Day: 7 December 2021

Jean Boivin, Head of BlackRock Investment Institute together with Wei Li, Global Chief Investment Strategist, Elga Bartsch, Head of Macro Research, and Beata Harasim, Senior Investment Strategist, all forming 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 new, highly contagious, virus strain could trigger growth downgrades, worsen risk sentiment and have significant sectoral impact. We are concerned about the human toll and expect renewed restrictions on activity. We still favor equities for now, but would change our stance if vaccines or were to prove futile. If they are effective, the strain only delays the restart oftreatments economic activity, and we would lean against any stock market pullbacks. Less growth now means more later.

Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, November 2021. Notes: charts show the yield on U.S. and German 10-year benchmark inflation-linked government bonds.

 

2021 has been marked by a confluence of events that have no historical parallel: a unique growth surge, a supply-driven spike in inflation and new central bank frameworks that are stress-tested in real time. Our anchor to interpret this macro environment has been that normal business cycle logic does not apply. The COVID-19 shock was more akin to a natural disaster, followed by a powerful restart of economic activity. This restart is nothing like the long, grinding recovery following the 2008-2009 financial crisis. It’s more like the world turned the lights back on. Economic activity surged, corporate profits rebounded at an astonishing pace in the restart, and developed market (DM) equities ripped. The chart shows how analysts have scrambled to upgrade their earnings forecasts to a 52% jump in 2021 (the red line). We had long warned of higher inflation after decades of disinflation. Inflation is here now. It’s being driven by supply bottlenecks coupled with unusually strong household spending on goods, rather than services. We expect it to settle at higher levels than pre-COVID even as pressures from supply bottlenecks ease. In the past, central banks would already have started to raise policy rates, and bond yields would have spiraled upward. Not this time.

Many central banks were content to let inflation run higher, and bond yields moved up only modestly relative to the inflation picture. The New nominal theme helped foretell this unusually muted response to rising inflation, and was the compass that has guided us throughout the year. The Fed last week belatedly acknowledged inflation risks, and we expect it to start raising rates next year. That’s a big change, but what matters are the rate trajectory and destination. We don’t see rates going as high as they would have historically in the next phase of the New nominal.

The second investing lesson of 2021: the transition to a more sustainable world is happening now, not at some distant point in the future. First, surging fossil fuel prices in 2021 have exposed a lopsided transition toward low-carbon power. We still see an orderly transition in the medium term – but with bumps on the way leading to growth and inflation volatility. But we think inflation pressures would be even more acute and growth lower in case of a disorderly transition or no-climate-action scenario. Second, the tectonic shift toward sustainable investing is already playing out, and we believe this will give sustainable assets a return advantage for years to come. Climate-driven repricing has already started, we believe, with carbon-efficient sectors able to lower their cost of capital. Lastly, carbon-heavy companies are not waiting for new climate policies but are changing their business models now, opening up selected investment opportunities.

Our third lesson of 2021 is having courage of conviction. Our macro framework – the New nominal playing out in the restart – kept us positive on equities and underweight government bonds throughout the year. But we did not put enough risk behind our view in hindsight, even considering this has been a tricky environment where things can change quickly. Having courage of conviction is not about adding risk per se, it is also needed when your framework tells you it’s time to pull back on risk-taking. The speed and magnitude of some market moves also surprised us. An example: the swings in 10-year U.S. Treasury yields as different market narratives on growth, inflation and the virus took hold in quick succession.

Where does all of this leave us heading into 2022? We are still overweight equities even as the Omicron virus strain and the Fed’s catching up to inflation reality have hurt risk sentiment. We expect new virus variants to delay, but not derail, the restart and see policy rates rising only modestly in the New nominal’s next phase. Our 2022 Global outlook will lay out the full picture next week, including refreshed granular views for tactical and strategic asset allocation.

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

 

Markets suffered a risk-off bout as the Omicron virus strain spread, and Fed chair Jerome Powell warned of inflation risks in the restart and indicated the Fed may wrap up its asset purchases earlier than planned. We expect the Fed’s interpretation of its employment objective to set the timing of the kick-off on rates and their pace. We see inflation settling at a level higher than pre-COVID even as pressures from supply bottlenecks ease, as we expect a muted policy response to inflation.

Week Ahead

• Dec 7:  U.S. and China trade data
• Dec 9: China PPI and CPI
• Dec 10: U.S. CPI and University of Michigan sentiment; UK GDP estimates; China money and credit data

U.S. inflation data are the key focus this week, especially after the Fed has caught up to inflation reality and warned of inflation risks last week. The Fed’s inflation target has been met, so now the key is how the central bank will interpret the other side of its mandate – full employment. The timing and trajectory of rate rises will depend on this. We see the rate path as historically shallow. U.S. and China trade data may give a read on how fast supply-demand imbalances are dissolving.

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 December 6th, 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

Last week equity markets remained volatile as investors focused on the Omicron variant headlines and rhetoric from central bankers. In particular, commentary from the Federal Reserve (Fed) was a key talking point as Chair Jerome Powell suggested the pace of Fed tapering could be accelerated. In that context, indices started off December with a distinctly unfestive performance, with the MSCI World Index down 1.5%, the European Stoxx 600 Index down 0.3%, the S&P 500 Index down 1.2% and the MSCI Asia Pacific Index down1%.

Omicron Concerns Weigh on Sentiment

Last week equity markets were at the mercy of the next Omicron variant headline as investor sentiment wavered around the potential impact of the new variant on global economies and markets.

Whilst there has been a lot of noise around the new variant, we are still waiting for full clarity on the severity of illness, vaccine efficacy and the likelihood of reinfection. However, cases continued to rise sharply in South Africa and further cases are appearing globally. As a result, some travel restrictions are returning, and the newsflow around variant concerns was enough for some economist to cut their global gross domestic product (GDP) forecasts.

It is important to remember that nerves were already frayed last week over COVID-19 as cases rose sharply in some places, namely Austria and Germany. Some countries have already added restrictions on travel and recreation, and last week saw further negative COVID-19 headlines from Germany weigh on sentiment as the government announced tighter restrictions on unvaccinated people. Chancellor Angela Merkel said “the situation is very serious. The number of infections has stabilised but at far too high a level.”

How the current situation impacts economic activity will be key, as early mobility numbers show declines in retail footfall in affected countries and flight bookings have decreased.

Central Bank Policy in Focus

December will be an interesting month for central banks as soaring inflation puts pressure on them to act. However, the waters are muddied significantly by the arrival of Omicron and the potential for disruption to economic activity.

Looking ahead this month, we have a number of central bank meetings on the calendar. The Bank of Canada and Reserve Bank of Australia meet this week, whilst the Federal Reserve, meeting and the Bank of England (BoE) and the European Central Bank (ECB) hold policy meetings next week.

ECB: Nobody thought that the ECB was moving any time soon, but President Christine Lagarde said last Friday that an interest rate rise in 2022 was very unlikely. She also confirmed that net purchases under its €1.85 trillion Pandemic Emergency Purchase Programme (PEPP) will likely expire on schedule at the end of March 20211. She also said the central bank may unveil short-term measures at December’s policy meeting due to heightened uncertainty, providing some clarity without making long-term commitments. So, it looks like the 16 December meeting may be a non-event, with eyes being focused on the 3 February and 10 March 2022 meetings, when we might see the bank scaling up its standard Asset Purchase Programme (APP) to make it more flexible upon the end of PEPP net purchases.

Despite European Union (EU) inflation hitting a record level of 4.9% (last week’s Consumer Prices Index (CPI) data), Lagarde feels this is peaking and will start to pare back in 2022.

Fed: Probably of more significance last week were Fed Chair Powell’s remarks suggesting that the term “transitory” should no longer be used, which added to expectations that the first US rate hike could be sooner than anticipated. He went on to say the Fed can consider wrapping up taper a few months sooner and must ensure higher inflation doesn’t become entrenched. That said, the November jobs data (released on Friday) did not look especially inflationary, besides the headline unemployment rate, with the Institute of Supply Management (ISM) data this week also on the softer side.

In this context, we have seen a sharp flattening of the US Treasury yield curve in recent weeks, with the curve now at levels similar to March 2020.

With Powell’s hawkish pivot, market expectations of rate hikes have risen, and expectations are for interest rates to hit 1.25% by the end of 2023.

BoE: An interest rate increase was very much expected at the last monetary policy meeting on 4 November, but did not transpire, and we saw UK banks decline. Comments last Friday from traditionally hawkish BoE member Mike Saunders surprised markets somewhat as he stated there were “advantages” to waiting for more information on Omicron before acting on rates.

With that, the British pound traded lower, gilts edged higher, and expectations of a rate rise on 16 December waned. Based on trading in interest rate futures, investors now see a 25% chance that the BoE will lift the base rate from 0.10% to 0.25%. Before he spoke, the probability stood at 50%, having already fallen significantly since the emergence of Omicron a week ago.

However, looking further ahead, Saunders said interest rates were likely to rise from their present historic lows over the coming months: “If the economy develops as I expect, then some additional tightening, on top of such a move, probably will be needed fairly soon.”

The Week in Review

Europe

European equities ended the week essentially unchanged, but mildly negative. However, that doesn’t tell the story of what was a volatile trading period, as markets nerves were brittle and we were very much at the mercy of the next COVID-19 headline.

With that, the European Volatility Index remained at elevated levels. It also felt like moves were exaggerated as we navigated month end, but also as we approach the year end and investors grow nervous about protecting performance.

Looking to sector performance, despite a volatile week for crude oil, oil and gas stocks were higher. On the downside, telecommunications and technology stocks were lower.

Credit: Looking beyond equities, it is noteworthy that European credit spreads widened on the Omicron news and have remained at somewhat elevated levels. We see this as a good barometer for investor sentiment and something to keep an eye on.

United States

US equities declined for last week as Omicron concerns rattled nerves and as Powell stuck by his recent hawkish tilt. The pain was greatest in growth names (particularly technology) as investors factored in a faster Fed tightening cycle.

Volatility remains high—on Wednesday of last week, the S&P 500 Index saw its largest intraday swing since March. As in Europe, the US Volatility index remains elevated, with the VIX Index around the 30 level.

Looking to Fed speak beyond Powell, Loretta Mester (a non-voter) said she is “very open” to scaling back asset purchases at a faster pace so the Fed can raise interest rates a couple of times next year if necessary. In addition, Mary Daly (also a non-voter) also said that the Fed may need to taper asset purchases more quickly.

Fund flows for the week to 1 December also carried a risk off tone, with investors moving largely to cash and US Treasuries.

It was also interesting to see retail investor favourites suffering in this risk-off climate, as crowded trades saw outflows. Given “buy the dip” has become a familiar mantra for some investors in recent times, it will be interesting to see if this behaviour continues into year end..

Asia Pacific

As with other regions, uncertainty over the Omicron variant and travel restrictions weighed on sentiment for Asian equities, with the MSCI Asia Pacific Index down last week. The Nikkei was hardest hit, as Japan banned foreign visitors once again.

South Korea was the best performing index in the region, rising on the back of a strong week for heavyweight Samsung.

In Hong Kong, the Macau gaming sector dragged the market lower.

In terms of macro data, China Purchasing Manager Index (PMI) prints were mixed; the Caixin PMI Composite came in at 51.2 vs. 51.5 prior while Caixin PMI Manufacturing came in at a weaker-than-expected at 49.9.

Week Ahead

Equity markets are off to a positive start this week in Europe as Dr Anthony Fauci, US President Joe Biden’s chief medical adviser, said early data on Omicron’s severity is encouraging, while a small South African study supported anecdotal evidence the variant causes only mild illness. No doubt we will be at the mercy of COVID headlines once again.

Key macro focus this week will be US Consumer Price Index (CPI) data Friday. China Trade data comes out on Tuesday and we have gross domestic product data from the European Union and United Kingdom towards the end of the week.

The Reserve Bank of Australia meets on Tuesday and the Bank of Canada meets on Wednesday. Note, the Fed is now in a blackout period ahead of the 15 December meeting so no comments are expected.

Monday 6 December:     

• Germany: factory orders (October), PMI construction (November)
• Italy: retail sales (October)
• UK: PMI construction (November)
• BoE Deputy Governor Ben Broadbent speaks on the outlook for growth and monetary policy. He is considered a key swing voter ahead of the BoE’s interest rate decision on 16 December.

Tuesday 7 December:    

• Germany: ZEW Survey expectations/current situation (December), Industrial Production (IP) (October)
• France: current account balance (October), trade balance (October)
• US: non-farm productivity, unit labor costs, trade balance (October), consumer credit (October)

Wednesday 8 December:

• France: private sector payrolls, total payrolls
• US: MBA mortgage applications, JOLTS job openings (October)

Thursday 9 December:      

• Germany: trade balance (October), current account balance (October), imports/exports (October)
• UK: RICS house price balance
• US: initial jobless claims, continuing claims, Langer Research Associates consumer comfort, wholesale trade sales (October), household change in net worth

Friday 10 December:       

• Germany: Consumer Price Index CPI (November)
• Italy: IP (October)
• UK: IP (October), manufacturing production (October), construction output (October), Index of services (October)

 

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 6th December 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.