Jean Boivin, Head of the BlackRock Investment Institute together with Wei Li, Global Chief Investment Strategist, Alex Brazier, Deputy Head of the BlackRock Investment Institute and Vivek Paul, Senior Portfolio 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.

Key Points:

Cutting DM stocks: We cut developed market (DM) equities to neutral on a risk of the Fed talking itself into overtightening policy and China adding to a weaker global outlook.

Market backdrop: Stocks plumbed new 2022 lows on fears steep rate rises will trigger a growth slowdown. We see a brighter picture, but this may not become clear for months.

Week ahead: U.S. PCE inflation data this week are expected to show pressures are slowing. We think inflation will settle higher than pre-Covid levels.

The Federal Reserve signaled its focus is on taming inflation without flagging the big economic costs this will entail. As long as this is the case and markets believe it, we don’t see the basis for a sustained rebound in risk assets. We think the Fed will consider the costs to growth at some point, especially if inflation cools, and expect a dovish pivot later this year. China’s slowdown is a large shock that will be felt over time. We further trim risk and downgrade DM equities to neutral.

China slowdown to ripple across globe

The Fed stepped up its rhetoric last week by vowing to bring inflation down at any cost. We think reality will be more complex. First, supply-driven inflation implies the sharpest policy trade-off in decades: between choking off growth via sharply higher rates or living with supply-driven inflation. Second, this trade-off is even more stark amid a weaker global macro outlook. The hit to Chinese growth is starting to rival its 2020 shock and already surpasses the one from the global financial crisis. See the chart. We think this will reduce growth in major economies and nudge up DM inflation at a very inopportune time when higher inflation is already proving more persistent. We had already seen Europe at risk of recession, which prompted us to reduce risk a few weeks ago. As a result, we further downgrade DM equities to neutral from overweight.

A hawkish pivot

The Fed’s hawkish pivot this year has been stunning, and pronouncements on reining in inflation have become regular fare. Chair Jerome Powell just last week said the Fed would keep hiking rates until inflation is “tamed” – a comment that dismisses any trade-off or the lagged effect of monetary policy on the economy. The Fed now appears to be constraining itself to the hawkish side of policy options with such language, just as talking about the jump in inflation being “transitory” last year boxed it in when inflation proved more persistent and forced a sharp pivot. We think the Fed could be forced into another sharp pivot later this year, which we expect rather than a recession. These Fed pivots are driving market volatility, in our view.

Market expectations are now calling for the Fed funds rate to zoom up to a peak of 3.1% over the next year, more than doubling since the start of the year. For the European Central Bank, market pricing reflects four hikes this year and getting to nearly 1.4% next year, well above our estimate of neutral and for an economy at real risk of stagflation this year. The equity selloff this year makes sense from this perspective – if you believe that the market’s view of the Fed and ECB rate paths are right.

The growth reality will be more complex – both from the policy trade-off it faces amid a deteriorating macro backdrop, especially China’s slowdown and Europe facing stagflation. That’s why we expect a dovish pivot later in the year. We stick to our view of the Fed raising rates to around 2.5% by the end of this year – and then stopping to evaluate the effects. We still see the U.S. economy’s momentum as strong – we expect growth of around 2.5% this year, slightly below consensus and far from recession. Equities may have short-term, technical rebounds. Yet until the Fed starts to pivot, we don’t see a catalyst for a sustained rebound in risk assets.

The upshot?

We further reduce portfolio risk after having trimmed it to a benchmark level a few weeks ago with the downgrade of European equities. We are now neutral DM equities, including U.S. stocks. But a dovish pivot by the Fed would spur us to consider leaning back into equities. Our change in view prompts us to keep an overweight to inflation-linked bonds from a whole-portfolio perspective. We prefer short-term government bonds for carry, and see scope for long-term yields to rise further as investors demand greater term premium for the risk of holding such debt in this inflationary environment. Overall we remain underweight U.S. Treasuries.

Market backdrop

Stocks plumbed new 2022 lows and bond yields edged down last week on concerns that higher rates are causing a growth slowdown. Earnings updates from large U.S. retailers underscored inflation is pinching demand – and eroding profit margins through higher costs. We see this year’s equity pullback in line with the hawkish repricing of the policy rate path. We believe the market will ultimately ease its expectations for policy tightening – but this won’t be clear for months.

This week’s U.S. PCE report is expected to show monthly U.S. inflationary pressures softening as spending shifts back to services and away from goods. Early May global PMI data could give an early read on spillovers from China’s slowdown and the knock-on impact on supply chains. We expect China’s deteriorating economic outlook to be a drag on global growth – and we think consensus forecasts for China’s 2022 GDP growth are likely to get revised down.   

Week Ahead

• May24: Global May flash PMIs
• May 25: U.S. durable goods; Germany GDP
• May 27: U.S. PCE inflation and spending; Japan CPI

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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 April 25th, 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.

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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.

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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 global equity markets struggled for any clear direction as investors fretted about economic growth. Regionally, performance was very mixed. The S&P 500 Index closed the week down 3%, the STOXX Europe 600 Index closed down 0.6%, whilst the MSCI Asia Pacific Index outperformed, closing the week up 2.8%. Investors focused on consumer sentiment last week as corporates made clear the true impact of inflation on the consumer. Household savings have been dented of late and that has started to feed through to retailers—last week served as a wake-up call for the retail space. The ongoing war in Ukraine as well as China’s zero-COVID-19 policy also continued to weigh on global growth estimates. We are now through most of the current earnings season with 95% of the companies in the S&P 500 and 86% of the STOXX Europe 600 done reporting. Overall, earnings have surprised to the upside, by 10.5% in Europe and 5% in the United States. Outperformance in Europe was mainly driven by the energy space. Yet, market sentiment remains very negative given the latest inflation data, more hawkish central banks and growth fears. The CNN Fear and Greed Index remained in Extreme Fear territory last week. The latest Fund Managers Survey showed very high cash levels.

Inflation concerns bring on growth fears

Inflation has been a hot topic for markets for months now and there was no change last week. Eurozone Consumer Price Index (CPI) surged to 7.4% in April. Oil and gas prices reached new peaks after Russia’s invasion of Ukraine and, we believe that inflation will likely stay close to current levels until the fourth quarter. In the United Kingdom, April’s inflation accelerated to 9% year-over-year (Y/Y), a 40-year high. Rising energy costs drove last month’s jump also. April’s number was actually a touch lighter than market expectations and in line with Bank of England expectations. The latest reading will keep the cost-of-living crisis front and centre for UK politics. Germany’s April Producer Price Index (PPI) report, which measures price change from the perspective of the seller, rose 33.5% Y/Y, the biggest increase since it was first measured in 1949. Also, last week, the European Commission increased their inflation forecast for fiscal year 2022 to 6.1% from 3.5% previously.

The impact of inflation on the consumer became clearer last week following poor earnings for large US retailers. Merchandise retailer, Target said that they saw a trading down from brand to private label and that discretionary spending was suffering. With that, the stock closed down significantly last week as investors fretted about the continued squeeze on consumers and the impact on future growth. It was a similar story for Walmart, Kohls and Ross. In Europe, Richemont warned of margin weakness and closed the week down substantially. Richemont’s report pointed to revenue weakness in Asia Pacific.

All these news added to concerns around global growth. With that, we saw a number of US banks slash their growth forecasts. JPMorgan cut their US gross domestic product (GDP) forecasts for this year, with second half of 2022 growth now expected to be 2.4% vs 3.0% previously. Goldman Sachs also cut their growth forecasts. They now expect the economy to grow 2.4% in 2022 and 1.6% in 2023, down from 2.6% and 2.2% previously. Also, the latest Fund Managers Survey showed that global growth optimism was at record lows.

Despite last week’s renewed fears on growth, the Federal Reserve (Fed) commentary was notably hawkish once again. Fed Chair Jerome Powell said that the Fed would not hesitate to raise rates until there is “clear and convincing evidence that inflation pressures are abating and prices are coming down”. Powell also noted that the labour market is “extremely strong” and consumer spending is healthy, implying the Fed feels that the US consumer can tolerate higher prices for a while longer. Chicago’s Charles Evans noted that forthcoming hikes were needed for tightening financial conditions “as well as for demonstrating our commitment to restraining inflation”. Philadelphia’s Partick Harker said the US economy could withstand a “methodical tightening”. As it stands, Fed fund futures are pricing in rates of 2.75% by the end of the year.

There was plenty of rhetoric from the European Central Bank (ECB) policymakers last week. Firstly, Pablo Hernandez de Cos said that the ECB would likely decide at its next meeting to end its stimulus programme in July and raise interest rates “very soon” after that. Luis de Guindos said that that the ECB needs to move gradually and cautiously, whilst Georg Muller had noted that “gradual” meant rate hikes of 25 basis points (bps). The market expects a rate hike in July. Ignazio Visco said that a rate hike in June is “certainly” out of the question and that July is “perhaps” the right time to start hiking rates. Meanwhile, Joachim Nagel said that a July hike is possible and that more hikes could follow in quick succession. As it stands, the market expects three 25 bps rate hikes in 2022, with the first fully expected to come at the July meeting.

The Week in Review

Europe

Last week was another volatile one for European equity markets. Despite the continued push-and-pull in markets, the STOXX Europe 600 Index closed the week down just 55 bps following a late sell-off. Albeit, volumes were poor—last week’s moves lower were on the lowest volume week of the year in Euro STOXX 50 cash. European equities have seen extensive outflows year-to-date. Macroeconomic data was in focus again last week as investors debated what the latest reports mean for future inflation and subsequent rate shifts. With that, sentiment has been very cautious of late and we believe we are at the mercy of a bear squeeze on any positive news. Markets did rally on Tuesday on more supportive headlines out of Asia on Chinese technology stocks and as the COVID-19 situation appeared to be easing there too. However, this rally was short-lived as European equities gave up all their gains and more on Wednesday and Thursday as markets struggled for their next move in either direction.

In terms of sectors in Europe, renewables were notably strong last week, following some mergers and acquisitions headlines in the space. Basic resources also outperformed in Europe, making up for recent losses. Utilities also performed better last week. Increasing concerns of consumers getting squeezed is evident when we look at the week’s laggards: Food and beverage, personal and household goods, and retail stocks. Sentiment was hit further as UK Consumer Confidence reported its lowest level since 1974.

United States

It was another tough week for US equities with the S&P 500 down 3.0% and the NASDAQ Composite Index down 4.5% as fears over central bank policy error, stagflation and global economic slowdown stalked markets. For the S&P 500, the decline makes it a seventh week of declines for the index, something that has not happened since 2001, and only happened four times prior to this run. On Friday, the S&P 500 briefly fell into bear market territory, down 20% from its January peak, but the index recovered ground later that same day.

Looking at weekly sector performance, energy names rose significantly, while consumer staples and consumer discretionary names fell, following high-profile profit warnings in the space.

In terms of macroeconomic data, two sentiment surveys came in weaker than expected with the May Empire State Manufacturing Survey falling 36 bps to -11.6 and the May Philadelphia Manufacturing Business Outlook Survey falling 15 bps to 2.6. However, the April US Retail Sales data was better than expected—albeit this reading did lose its significance given the corporate warnings in the space.

Looking at other asset classes, US bonds saw yields tighten in a ”risk-off” environment with the 10-year Treasury yield at 2.78%, down 14 bps. The US dollar (USD) actually saw some respite after weeks of strengthening, with the USD spot down 1.3% with some putting this down to the suggestion we are at peak Fed hawkishness. Interestingly, US credit markets appeared calmer than European credit, with no signs of panic yet in high-yield or investment-grade spreads.

Asia Pacific

Asian equities outperformed global peers with the MSCI Asia Pacific Index seeing a 2.8% rise last week. Hopes that China would step up its support for the economy and ease the crackdown on tech stocks helped improve sentiment.

Hong Kong stocks rose 4.1% after Vice Premier Liu He said the government will support the development of digital economy companies and their public listings. On the back of this, the Hang Seng TECH index gained 6.0% on hopes that China may be ready to ease up on a year-long clampdown on tech giants.

In China, the Shanghai Composite Index rose 2% with talk of a phased reopening of shops in Shanghai. On Friday, the People’s Bank of China (PBOC) lowered the five-year loan prime rate to 4.45% from 4.60%, exceeding expectations for a move of between 5 bps and 10 bps, which should help disposable income for the middle class and counter weak loan demand.

Over the weekend, US President Joe Biden was in the region and helped sentiment further by stating he will review US tariffs on Chinese imports. He noted: “We did not impose any of those tariffs—they were imposed by the last administration”. However, he also stated that the US will defend Taiwan in any attack from China.

The economic picture remains challenging in China. April macroeconomic data released last week were weak, with Industrial Production down 2.9% and Retails Sales down 11.1%.

In Australia we saw a change of government following the election victory of Australian Labor Party leader Anthony Albanese, replacing the current Liberal-National government. There are eight seats left to be counted, with Labor requiring two more seats to hold a majority by itself in the House of Representatives. There was a muted reaction from Australian equities, with the Australian Stock Market Index rising a mere 0.1%.

The Week Ahead

Holidays:            

• Wednesday 25 May: Sweden (half day)
• Thursday 26 May: Denmark, Finland, Norway, Sweden, Switzerland
• Friday 27 May: Denmark

 Key Events:

• Monday 23 May: Germany IFO Survey
• Tuesday 24 May: Euro area and UK flash composite Purchasing Managers’ Index (PMI)
• Wednesday 25 May: US Federal Open Market Committee (FOMC) minutes
• Thursday 26 May: US GDP and Jobless Claims
• Friday 27 May: Month-end US pension rebalance

Monday 23 May 

• Germany IFO Survey
• Sweden Public Employment Service (PES) weekly Unemployment

 Tuesday 24 May

• Euro area flash composite PMI Survey
• UK flash composite PMI Survey
• US S&P/Markit Manufacturing PMI

 Wednesday 25 May

• Sweden Unemployment Rate and PPI
• Germany GDP and Government Spending
• Norway Unemployment Rate
• France Consumer Confidence
• US Durable Goods
• US FOMC minutes

 Thursday 26 May

• Italy Consumer Confidence Index
• Italy Industrial Sales
• US GDP and Jobless Claims

 Friday 27 May

• Sweden Retail Sales
• Spain Retail Sales
• US Personal Income

Franklin Templeton Key risks & Disclaimers:

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All investments involve risks, including the 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.

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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 23 May 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.