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:

A new regime: Growth concerns, inflation and volatility fueled the debate at our Outlook Forum over why we’re entering a new macro and market regime and what that means.

Market backdrop: Poor activity data reinforced slowdown fears, resulting in falling yields and rising stocks last week. Persistent UK inflation caused worries of overtightening.

Week ahead: This week’s U.S. PCE inflation update may show if inflation pressures are easing. Euro area inflation data will likely reinforce the ECB’s rate hike plans.

Global growth and inflation concerns are keeping investors up at night. This backdrop made for a spirited gathering at our June 14-15, 2022 Outlook Forum, a semiannual meeting we host for BlackRock’s portfolio managers and executives. We made the case we’re entering a new macro and market regime, and debated the implications at our first in-person Forum since the pandemic broke out in early 2020. Watch for updated investment views in our 2022 midyear outlook on July 11. 

A historic shift

U.S. nominal goods share of consumer spending

Many forum discussions centered on the production constraints driving today’s inflation. The pandemic sparked a massive shift in consumer spending to goods and away from services. See the gray shaded area in the chart. This reallocation occurred as lockdowns limited production and movement – and led to a sectoral re-allocation of resources. The restart of economic activity unleashed pent-up demand for services, creating an ostensibly tight labor market. The war in Ukraine added an additional commodities price shock. These factors pushed up inflation to 40-year highs. Almost all Forum participants said average U.S. inflation would settle above the Federal Reserve’s target of 2% over the next five years. That was a marked change from our November Outlook Forum, when only half forecast this. Participants were divided on how companies will adapt to this new environment – and whether they can maintain historically high margins amid rising input costs and the need to diversify supply chains in a more fragmented world.

Concerns over a global growth slowdown weighed on participants as a stampede of central banks raised rates in an effort to rein in inflation – all in the week the Forum took place. Half of participants saw the restart stalling in the next two years, leading to a short and shallow global recession, up significantly from November 2021. Waning U.S. growth was in sharp focus as the risk of the Fed overtightening increases. The flurry of central bank rate hikes has shown many are ignoring the crushing effect this will have on growth, in our view, and we now see the U.S. restart of economic activity stalling.

Signs of a new regime

A quickly changing world complicates matters. The war in Ukraine has exacerbated high inflation caused by the restart’s supply disruptions – and sparked sharply higher commodity prices. Commodity prices are likely to stay elevated, Forum speakers said. Why? Lower production capacity after years of underinvestment as well as ballooning demand for industrial metals needed for the transition to net-zero carbon emission by 2050. The outperformance of traditional energy assets this year does not mean the transition is reversing, speakers said. It reflects higher expected earnings for companies replacing Russian energy supply. Energy use in coming decades will look very different, we believe, and lower carbon fossil fuels have a large role to play in enabling the transformation.

Geopolitical fragmentation is another tenet of the new regime, and the Ukraine war has accelerated this. The Forum focused on how many emerging market (EM) countries now try to find a middle ground between the U.S. and China or try to play one against the other. EM isn’t what it used to be, anyway. The name itself is a misnomer as it hides an incredibly diverse set of countries. The old approach of chasing growth and cheap assets in EMs is outdated, Forum participants argued. It’s now about quality investments, income potential and seeking out beneficiaries of “friend-shoring.” Another change: EM dependence on China is declining, buffering some of the effects of China’s lockdowns to prevent the spread of Covid-19.

The road ahead 

So how should investors adjust to all this? Ignore macro peril at your own risk. Most attendees said they expect to see short cycles, more macro volatility and volatile markets. They stressed the need to be make quicker portfolio shifts amid shrinking investment horizons and prioritize liquidity, too. Participants also questioned the classic portfolio construction setup of 60% stocks and 40% bonds. A 40-30-30 split – comprising traditional fixed income, public equities and private assets – is perhaps more apt in the new regime. Simply betting on mean reversion, or buying the dip won’t work anymore, many agreed.

Market backdrop

Poor global PMI data reinforced slowdown fears, capping the rise in yields and triggering a rebound in stocks from 2022 lows. UK inflation hit a four-decade high of 9.1%, bolstering pressure on the Bank of England (BOE) to respond aggressively with further tightening. Many developed market (DM) central banks have moved ahead with rapid rate hikes without acknowledging how they could hurt economic activity. Failing to recognize policy trade-offs boosts risks to growth, we think.

Inflation and survey data will be top of mind this week. In the U.S., an update on the Fed’s preferred PCE inflation measure will shape its view of whether inflationary pressures are starting to subside amid a possible softening in activity surveys. Euro area inflation data will likely bolster the ECB’s resolve to tighten policy in July. While we see the ECB raising rates materially in coming meetings, the burden of the energy shock hitting Europe will ultimately force it to rethink its hiking cycle.

Week Ahead

June 28: U.S. consumer confidence

June 30: China PMI; U.S. consumer spending and PCE inflation

July 1: Euro area inflation; U.S. ISM manufacturing PMI

---

BlackRock’s Key risks & Disclaimers:

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 27th, 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 some respite for global equities markets with a relief rally in many markets as we approach month and quarter-end. There were a range of catalysts for the moves, including an easing in rate-hike expectations as recession risk rises and some potential signs that some of the key drivers of inflation could be peaking. In addition, some argue markets are oversold following a sharp move lower and quarter-end positioning has lent support.

On the week, the MSCI World Index was up 5.4%, S&P 500 Index was up 6.4%, the STOXX Europe 600 Index was up 2.4%, and the MSCI Asia Pacific Index was up 1.5%.

Market bounce: quarter-end squeeze or improved fundamentals?

Last week’s rally was a welcome relief for equity investors, but questions remain as to the reasons for the move.

Hopes rose that we could be approaching peak inflation thanks to declines in commodity prices, with the Bloomberg Commodity index down 4.3% last week. Notably, the price of copper fell 7% and iron ore 5%. In addition, some soft commodities have also declined this month, including corn, wheat and palm oil. Importantly, there were some possible signs in the macro data that inflationary pressures were easing, including the latest US Purchasing Managers Index (PMI) report. Furthermore, the University of Michigan Survey data for the end of June saw 5-10 year inflation expectations drop to 3.1% from 3.3%. It is too soon to say if this does mark peak inflation, but this dynamic is crucial to watch in the coming months.

On Friday, St. Louis Federal Reserve (Fed) Bank President James Bullard said worries over a US recession are overblown, also aiding the market bounce. That said, last week we also saw some economists up the odds of a recession. Those increasing recession fears have started to feed into interest-rate expectations, with markets now pricing in US rates at about 3.41% at the end of the year (down from about 3.57% at the end of last week).

It seems likely that the market bounce was also driven by some month- and quarter-end positioning from oversold levels. A similar trading pattern was seen at the end of the first quarter when markets rallied 11% ahead of quarter-end. Investor sentiment has also been extremely bearish in recent weeks. Last week saw some improvement, with the CNN Fear & Greed Index moving from “Extreme Fear” to “Fear”.

With the move lower this quarter, European equity valuations are now close to pandemic lows.

Looking to other assets, cryptocurrencies seem to have stabilised, which may give some confidence for retail investors to step back into the market. That said, credit markets do not show the same improvement in sentiment. Investment-grade credit dramatically underperformed equities last week, something credit participants consistently highlighted as a reason not to believe the equity rally has legs.

European credit hasn’t reflected the same change in sentiment, with the ITRAXX XOVER Index still close to recent highs. Sovereign bond yields were healthier though, with the Italian 10-year bond yield falling back to 3.4% vs. 4.1% high previously.

European gas supply in focus

Gas prices in Europe have been a focus for markets, particularly the tightness of the European gas market after Russia significantly reduced its flow of gas to Europe. Overall flows of gas into Europe from Russia are down 55% from the start of 2022, with gas prices continuing to surge. An unexpected outage from Freeport LNG, one of the largest operators of liquefied natural gas export terminals in the United States, hasn’t helped.

Germany, which gets roughly 65% of its gas imports from Russia, began planning for potential shortages in winter. Reports at the start of the week suggested Germany is planning incentives for the industry to reduce consumption and is preparing to reopen more coal plants to reduce the reliance on gas. Other countries are also looking at alternatives, which are in short supply. Austria and the Netherlands announced they would be restarting the use of coal plants as an energy source, a move which resulted in a warning from European Commission President Ursula von der Leyen that countries must remain focused on their “massive investment in renewables”.

On Wednesday, the Financial Times reported that the International Energy Agency (IEA) was advising governments to prepare for a complete severance of Russian gas this winter, urging governments to take measures to cut demand and keep ageing nuclear power stations open. Gas supplies via NordStream 1 have been reduced by 60% in the last 10 days. The head of the IEA, Fatih Birol, said Russia reducing gas supplies could be an attempt by the Kremlin to gain “leverage” during its war with Ukraine.

On Thursday, Germany triggered the second level of its gas emergency plan. German Economy Minister Robert Habeck called the cut to gas supplies by the Kremlin an “economic attack” and said  gas is “a scarce commodity” in Germany and that citizens are obliged to reduce gas consumption. The second “alarm stage” of a three-stage emergency plan signals that authorities see a high risk of long-term gas supply shortages. Rationing of gas supplies would kick in if Germany triggered level three of the emergency plan. The risks of course are further cuts on Russian deliveries and a colder-than-normal winter, whilst, in the current market, countries can’t fully rely on supply from alternative sources.

Interesting week for European macro data

It was a busy week in terms of macro data updates. European PMI data missed expectations, although still came in expansion territory, with the June preliminary composite figure coming in at 51.9 (a 16-month low and weaker than anticipated). Manufacturing output was down for the first time in two years.

UK inflation edged up again in May, hitting 9.1% year-on-year, and up from 9.0% in April. The print was in line with market expectations. Core inflation, which strips out some of the more volatile energy and food components, edged down to 5.9% from 6.2%. From here, it could be an uncertain path ahead, resulting in a severe squeeze for UK corporates.

In addition, last week saw UK Consumer Confidence data came in with the lowest reading on record, at -41.

The Week in Review

United States

US equities rebounded last week, recording their biggest one-day move since June 2020 on Friday to finish the week up 6.4%. It was a holiday-shortened week, with US equity markets closed on Monday for Juneteenth. Sentiment remains very bearish on a technical level, so bear-market squeezes such as last week’s are possible. Recession fears continue to plague sentiment; however, there was hope last week that we may be beyond peak inflation after the University of Michigan’s latest survey showed consumer inflation expectations eased from a 14-year high. Fed Chair Jerome Powell also hardened his resolve in the fight to cool inflation, but the markets’ US rate expectations eased last week. US equity funds saw their first outflow in seven weeks, and bond funds continued to see redemptions.

Energy—a huge year-to-date outperformer—was the only sector to finish lower last week. The sector closed the week lower, with West Texas Intermediate crude prices declining and fears of a recession raising questions of forthcoming demand. Over the last two weeks, the US energy sector has seen its third-worst drop over the last 40 years, beaten only by October 2008 and March 2020. Given the robust gains this year, it seemed primed for profit-taking at some stage. As we also noted last week, there are other factors weighing on the sector at the moment, such as China ramping up purchases of discounted Russian oil, overall Russian oil exports increasing month-on-month, and the potential for a windfall tax on US energy companies.

Macroeconomic data continues to be a focus for markets as investors seek a pullback in inflation levels. As noted, the University of Michigan consumer inflation expectations dropped to 3.1% in June from 3.3%, flagging the attention of Fed Chair Powell. Also, with recent moves in commodity markets potentially impacting the July Consumer Price Index (CPI) report, focus will continue to be on further signs we are past peak inflation. Also, last week, new home sales rebounded in May, partially retracing their fall in April. US PMIs were soft, however, with the preliminary manufacturing PMI coming in at 52.4. Services were lower as well at 51.6. The underlying details were poor, with output and new orders dropping into contractionary territory for the first time since the pandemic downturn.

Europe

European equity markets recovered ground last week thanks to a late squeeze higher on Friday led by some clear rotation into growth names. Growth stocks outperformed value stocks by a significant amount. With the chatter of peak inflation on the back of Powell’s testimony and the University of Michigan revising inflation expectations lower, we saw underweights in in growth names squeezed aggressively into the end of the week. Another factor in Europe was falling rate-hike expectations; following the weak PMI data, the market’s rate-hike expectations for the European Central Bank fell from 1.75% to 1.50%. Finally, with quarter end next week, it feels like there is more than a touch of winners being sold and vice versa at play.

Another dynamic for Europe was a move out of cyclicals as fears around future gas supply and economic outlook came to a fore.

These dynamics were reflected in European sector performance, with technology stocks and consumer staples higher whilst basic resources and autos were lower.

Fund flow data shows that EU equity funds recorded their 19^th consecutive week of net outflows.

Asia and Pacific

Asian equity markets were mainly higher last week, with the MSCI Asia Pacific Index closing the week up 1.5%.

China’s COVID-19 outbreak remains the key focus for investors, with the outbreak shifting to other regions in Shenzhen and Macau. There was better news in Beijing and Shanghai, where outbreaks appear to be receding—both cities recorded single-digit daily infections by the end of last week. In Macau, closures of cinemas, gyms and bars were announced to try and curtail the spread. Despite the outbreak, President Xi Jinping pledged to meet economic targets for the year even as the government’s zero tolerance approach to combating COVID and a weak housing market put the growth goal further out of reach. Also, Hong Kong’s incoming leader John Lee said he plans to “quickly review” mandatory quarantine measures for incoming travelers, including suggestions to isolate at home or reduce the number of days required to stay in designated hotels.

In Australia, the Reserve Bank of Australia Governor Lowe reiterated that more hikes are coming to fight inflation. The market was expecting Lowe to track the Federal Reserve with a 75 basis point (bp) hike in July; however, he insisted a rise of 50 bps was more likely. This triggered a rebound in the Australian bond market.

The Week Ahead

This week, we will see quarter-end in focus, with much chatter of pension rebalancing impact.

In terms of macro data, European consumer confidence and CPI data are of interest. In the United States, gross domestic product (GDP) and manufacturing PMI data will be in focus.

Events: ECB Sintra forum (Monday); G7 Summit (Sunday); NATO summit (Wednesday); many central bank speakers (including Lagarde, Powell, Bailey and Carstens at Sintra on Wednesday); potential speech by Chinese President Xi Jinping (Friday); primary elections in a number of US states (Tuesday).

Marco data

Monday 27 June

• US Durable Goods
• US Dallas Fed manufacturing survey
• US Durable Goods
• US Dallas Fed manufacturing survey

Tuesday 28 June

• Germany Consumer Confidence
• France Consumer Confidence
• Italy Industrial sales
• US Retail inventories ex-auto
• US Merchandise trade balance & Wholesale inventories

Wednesday 29 June

• Eurozone Economic & Consumer Confidence
• Germany CPI
• US GDP & Real consumption

Thursday 30 June

• UK GDP & CA Balance
• France CPI & PPI
• Germany Unemployment Change
• Euro Zone Unemployment Rate
• Italy PPI
• US Jobless claims & Personal income

Friday 1 July

• UK Consumer Credit
• UK Manufacturing PMI
• Italy CPI EU Harmonized
• Eurozone CPI Estimate
• US Manufacturing PMI
• US Construction spending

Franklin Templeton Key risks & Disclaimers:

What Are the Risks?

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.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

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 28 June 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.

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.