Day: 25 January 2022

Jean Boivin together with Wei Li, Global Chief Investment Strategist, Alex Brazier, Deputy Head, Elga Bartsch, Head of Macro Research and, Scott Thiel, Chief Fixed Income 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.

We see the sharp rise in government bond yields this year as consistent with a fundamental asset reallocation driven by investors wanting greater compensation for the risk of holding government bonds. The swiftness of these moves is an example of a market primed to overshoot amid confusion over the macro backdrop, as flagged in our 2022 Global Outlook. We slightly reduce our tactical underweight on U.S. Treasuries as a result, while keeping our strategic underweight unchanged.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, January 2022. Notes: The chart shows the number of 25 basis point rate to the end of 2024 across selected DM economies priced in currently vs. the number that were priced in November 2021. The hikes are calculated by comparing the average forward rate priced by the market in 2024 and comparing it to the current rate. We use the  Secured Overnight Financing Rate in the U.S. and overnight index swaps for the rest.

 

Bonds have had a rough start to 2022 – extending last year’s unusually poor run. Yields are up sharply in the last month, as the chart shows. The short-end has surged because of a sharp pulling forward of policy rate hikes. Markets have rushed to price in faster and more aggressive Fed actions than we think is warranted. The rise in 10-year yields has largely been driven by a resurgence of the term premium, or the extra compensation investors demand for the risk of holding government bonds at still historically low yield levels. We have long had an underweight in U.S. Treasuries, so the recent market moves are playing out as we expected via a higher term premium – just much faster. Our base case remains that yields are headed higher on a one-year horizon, yet a short-term reversal has already started to unfold. On a strategic or long-term horizon, we still view the outlook for nominal government bonds as challenging and maintain our large underweight.

What’s striking is the speed of the yield spike. The Fed has effectively abandoned its prior guidance by suggesting it’s ready to start raising rates before achieving its “broad and inclusive” employment mandate. By doing so, it may have added to the confusion about the expected path of rates. Markets have quickly shifted their short-term expectations to include earlier and more rate hikes this year. The hawkish mood has spread to longer-term yields and to markets such as the euro area.

We trimmed risk heading into 2022 because we thought potential confusion over the macro backdrop could become a source of market stress. But cutting through the confusion – one of our 2022 Global outlook themes – is about recognizing that what matters is the cumulative rate hikes priced in over coming years, not their timing. That hasn’t changed and believe that’s right. How to cut through the confusion? We believe the key to making sense of the current environment is to recognize the cause of inflation: supply constraints. This marks a profound change from the decades-long dominance of demand drivers. We are in A world shaped by supply, where monetary policy cannot stabilize both inflation and growth: it has to choose between them. Central banks will be forced to live with more inflation, in our view, given the cost to growth of pushing down inflation. Understanding this shift in the economic landscape helps put the Fed’s pivot in context: it is taking its foot off the gas by starting to remove emergency stimulus – but this is a far cry from slamming on the policy brakes. We expect the transition to a more sustainable world to drive supply-triggered inflation far beyond the current economic restart. This is why we still see a historically muted policy response to inflation.

Our bottom line: Given the speed of the Fed repricing, bond markets may have gotten ahead of themselves in the short term. We reduce our tactical underweight to U.S. Treasuries as a result. But the backdrop for Treasuries remains negative as we see a further resurgence of the term premium pushing yields higher, especially as the Fed prepares to shrink its balance sheet. We don’t see this as necessarily bad news for equities. This year’s stock selloff hides huge shifts under the hood, with tech shares falling and many cyclicals eking out gains. We believe the narrative of “rates up, tech down” is too simplistic given the drivers behind the long-end bond selloff and the broadly unchanged, still-low sum total of expected rate hikes. Indeed, we believe fading Omicron fears have contributed to the tech selloff. We favor a barbell approach in our sector views.  We like cyclicals as the powerful restart rolls on, and beyond a tactical horizon we still favor solid tech and healthcare stocks because we see them as beneficiaries of structural trends like digitalization and the transition to a net-zero world.

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 January 20, 2022. Notes: The two ends of the bars show the lowest and highest returns at any point over the last 12-months and the dots represent current 12-month 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, ICE U.S. Dollar Index (DXY), Bank of America Merrill Lynch Global High Yield Index, spot gold, J.P. Morgan EMBI Index, 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, Refinitiv Datastream U.S. 10-year benchmark government bond index and MSCI Emerging Markets Index.

 

The surge in long-term yields is part of what we see as a broader reallocation driven by the need for greater compensation for the risk of holding fixed income. That ultimately shouldn’t hurt risk assets, in our view. It’s early days still in the earnings season, but more than 75% of the 11% of the S&P 500 companies have beaten estimates. And growth expectations are being revised up as Omicron waves abate. We see inflation settling at a level higher than pre-COVID.

Week Ahead

• Jan. 24  – Global flash purchasing managers’ indexes
• Jan. 25-26 – U.S. Federal Open Market Committee (FOMC) meeting
• Jan. 27 – U.S. GDP, Japan inflation data
• Jan. 28 – U.S PCE inflation and employment cost data

No policy change is expected at this week’s FOMC meeting, yet the meeting comes amid heightened market expectations of a sharp Fed rate hiking cycle starting as soon as March. The focus will be on what is actually driving Fed policy now that it has walked back on its previous guidance that meeting its “broad and inclusive” employment goal was a pre-cursor to lift off. Corporate earnings season sees about two-thirds of the S&P 500 – including big tech – reporting results the next two weeks.

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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 January 24th, 2022 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 our 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 a rough ride for most global equity markets as investors appear increasingly focused on the trajectory of the US Federal Reserve (Fed) tightening. Several additional factors weighed on investors’ already brittle nerves, including geopolitical concerns, some lacklustre corporate earnings and continuing inflationary pressures. With that, we saw de-risking in equities, with the MSCI World Index down 4.7%; the S&P 500 Index down 5.7%, the STOXX Europe 600 Index down1.4%; and MSCI Asia Pacific Index down 1.7%.

“Wall of worry” spooks investors

Last week we had pressure on equities from several different factors, and technology and growth stocks continued to lead the US market lower. It is helpful consider the factors at play.

To put some of the moves in context, the S&P 500 Index had its worst start to a year since 2009. The small-cap Russell 2000 Index has also had a torrid time, down 8% last week, slicing through key support levels and now trading at levels last seen in 2020. The tech-heavy Nasdaq Index, which entered correction territory on Wednesday, in now off to its fourth worst start to a year ever. In the past three weeks, we have had two of the worst weekly performances since March 2020.

Rotation from growth names and into value names has been extreme.

There were a number of moving parts driving these market dynamics.

Heightened Inflation concerns and widening bond yields: In the United States, we saw the 10-year Treasury yield remain near 1.75% throughout the week, maintaining pressure on the TINA (there is no alternative) argument for investing in equities for yield. Inflation data was in focus in Europe last week. The UK Consumer Price Index (CPI) came in at 5.4% and eurozone CPI at 5%. This is the highest level of UK inflation since 1992 and a record high for the eurozone. With that, the market expects four interest-rate hikes from the Bank of England (BoE) in 2022 and, despite the European Central Bank (ECB) trying to stick with its dovish narrative, the market does expect one ECB hike by year end. Unsurprisingly, government bond yields continue to edge higher, with 10-year UK gilts (1.23%) and Bunds (-0.03%) at levels last seen in 2019. It was notable the 10-year Bund yield actually edged into positive territory.

Corporate Earnings: US earnings didn’t offer many reassurances, and heavyweights Netflix and Goldman Sachs both slumped post earnings releases. Lockdown darling Peleton also slumped on earnings, adding to the unease in the tech space.

Energy prices: The price of crude oil rose again, with West Texas Intermediate (WTI) crude oil up 2.2% on rising geopolitical tension in the Middle East, and on news that Russia is amassing more troops along the Ukrainian border. This adds to inflationary concerns and fears over input costs.

Geopolitics: Tensions between the West and Russia over the Ukraine remain high, despite talks between the United States and Russia.

Buybacks on hold: Recall US corporate buybacks, a key support for markets in recent years, are largely on hold as we head through earnings season.

Technical levels: The S&P 500 Index failed to hold a key technical support at its 50-day moving average and closed below its 200-day moving average on Friday. These declines through support levels often see selling pressure accelerate as stop losses kick in.

Central bank policy: No “Fedspeak” last week as Fed policymakers were in black-out period ahead of this week’s Federal Open Market Committee (FOMC) meeting.

Recall, a lot of the nerves stem from the fact that a key pillar of the strength of equities markets since the global financial crisis has been the “Fed Put”—that is, central bank rate cuts, quantitative easing and short-term financing operations. Now we are in a tightening cycle, that support has been taken away. Central banks are looking to reduce rather than expand balance sheets, and nerves over this appear to have taken hold. Furthermore, investors see a risk the Fed makes a policy mistake and hikes into a slowing economy and inflation.

What next: A big couple of weeks are in store for markets as we have a Fed policy meeting on Wednesday and both the ECB and BoE meetings next week. The tone from these meetings will be key for investor sentiment. Macro data will be closely watched, starting with this week’s Purchasing Managers Index (PMI) data, with fears of a policy mistake in mind. Corporate earnings will be crucial for sentiment too, with some tech heavyweights to report this week.

There is not a great sense of optimism from some of the investment banks on a market rebound, and whether the value/growth rotation will run out of steam.

Looking beyond equities, credit markets remain a key barometer to monitor. High-grade US bond spreads widened for a second day on Thursday of last week, and the benchmark credit risk gauge rose. Analysts are increasing calls for wider spreads as heavy supply and declining risk appetite hit corporate debt markets. However, it appears credit markets are not signalling a red flag for now as spreads remain fairly tight compared to what we saw in March 2020.

The Week in Review

United States

Last week, US equity markets capped their worst trading week since March 2020. As noted, the S&P 500 Index closed the week down 5.7%, trading below its 50-day moving average all week and even closed below its 200-day moving average. That represents the worst start to a year for the index since 2009, now with losses of 7.7% year-to-date. The Nasdaq, which was down 7.5% last week, entered correction territory and is off to its fourth worst start to a year ever. Yet, of the main indices, the laggard was the Russell 2000, down 8.1% last week and now approaching a bear market. There was a clear defensive skew to sector moves last week. All sectors finished in the red, but utilities, consumer staples and real estate investment trusts (REITs) were the relative outperformers. Meanwhile, consumer discretionary stocks finished the week lower. The CBOE VIX Index rose 50% on the holiday-shortened week, a sign of increased trepidation. In terms of notable movers, Netflix closed last week down 24% following disappointing first-quarter guidance. Peloton closed the week down 14% on demand fears. Bitcoin closed down 11% on Friday alone, now trading below US$35,000 and nearly 50% below its highs of November 2021.

The risk-off theme continues to dominate the headlines and the markets. The Fed is in blackout period ahead of its meeting on Wednesday of this week. The hawkish Fed policy shift has dominated as a driver of market sentiment so far this year; however, dampened fiscal policy support is another area of worry and plays into broader policy mistake fears.

Last week, US President Biden backed the Fed policy shift to combat inflation and repeatedly flagged high prices as one of country’s biggest problems. On the fiscal policy front, his “Build Back Better” legislation would likely have to be broken up into pieces in order to pass Congress. Biden also added that we are “not there yet” on possible easing of tariffs on Chinese goods. Some strategists believe that tariff relief from the Biden administration could be one of the few meaningful levers it has to address inflation concerns.

In terms of earnings, 13.9% of the S&P 500’s market capitalisation has reported. Earnings have beaten estimates by 5.9% so far, with 75% of companies topping projections, although below what we saw in the second quarter 2020 through the third-quarter 2021. Apple, Microsoft, Tesla, J&J, Mastercard and Visa are all due to report earnings this week.

In terms of data, supply-chain issues still continue to be felt following the Omicron wave, with the US Empire Manufacturing Index coming in at -0.7, much lower than expected. New orders and shipments stalled too, coming in at -5.0 and 1.0, respectively.

Europe

European equities have outperformed their US counterparts this week, but still closed the week down 1.4%. Market volumes improved, up 25% on recent levels. Volatility climbed again last week, up 17% in Europe on Friday. Note, European equities haven’t closed higher on a Friday in over two months. The value rotation which we have witnessed so far this year pulled back a bit last week, with value stocks in Europe closing the week down. There was no real update in terms of market themes, and the focus remained on the rate trajectory and the velocity of it. The latest earnings season will be a clear focus for equity markets, and it kicks into gear this week in Europe when 10% of the companies that make up the Stoxx Europe 600 Index are due to report.

Despite the weakness, Europe saw another week of inflows to make it three in a row, eclipsing the regions net cumulative inflow for all last year. Whilst equities continue to see inflows, matching the same trend we saw at the start of 2021, the same cannot be said for bonds, which have seen outflows.

Although the value rotation stalled last week, the UK FTSE 100 Index continues to outperform, the only one of the major indexes in Europe to be up year to date, at 1.5%. Sector performance divergence between best and worst remains wide. There was an apparent defensive skew to sector performance, with cyclicals selling off overall. Personal and household goods stocks outperformed, with luxury stocks better off following some earnings beats and subsequent short covering. Telcomms were another relative outperformer, benefitting from their defensive profile. Basic resources also closed last week higher despite Friday’s selloff. Recall, the sector is trading at an all-time high. In terms of the laggards, Autos closed the week down 3.9% following a strong start to the year as investors now await earnings. Bank stocks, another year-to-date winner, were also worse off.

Asia-Pacific

Another mixed week for Asian markets, with Hong Kong’s equity market the clear outperformer last week, alongside China, while Australia’s market closed down 2.9%.

Hong Kong was the standout performer globally, bucking the trend to make year-to-date highs and ending the week up2.4%. The respite came as we saw improving sentiment in credit markets and the China Property situation has greatly improved after a number of People’s Bank of China (PBOC) rate cuts. This follows comments from PBOC Vice Governor Liu Guoqiang said that China will roll out additional policy measures to stabilise the economy and pre-empt downward pressures.

In Japan markets drifted, with the Nikkei Index down 2.1%, as global concerns weighed but also as a number of fresh COVID-19 restrictions were put in place in response to rising case numbers.

Of note, the Bank of Japan did meet last week and, in contrast to many other central banks globally,  stuck to its dovish stance and kept rates unchanged. It did adjust some of its economic forecasts, raising the fiscal year 2022 GDP forecast to 3.8% (vs. 2.9% projected in October 2021).

Korean equities slumped, trading down 3% last week as the global tech selloff weighed on Korean tech stock names.

The Week Ahead

It’s been a tough start to the week for European equities as they catch up with the US move lower on Friday. Looking ahead, all eyes will be on the Fed meeting on Wednesday and a number of bellwether corporate earnings reports in the United States. US GDP and global PMI data will also be in focus.

Key Events:

Monday 24 January:  Italy Presidential Election; Euro-Area Flash Composite PMI; UK Flash Composite PMI

Wednesday 26 January: US FOMC statement

Thursday 27 January: US GDP & Jobless claimsFriday 28 January:  France GDP; Spain GDP; Germany GDP (Quarter-over-Quarter)

Calendar:

Monday 24 January

• Italy Presidential Election
• Euro-area Flash Composite PMI Survey
• UK Flash Composite PMI Survey
• US Markit Manufacturing PMI

Tuesday 25 January

• UK Public Finances (PSNCR)
• Spain PPI

Wednesday 26 January

• US FOMC statement

Thursday 27 January

• Spain Unemployment Rate
• Italy Industrial sales
• US GDP & Jobless claims

Friday 28 January

• Spain 4Q GDP
• Germany 4Q GDP
• France 4Q GDP & Consumer Spending
• Italy PPI

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Past performance is not an indicator or guarantee of future performance. There is no assurance that any estimate, forecast or projection will be realised.

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 24 January 2022, 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.