Still a Risk

The push and pull we have recently seen in markets on the back of reopening headlines was evident again last week. In the United Kingdom, the lockdown exit in England that was scheduled through June received a bit of a blow as ministers questioned whether a full reopening on 21 June was sensible, given the recent rise in cases. Scientists who brief the government remain split on whether this reopening should be delayed. Combining that with the news that Portugal would be removed from the UK’s “green list” for quarantine-free travel, businesses and investors had reason for increased concern.

Prime Minister Boris Johnson had previously said that any loosening of restrictions would be irreversible. Whilst the data is showing a notable increase in cases, the number of daily deaths remains at relatively low levels. The average age of those testing positive for COVID-19 in the United Kingdom is 29, the youngest yet recorded. This is down from age 35 at the beginning of April and 41 at the start of the year. The latest figures show that half of UK adults have received both doses of a COVID-19 vaccine. The milestone came on 3 June, a day after the UK government announced that three-quarters of adults had received their first dose. Indications show that the vaccination programme continues to have a material impact on serious illness resulting from COVID-19.

The vaccination programme is also picking up in continental Europe. At the start of April, Germany had administered 17 vaccines per 100 people, and the number rose by the end of May to 60 vaccines per 100 people. France (17 to 54) and Italy (17 to 57) saw similar increases over the same period. The schedule of vaccine deliveries points to further rapid progress ahead. There was a report last week which noted that the European Union (EU) has proposed to lift all quarantine requirements from 1 July for those who are fully vaccinated against COVID-19.

The market continues to react to specific headlines and announcements, rather than the reopening trade as a general theme. For example, European airlines sold off last week following the United Kingdom’s removal of Portugal from the green list, and the Credit Suisse European Airlines Index closed the week down 3.5%. More generally, the Goldman Sachs Stay at Home basket outperformed last week, up 1.4%, but the equivalent Going Out basket was also up 0.2% with the latest headlines regarding the Delta variant in the United Kingdom failing to spook investors just yet.

UK Economy: “Eye popping” Growth

UK macro data continues to reflect a sharp bounce back in the recovery, with the UK Services Purchasing Managers’ Index (PMI) showing the fastest growth in 24 years (62.9 actual vs. 61.8 estimated). According to IHS Markit (who produce the PMI data), “the rollback of pandemic restrictions unleashed pent-up business and consumer spending” and points to an “eye-popping” rate of UK gross domestic product (GDP) growth in the second quarter. In addition, the UK May jobs report showed the fastest growth in permanent and temporary placements in 20 years, the strongest wage growth in three years and the sharpest fall in candidate availability in four years. Also, only 8% of the UK business workforce are on furlough now.

Meanwhile, UK consumer finances continue to improve. The Bank of England’s (BoE) figures last Wednesday showed consumers continued to pay off significant amounts of debt since the start of the crisis. Net lending for consumers fell by GBP400 million in April, while households deposited a further GBP10.7 billion in banks and building societies.

The UK Housing Market is also Surging

UK house prices rose by 10.9% year-on-year to May 2021 and there were strong UK property sales, with UK mortgage approvals rising unexpectedly in April from the previous 83,000 to just under 87,000, above the consensus of 81,000. These figures add to the strength in the housing market as the UK government extended the stamp duty holiday on home purchases, fueling a surge in property prices. The BoE has said it is watching this closely. Deputy Governor Dave Ramsden said, “there’s a risk that demand gets ahead of supply and that will lead to a more generalized pick-up in inflationary pressure…that’s something we are absolutely going to guard against.”

European Impact from Retail Volatility?

Last week’s volatility in the heavily shorted so-called US “meme” stocks has not filtered through to European markets in a meaningful way as yet. Research from Cowen compared baskets of the most shorted stocks in the United States and Europe, noting that last Wednesday the United States basket traded +7.5% (AMC +95%) while European shorts were essentially flat. Indeed, their European “most shorted” basket has seen muted performance for a couple of months. However, in January we also saw US retail investors play a few European names (notably Nokia and Volkswagen) via their American depositary receipts (ADR). Volume in Nokia ADR was elevated last week (2x adv on Tuesday) suggesting some impact. This dynamic will be closely watched for any material impact over the coming weeks and months.

In terms of how prevalent retail investing is in Europe, it does appear to be on the increase.

Week in Review

Europe

European equities treaded water for most of last week and ahead of the Friday release of the May US employment report. Stocks in Europe, now the outperforming region year-to-date, were resilient, with the STOXX Europe 600 Index closing the week up 0.8%. We were very light on broader macro themes through most of the week; however, as noted, we have seen focus shift back to COVID-19 recovery somewhat, with a few announcements this week providing some push and pull for markets.

In terms of the country indexes, the Italian FTSE MIB Index led the way, up 1.6%, helped by outperformance from some of its heavyweight constituents. Conversely, Spain’s IBEX 35 Index lagged last week, down 1.5%, weighed by underperformance in its own heavyweights.

In terms of sectors, the automobiles outperformed last week, up a notable 5.3%, making it the best sector year-to-date in Europe. The sector was helped by cyclical outperformance and with chip shortage fears subsiding somewhat. Oil and gas stocks were also strong in Europe, up 2.7%, with oil prices breaking higher. Brent broke through US$72 for the first time in over two years. The notable laggard last week was utilities, down 2.4%, the worst performer year-to-date, with the defensives unfavoured once again in Europe. Overall, it was another big week for inflows into European stocks, with data showing another US$2.3 billion into equities in the region.

In Germany, the ruling Christian Democratic Union (CDU) partly surpassed expectations (based on polling) over the weekend and won the Saxony-Anhalt state election with 37% of the vote. Renewables traded lower at the start of this week, as the strong performance from the CDU suggests a Green victory in September national elections is less likely. Some recent polls had given the Greens a national lead.

United States

Like in Europe, it was a very quiet week for US markets as equities continued to trade in a narrow range with very few developments surrounding the high-profile themes. All the major indices had very similar moves, with the S&P 500 Index up 0.6%, the Dow Jones Industrial Average up 0.7% and the Nasdaq Composite up 0.5%. Much of the focus was anticipation of the May employment report, released on 4 June. Non-farm payrolls came in at 559,000, which was lower than expected. It shows that the US economy still has a long way to go to recover the 7.6 million jobs lost since February 2020. Following the employment report, the consensus view was that the Fed’s reinsured dovish commentary is leading the market for now.

The cyclicals outperformed overall as the data continues to point to a strong economic rebound. The ISM Manufacturing Index rose to 61.2, whilst new orders came in at 67.0, both better than expected. With West Texas Intermediate (WTI) up 5% on the week, US energy stocks were strong, up 6.7%. The defensives also lagged stateside, with health care down 1.2%.

The Federal Reserve’s Beige Book report showed the US economy growing at a “moderate pace” during the observation period of early-April to late-May. The report showed that “overall price pressures increased further since the last report. Selling prices increased moderately, while input costs rose more briskly.” The report also indicated that final goods prices may increase in the coming months as it cited “strengthening demand…allowed some businesses, particularly manufacturers, builders, and transportation companies, to pass through much of the cost increases to their customers.” The Federal Reserve also found increasing wages in some industries, with wage growth increasing moderately. Markets were largely unchanged following the release, as much of this was known from various sources already.

It was also interesting to see how US credit card balances and personal income have been transformed through the pandemic. Not only are credit card balances down significantly, but personal income in the United States has risen sharply, suggesting Americans have more room to spend as the country emerges from the pandemic.

Tax issues remain a major overhang for the market, but there did seem to be a step back from previous proposals. There were media reports that US President Joe Biden may drop plans for a 28% corporate tax rate to finance an infrastructure bill and to find a bipartisan solution. This of course comes at a time when G7 leaders are near to agreement on a 15% global minimum corporate tax rate, which would end decades of countries undercutting each other in the race lower and will also help countries pay for the colossal COVID-19 bills that governments now face.

Asia and Pacific

Last week saw a mixed bag in terms of performance in Asian equity markets. Australian equities performed well, up 1.6%, as the basic resources stocks rallied. In addition, the Reserve Bank of Australia (RBA) kept interest rates on hold at 0.1%, saying the economic recovery has been stronger than expected, but the pandemic continues to cloud the outlook, It kept the cash rate on hold at 0.1% and said it will discuss the three-year yield target and the case for further quantitative easing in July.

Korean equites also rose, with the benchmark index up 1.6%. South Korea’s inflation data showed a rise of 2.6% in May, its highest level since 2012. This marked the second month the headline inflation exceeded the central bank’s 2% target.

In China, performance was more muted, with the Shanghai Composite down 0.2%. There were some negative COVID-19 headlines, as China put Guangdong under partial lockdown due to a fresh outbreak. In terms of Chinese macro data, the Caixin May PMI Manufacturing came in with a reading of 52.

US-China ties were in focus as Chinese Vice Premier Liu He had a meeting via video conference with US Treasury Secretary Janet Yellen. According to the Chinese press, “The two sides believe that China-US economic relations are very important.” In addition, US Trade Representative Katherine Tai and China’s Vice Premier Liu He had a “candid” first conversation, according to China’s Ministry of Commerce.

Japanese equities lagged, down 0.7% last week. Focus remains on the upcoming Tokyo Olympics, with a number of sponsors suggesting the games should be postponed. Aside from that, after a very slow start the vaccine rollout has picked up pace, which is encouraging. Of the Japanese population, 11% have now received at least one vaccine dose. Furthermore, the Japanese government eased some restrictions for department stores and movie theatres last week.

Macro Week Ahead Highlights

At the start of this week, China trade balance data was announced. May exports grew 27.9% year-on-year and imports 51.1%. Outside of that, the European Central Bank (ECB) announcement on Thursday will be a focus as the central bank gears up for a major decision on asset purchases. Meanwhile, we have German Industrial Production (IP) data and the ZEW survey on Tuesday, and Chinese Consumer Price Index (CPI) on Wednesday. UK gross domestic product (GDP) and industrial production (IP) and US Consumer Confidence on Friday will all be in focus.

Monday 7 June

• Germany factory orders
• Spain industrial output
• US consumer credit
• China trade balance

Tuesday 8 June     

• Germany IP and ZEW survey
• France trade balance
• Eurozone GDP
• US trade balance
• Japan GDP and trade balance

Wednesday 9 June

• Germany trade and current account balance
• China CPI

Thursday 10 June

• France industrial and manufacturing production
• ECB main refinancing rate
• ECB deposit facility rate
• US CPI and weekly jobless claims
• US federal budget

Friday 11 June     

• UK monthly GDP and IP and trade balance
• Spain CPI
• Italy quarterly unemployment rate
• US consumer confidence

 

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 7th June 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.