BlackRock Commentary: Looking through near-term volatility

Jean Boivin, Head of the BlackRock Investment Institute together with Wei Li, Global Chief Investment Strategist, Elga Bartsch, Head of Macro Research and Vivek Paul, Senior Portfolio 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.

Investors are contemplating very different potential outcomes beyond the economic restart – leaving markets prone to overreacting to news flow, as we witnessed just last week. We see holding on to a clear medium-term anchor as crucial. The new nominal – a more muted monetary policy response to inflation than in the past – is for us such an anchor, and supports our pro-risk stance.

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Forward looking estimates may not come to pass. Sources: BlackRock Investment Institute, U.S. Bureau of Economic Analysis, Eurostat, Cabinet Office of Japan, China National Bureau of Statistics, with data from Refinitiv Datastream and Reuters News, July 2021. Notes: The chart shows actual GDP, and projections of GDP levels in different economies according to latest consensus estimates compiled by Reuters, with data rebased to 100 in Q4 2019. Solid lines represent published GDP data, and dotted lines show median consensus expectations.

 

The powerful restart is broadening, as we detailed in our 2021 midyear outlook. China’s activity levels already surpassed pre-Covid trend estimates within 2020. We see U.S. activity now back above pre-Covid levels, and restart momentum is now picking up in the euro area and Japan. See the chart above. We see the post-pandemic world as very different from the recovery after the global financial crisis that featured deleveraging, sluggish growth, low inflation and constant policy support. That support helped herald a decade-long bull market in both risk assets and bonds. By contrast, historic fiscal stimulus and innovative monetary policy in response to the Covid-19 shock make a repeat of the 10-year bull market in stocks and bonds unlikely, in our view. Our base case is the new nominal: We expect a higher inflation regime in the medium term – with a more muted monetary response than in the past. This should be positive for equities and neutral for bonds, in our view. Yet we also see the potential for other macro outcomes. In such a noisy and unprecedented economic restart, volatile data and market over-reactions are to some extent expected, in our view.

The new nominal is one of our three themes, along with China stands out and the journey to net zero. It is key to our tactical pro-risk stance and supports our strategic preference for equities over credit and bonds. Tactically we see potential for cyclical shares and regions to benefit from the broadening restart. We are turning positive on European equities – after having upgraded it to neutral earlier in the year when sentiment on this market was negative – and upgrading Japanese equities to neutral. Strategically we see the equity risk premium – our preferred gauge of equity valuations that accounts for interest rate changes – as in line with historical averages. This suggests equities are not overvalued, while credit spreads are near historically tight levels. We also see private market valuations supported in such an environment.

Our second theme – China stands out – stems from our belief it is time to treat China as an investment destination separate from emerging markets (EM) and developed markets (DM) as it is already a distinct pole of global growth. China’s central bank last week announced a decision to cut the reserve requirement ratio, or the amount of cash banks must hold as reserves, to support economic growth that appears to be losing steam. This came sooner than we had expected, yet we still believe the government will maintain its broadly hawkish policy preference to stay focused on the quality of growth. Together with the ongoing anti-monopoly clampdown, this supports our tactically neutral view on China equities and overweight on China bonds. We are positive on Chinese equities and government bonds on a strategic basis.

The journey to net zero is our third theme. We believe markets are underappreciating the profound changes coming, and the transition to net zero carbon emissions will create opportunities across investment horizons. Certain commodities, such as copper and lithium, will likely see increased demand along the journey, in our view. Yet we think it’s important to distinguish between the near-term drivers of commodity prices – such as the powerful restart – and the net-zero transition that will have implications on prices over the long term. Our climate-aware return assumptions sees a green transition to a low-carbon economy improving the outlook for growth and risk assets relative to a no-action scenario.

The bottom line: Investors shouldn’t be surprised by any near-term market whipsaw as volatility is expected to some extent under the unprecedented restart dynamics. We favor equities over credit and government bonds on both a strategic and tactical horizon, informed by our three investment themes. Read details in our 2021 midyear outlook.

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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 July 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 USA Index, MSCI Europe Index, MSCI Emerging Markets Index, ICE U.S. Dollar Index (DXY), Bank of America Merrill Lynch Global High Yield Index, 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 U.S. 10-year benchmark government bond index, Refinitiv Datastream Germany 10-year benchmark government bond index and spot gold.

Market backdrop

U.S. stocks rallied to record highs after selling off earlier in the week. U.S. government bond yields declined. In a noisy and unprecedented economic restart, volatility in data and market reaction is to some extent expected, in our view. China’s central bank unexpectedly announced a decision to cut the reserve requirement ratio, or the amount of cash banks are required to hold as reserves, effective on July 15. Yet we still believe the government will maintain its broadly hawkish policy preference as it focuses on the quality of growth.

Week Ahead

  • July 13 – U.S. consumer price index; China trade data
  • July 15 – China industrial output, retail sales and GDP
  • July 16 – Euro area inflation; U.S. retail sales, Univ. of Michigan Surveys of Consumers; Bank of Japan policy meeting

Investors will focus on a number of activity indicators for China and U.S. consumer inflation data. We will watch for signs of a slowdown in China’s data after the economy has come through the Covid-19 shock stronger than global peers. U.S. inflation is likely to remain high, even if price pressures brought on by the restart dynamics may ultimately prove to be transitory.


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 July 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. 

Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.


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Notes from the Trading Desk – Franklin Templeton

Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what their professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland, with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice.

The Digest

Last week saw global equity markets largely unchanged, there but was some notable volatility as markets saw sharp declines on Thursday. A few hawkish comments in the US Federal Open Market Committee (FOMC) June meeting minutes were blamed as a catalyst for US Treasury yields to tighten and for the move lower in equities. Aside from that, the spread of the COVID-19 Delta variant remains a concern for investors. On the week, the MSCI World Index was up 0.2%, the Eurostoxx 600 Index was up 0.2%, the S&P 500 Index was up 0.4% and the MSCI Asia Pacific Index was down 2%.

Hint of a Taper Tantrum on Thursday?

Equity markets continued their grind higher for much of last week, with the notable exception of Thursday’s session. The MSCI World index traded down 0.9%, the Eurostoxx 600 Index lost 1.7%, and the narrower Eurostoxx 50 Index fell 2.1%, closing below its 50-day moving average support for the first time since the end of January. US equities outperformed Europe on Thursday, albeit still lower, with the S&P 500 Index down 0.8%.

Thursday’s selloff appeared to be a culmination of a few factors currently causing investor nervousness. The June FOMC meeting minutes were released on Wednesday and noted, “various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings”. In addition, “A substantial majority of participants judged that the risks to their inflation projections were tilted to the upside”.  Whilst not that surprising, some suggest this was a touch more hawkish than expected.

It was quieter for macro data last week, but some weaker data points also weighed on sentiment. The ISM Services Index came in at 60.1, weaker than expected and lower than the prior reading of 64.0. The Markit PMI services index was revised lower, and May JOLT job openings report missed expectations, too.

In China, the Caixin Purchasing Managers Index (PMI) services component dropped to 50.3, weaker than expected and lower than the previous reading of 55. This has raised some concerns that we have reached “peak growth” and with the market pricing in a strong pandemic rebound, the bar for expectations looks high.

The COVID-19 backdrop is still a concern, with the Delta variant becoming more and more prevalent globally.

Finally, oil prices have moved lower, with the OPEC+ members beginning to squabble again on whether to extend the current oil supply cuts at the August meeting.

Moves in the bond market also added to the sense of concern, as the US 10-year Treasury yield broke through 1.3% on Thursday after having tested that level on Wednesday. The move in bond yields was accompanied by a strengthening in the US dollar through Wednesday and into Thursday, suggesting that it was more of a safe-haven move. However, these moves helped spook equity investors on Thursday.

Context is key. Even though we saw some selling pressure last week, it’s important to keep the moves in context. Whilst the S&P 500 Index did close lower Thursday, it had made new all-time closing highs the prior day. It’s also worth bearing in mind that coming into the start of the US week, the S&P 500 had been up seven sessions in a row. With earnings season looming large, some profit-taking in often-crowded positions is not too surprising. As we have said before, we expect market volatility around commentary to be a key theme in the second half of this year.

Concerns over Delta Variant

As we have mentioned in recent weeks, the rapid spread of the Delta COVID-19 variant is concerning some investors, as it threatens the improving economic outlook globally. Over the past five days, the Goldman Sachs EU reopening basket was down 4.1%. As cases rise, we have seen a number of countries reintroduce travel and social distancing restrictions. The rise of cases is particularly of concern in countries where the vaccination programmes lag the likes of the United States and United Kingdom.

In Europe, Germany and France warned their citizens against travel to Spain, where the coronavirus infection rate has surpassed Portugal to become the highest in mainland Europe. We also saw the Netherlands reintroduce restrictions on restaurants, etc., having removed them just two weeks ago. Note: Even though cases have increased in some areas, 44% of EU citizens are fully vaccinated, so significant progress has been made on vaccinations.

In Asia, we saw new restrictions across the region, with South Korea, Japan, Vietnam and Australia among those to extend lockdown measures.

The United Kingdom remains a crucial bellwether for the route out of the COVID-19 crisis. Daily cases continue to surge (now around 30,000 a day) and some suggest they could hit 100,000. However, the vaccination programme now has 66% of the adult population fully vaccinated and 87% of adults have had one dose. Whilst hospitalisations and deaths are edging higher, they are rising at a much slower rate than in previous waves.

In that context, the UK government continues to plan for most social distancing restrictions to be removed on 19 July. If the UK economy can fully reopen in the face of such a surge of cases, it sets a crucial precedent.

The Week in Review

Europe

The market went into risk-off mode through the middle of the week, with a number of factors at play. European equities were down just under 3% on Thursday, marking the weakest daily move on a percentage basis this year, before recovering some of the losses on Friday. Interestingly, in all 12 days where the Eurostoxx has been down by 1% or more this year, we have seen a positive move the next day, on average up 1%. With that, Stoxx 600 closed last week up 0.2%. In terms of the major country indexes, on a week of risk-off, the German DAX Index outperformed, closing up 0.2%. The Spanish IBEX Index lagged once again, down 1.5%. As such, there was a defensive skew to sector performance in Europe with Citi’s European Defensives basket up 0.7% vs. the equivalent Cyclicals basket down 0.2%.

Another talking point for Europe was some fresh policy commentary from the European Central Bank (ECB). Thursday saw the ECB announce the results of its Strategy Review, raising its inflation goal and stating a willingness to tolerate a limited overshoot of its inflation target, the outcome of a strategy revamp aimed at bolstering the economy after years of lackluster prices and growth. Key points were:

  • Inflation goal changed to “symmetric” target of 2% over the medium term from “below, but close to, 2%”.
  • ECB may allow transitory period in which inflation is moderately above target.
  • Governing Council recommends inclusion of owner-occupied housing into inflation measures over time.
  • Climate-change considerations will be included in monetary policy operations in areas of disclosure, risk assessment, collateral framework and corporate-sector asset purchases.
  • New strategy will be applied starting with July 22 monetary policy meeting.
  • Governing Council intends to assess its strategy periodically, with the next assessment expected in 2025.

ECB President Christine Lagarde told investors to prepare for new guidance on monetary stimulus in 10 days and signalled that fresh measures might be brought in next year to support the euro-area economy after the current emergency bond programme ends. Speaking to Bloomberg Television, Lagarde said the July 22 Governing Council session would bring “some interesting variations and changes.” and “It’s going to be an important meeting”.

United States

As covered in the earlier section, last week’s main focus in the United States was the June Federal Reserve meeting minutes and resulting market volatility in the second half of the week. After making news highs mid-week, the S&P 500 Index ended the week up 0.4% in what was a choppy trading period.

Also, last week US President Joe Biden signed an executive order aiming to reduce the power of big business, focusing on anti-competitive practices. He stated “No more tolerance of abusive actions by monopolies. No more bad mergers that lead to massive layoffs, higher prices and fewer options for workers and consumers alike”.

Asia

Asian stocks underperformed last week, as Chinese internet giants weakened after China’s cyberspace regulator ordered app stores to remove Didi days after the ride-hailing firm’s US listing. With that, the Hang Seng Index was down 3.4% last week. Furthermore, technology names also suffered amid news of a widening Chinese tech crackdown; the government fined 22 companies for market violations, including BABA. Tencent and Meituan both erased 2021 gains.

On Friday the People’s Bank of China announced a cut in the required reserve ratio of 50 basis points for banks and reemphasized the commitment to a “stable” monetary policy stance.

COVID-19 concerns remain in Asia, with a number of countries extending or reintroducing social distancing measures. In New South Wales, the number of COVID-19 cases has been on the rise of late, and lockdown remains in place. Rising cases in South Korea, Vietnam and Japan also remain a concern.

In this climate, we have seen Asian equites continue to lag in 2021.

The Week Ahead

Macro Highlights

Investors will be sensitive to inflation readings in both the United States and Europe early in the week. US corporate earnings season kicks off, with a number of financials reporting quarterly results.

Tuesday 13 July

  • Germany Consumer Price Index (CPI)
  • France CPI
  • US CPI
  • US Federal budget

Wednesday 14 July 

  • UK CPI & RPI
  • Spain CPI
  • Eurozone Industrial Production
  • US Core Producer Price Index (PPI)

Thursday 15 July

  • UK ILO Unemployment Rate & Claimant Count Rate
  • Italy CPI EU Harmonized
  • Italy General Government Debt
  • US Jobless claims
  • US Industrial production

Friday 16 July     

  • Eurozone EU27 New Car Registrations
  • Eurozone Trade Balance & CPI
  • US Retail Sales

 


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 July 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.

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