Day: 12 June 2023

Jean Bovin – Head of BlackRock Investment Institute, together with Wei Li – Global Chief Investment Strategist, Alex Brazier – Deputy Head, and Vivek Paul – Head of Portfolio Research 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

Forum takeaways: BlackRock investment leaders at our Outlook Forum agreed the new regime is playing out. They eye assets that price that in and benefit from structural trends.

Market backdrop: Developed market (DM) stocks ticked up last week, led by U.S. tech. Bond yields rose as markets priced out Federal Reserve rate cuts ahead of its June meeting.

Week ahead: We see the Fed and the European Central Bank (ECB) keeping rates higher for longer to fight inflation. We think that overshadows rate decisions this week.

BlackRock investment leaders at our June 6-7 Outlook Forum agreed the new regime of macro and market volatility is playing out. The consensus: Granular investment opportunities abound even against that backdrop. Counting on broad market moves won’t do now, in our view. That shift comes as U.S. and European economies have entered recession. But we don’t see central banks coming to the rescue with rate cuts. We see opportunities in relative pricing and structural trends.

The average range of individual stock returns versus broad index returns, or dispersion, since 2020 (green line in chart) has jumped about 10 percentage points above the average from 2009 to 2019 (yellow line). We think that reflects the new macro regime and structural changes shaping returns. Forum attendees agreed the new regime of heightened volatility is playing out. We see supply constraints driving higher inflation in the new regime. Persistent inflation makes it unlikely developed market (DM) central banks will cut interest rates this year. The new regime presents central banks with a sharp trade-off between living with some inflation and crushing activity, as we’ve argued. That shift is in sharp contrast with the four-decade period of steady activity before 2020 known as the Great Moderation. Today’s environment offers new opportunities, in our view, thanks to market divergences and structural changes playing a bigger role.

Roughly 100 of BlackRock’s portfolio managers, executives and experts gathered in London for our semiannual forum to debate the macro and market outlook. They agreed the new regime calls for getting more selective and dynamic in making investment decisions. That approach starts by first assessing to what extent assets are pricing in the economic damage from rate hikes. They’re also eyeing relative pricing divergences across sectors and regions. A case in point: We think emerging market (EM) stocks better price in the damage we expect than developed market (DM) peers. EM stocks and local currency debt also benefit from China’s economic restart, EM hiking cycles nearing an end and a broadly weaker U.S. dollar.

Megaforces

Megaforces, or structural changes shaping returns now and longer term, were also top of mind. Investment decisions need to reflect them, in our view – even within a cautious macro outlook. We see some megaforces already playing out: There is a widening disconnect between bond and stock pricing of the macro environment. The market’s hopes artificial intelligence (AI) will gain widespread adoption may help explain that gap. Just a few technology firms valued over $200 billion are carrying the U.S. equities rally so far this year, and upbeat tech earnings expectations are reinforcing the gains. Other megaforces include aging populations, geopolitical fragmentation causing a rewiring of supply chains and the transition to a lower carbon economy. These forces are likely to be largely inflationary over time, though AI could eventually help lessen inflationary pressure as it delivers productivity gains.

A tough macro picture

We focus on other methods of generating additional returns as the macro outlook itself calls for keeping risk low. Core inflation has fallen from its highs but remains above the Fed and ECB’s 2% policy targets. We think tight labor markets are driving wage gains and making core inflation sticky – even as the U.S. and European economies have arguably slipped into recession. In particular, the U.S. lacks enough workers to fill job openings, while in Europe, workers have left the private sector for the public sector. Tight labor markets could squeeze corporate profit margins or force companies to trim workforces to maintain profits. These dynamics mean broad asset class exposure may not generate the same level of returns as in the past.

Bottom line

Forum participants agreed that the new regime keeps playing out as central banks’ rate hikes start to kick in, but they debated the extent of the economic damage. We think the new macro regime still offers abundant, if different, investment opportunities relative to the past with the right approach. Read more in our 2023 midyear outlook on June 28.

Market backdrop

DM equities posted slight gains last week, with U.S. tech stocks pushing to 14-month highs. Short-term yields led an overall rise in government bond yields as markets further priced out Fed rate cuts later in the year heading into next week’s meeting. The U.S. economy is in recession based on some income-based measures, while euro area Q1 GDP data confirmed it slipped into a mild recession. Last week’s U.S. services activity data also showed the sector barely grew in May.

Major central banks take center stage this week. We see rates staying higher for longer because of stubbornly high inflation, driven by wage pressures in tight labor markets. Central banks face a sharp trade-off: crush growth or tolerate some above-target inflation. We see the Fed eventually living with some inflation but see the ECB resolved to bring it down to target.

Week Ahead

June 13: U.S. CPI

June 14: Fed policy decision

June 15: ECB policy decision; U.S. industrial production

June 16: Bank of Japan policy decision; University of Michigan sentiment survey

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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 12^th June, 2023 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 Information Document (KID), 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. As part of Templeton Global Equity Group, the European equity desk is manned by a team of professionals based in Edinburgh, Scotland, 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

Global equity markets were fairly mixed last week, ahead of a big week for central bank policy announcements. The MSCI World Index closed the week up 0.4%, while regionally, the S&P 500 Index closed up 0.4% and the STOXX Europe 600 Index was down 0.5%, whilst the MSCI Asia Pacific outperformed, up 1.7%.

There were very few market catalysts last week, with a lot of the focus on upcoming Federal Open Market Committee (FOMC) and European Central Bank (ECB) interest-rate decisions. The Bank of Canada (BoC) and the Reserve Bank of Australia (RBA) both surprised with 25 basis-point (bp) hikes, giving a hawkish feel to markets ahead of this week’s announcements.

The CBOE VIX dipped to 13.50 on Friday, its lowest level since January 2020, which could imply that the market is feeling relaxed heading into this week (and possibly complacent).

In terms of fund flows, there was another big weekly inflow into cash as investors took advantage of higher yields. An inflow of US$70.6 billion took year-to-date inflows into cash to US$837 billion, almost as large as the record US$917 billion in 2020. European-focused equity funds saw their 13th consecutive weekly outflow, shedding another US$2.6 billion. US equities saw a second weekly inflow of US$0.5 billion, Japan saw inflows resume (US$1.8 billion), whilst emerging markets saw another inflow of US$2.6 billion).

FOMC and ECB preview

Focus shifts quite firmly this week to some key central bank policy decisions. On Wednesday, the FOMC holds its policy meeting, and the market currently sees a 70% chance of a pause/skip in the Federal Reserve’s (Fed’s) tightening cycle. Then, on Thursday, the market sees a 94% chance of a 25 bp ECB rate hike, basically a done deal.

FOMC

Before the FOMC went into its blackout period, the rhetoric from board members was on the dovish side. Also, recent data showed a downturn in regional Manufacturing Purchasing Managers Indexes (PMIs) and a jump in the national unemployment rate. The May employment report showed the largest percentage increase in unemployment since April 2020. Jobless Claims came in at their highest level since November 2021, suggesting a slowdown in the jobs market.

However, the Fed will likely be torn, with the April core Personal Consumption Expenditures (PCE) inflation report at 0.4% and the employment report showing 339,000 new jobs added in May. All-in-all, some fairly mixed signals.

Ahead of Wednesday’s announcement, the US Consumer Price Index (CPI) report for May will be released. The report is expected to show that inflation cooled as gasoline prices fell. The CPI report is usually highly correlated with the Institute of Supply Management (ISM) Service Prices report.

Whilst the market pricing is in a “hawkish skip”, there are some analysts calling for another rate hike—so it could prove an interesting week.

ECB

The ECB then takes centre stage on Thursday and the market view is that it will almost certainly raise all three of its key rates by 25 bps. With recent hawkish tones, focus will be on any signals from the Governing Council on when the hiking cycle may come to an end. In the lead-up to this week’s announcement, the May eurozone CPI fell sharply. But despite the welcome easing in inflation, ECB officials have continued to push the hawkish messaging of late, appearing fully committed to a June hike and possibly a further 25 bps in July, too. This represents the most aggressive hiking cycle for the ECB ever.

Moreover, ECB Governing Council member Klaas Knot suggested that market pricing of ECB rate cuts in 2024 is misguided. Knot added that once the ECB reaches its desired terminal rate then it should stay there for a “significant” period of time. The hawkish rhetoric has been fairly broad-based at the ECB of late. ECB President Christine Lagarde has spoken of inflationary pressures remaining “high” and that there is “no clear evidence that underlying inflation has peaked”.

Also, the Bundesbank’s Joachim Nagel had indicated recently that “several” more rate hikes were still required.

Last week’s eurozone macroeconomic data appeared to paint a gloomy picture. The Eurozone Citi Economic Surprise Index is back towards levels seen in July 2022, when gas was 10 times the price.

Meanwhile, first-quarter gross domestic product (GDP) was revised lower to -0.1% month-on-month, down from the previous estimate of +0.1%, meaning the eurozone is now in a technical recession. The Composite PMI number was also revised lower to 52.8 from a flash estimate of 53.3, with readings in France and Germany both revised lower. April Factory Orders saw a sharp decline and a notable miss, down 0.4% on the month. April’s Retail Sales also missed expectations, coming in flat month-on-month.

Despite a waning macro picture, most observers see a rate hike at Thursday’s monetary policy meeting as a done deal.

Week in review

Europe

Last week was fairly uninspiring for equity markets in Europe, with investors on hold ahead of the ECB and FOMC policy announcements. The STOXX Europe 600 Index closed the week down 0.5%. Market volumes have been poor too, each day down 20% versus 100-day averages. Most of the market drivers this week came from outside of the region.

The deterioration of market breadth has been a hot topic the last couple of weeks. In Europe, the five largest stocks have accounted for 41% of the move higher in the Euro STOXX. We saw that reverse last week with investors favouring cheap value stocks. With that, and given continued Chinese stimulus hopes, basic resources stocks were market leaders last week.

Auto stocks also rose last week on news that China’s Ministry of Commerce announced a nationwide campaign promoting vehicle sales, telling banks to offer credit support for car purchases. In terms of the underperformers, chemical stocks lagged last week following a late profit warning from Croda. The insurers continued their recent weakness. Wildfires in Canada were not helping that space. Defensives were unloved again last week, with personal and household goods and food and beverage stocks declining.

United States

Last week felt like a lull between notable events—the debt ceiling situation was resolved the prior week and this week holds the release of the CPI report and Fed meeting. Trading volumes were lighter and having broken through resistance at 4200, the path of least resistance was higher for the S&P 500, which ended the week up 0.4%. Looking at the chart for the S&P 500, it is now testing 4300, where it failed to break through last summer.

Since the start of June, there has been something of a reversal to the recent outperformance of technology stocks. This was evident last week as the Nasdaq was down 0.1% and the more value-orientated, small-cap Russell 2000 was up 1.9%. Given the extent of the tech sector’s recent outperformance, the NSYE FANG+ index is up 67% year-to-date. It is perhaps not surprising to see some tech-sector profit taking.

Meanwhile, consumer discretionary stocks outperformed, rising last week. With the VIX at lowest level since January 2020 and the CNN Fear & Greed Index hitting “Extreme Greed” territory, some question whether markets are becoming complacent ahead of the CPI data release and the Fed meeting this week.

In terms of macro data, the ISM Service data fell to 50.3, the weakest level this year, from 51.9 in April. New orders declined to 52.9 from 56.1 a month earlier.

Asia Pacific

Last week was another decent one for markets in Asia, with the MSCI Asia Pacific Index closing the week up 1.68%.

Equity markets in Hong Kong and Japan were the best performers, with Australia’s market again underperforming after its surprise 25 bps rate hike on Tuesday.

Looking ahead, we have a big macro week ahead in Asia. China, Hong Kong and Taiwan have interest-rate decisions on Thursday, and the Bank of Japan (BoJ) makes its rate decision on Friday. In Japan, rates are expected to remain on hold with yield curve control policy maintained. Trade figures from Japan, India, and Indonesia on Thursday will show the latest state of global demand, while New Zealand also reports on its first-quarter GDP growth that day.

China

Last week was mixed for equities in China given concerns about the pace of the country’s recovery, as May inflation data indicated deflation risk.

China’s May exports came in at -7.5% year-over-year, whilst imports came in at -4.5% year-over-year. May CPI was in line with expectations at +0.2%, while the Producer Price Index (PPI) fell 4.6%.

This comes on top of weaker home and abroad demand, worrying unemployment and of course the continued sluggishness of the property sector.

The rebound has been disappointing. Chinese crude oil stockpiles provide evidence, rising to two-year highs in May as demand fell well short of expectations.

Having said that, the private Caixin/S&P Global survey of services activity rose to 57.1 in May versus April’s 56.4, its fifth successive monthly expansion since Beijing lifted pandemic restrictions in December. The Caixin survey of manufacturing activity, released the prior week, also unexpectedly rose to 50.9 in May. The bullish Caixin data countered the official PMI, which contracted in May for a second consecutive month.

People’s Bank of China (PBOC) Governor Yi Gang played down the threat of deflation, but all this softer data has increased the likelihood the PBOC could introduce further support measures to bolster growth, with some commentators predicting that the PBOC will reduce the reserve requirement ratio and interest rates later this year to boost demand.

Hong Kong

Hong Kong’s equity market started the week strongly, seeing its biggest rally in three months amidst expectations that the BoJ will roll out measures to support an economic recovery.

The property and auto sectors both saw potential stimulus from the government and rallied near the end of the week. Also, the auto sector saw some positive May vehicle numbers, which helped sentiment.

Chinese authorities asked the largest biggest banks there to cut deposit rates, leading to a rally in the banks and property sectors.

Today, a Hong Kong court will decide whether to issue the government with a court order to ban a popular pro-democracy anthem, which has appeared on YouTube.

Japan

Last week marked another impressive week for Japanese stocks, with the Nikkei closing the week up 2.35%, supported by an upward revision to first-quarter economic growth.

The yen weakened further as the ongoing monetary policy divergence versus other major economies continues.

Revised GDP numbers released last week for the first quarter showed the economy grew 0.7%, which was more than expected.

On Friday, we have the BoJ rate decision. The market is still anticipating that the bank will again tweak its yield curve control policy, but these expectations have fallen a bit as Governor Kazuo Ueda has repeatedly stated that the bank will patiently continue with monetary easing until it achieves its 2% price stability target in a sustainable and stable manner, accompanied by wage increases.

Australia

Australian equities fell after last week’s surprise RBA decision to resume its campaign of interest-rate hikes. The RBA, concerned about the pace of wage inflation in the Australian economy, surprised markets by raising rates from 3.85% to 4.10%. Markets are now expecting another rate hike, increasing the probability of a recession in the next 12 months.

This week, business confidence and employment numbers will be released.

The week ahead

As discussed, investor focus is very much on the Fed, ECB and BoJ rate decisions due this week. In terms of macro data, the US CPI will be the main focus. From a European perspective, UK GDP and eurozone Industrial Production reports are key to watch. In Asia, keep an eye out for Chinese Industrial Production and Retail Sales.

Tuesday 13 June                     

• UK Unemployment Rate
• Germany ZEW Expectations Survey; Germany CPI revision
• Spain CPI revision
• US CPI

Wednesday 14 June

• UK Monthly GDP; UK Industrial Production
• Sweden CPIF Inflation
• Euro-area Industrial Production
• China FAI, IP and Retail Sales
• US Mortgage Applications; PPI; FOMC Rate Decision

Thursday 15 June  

• ECB Main Refinancing Rate; ECB Deposit Facility Rate
• US Retail Sales; Import/Export Price Index; Jobless Claims; Empire Manufacturing and Philadelphia Manufacturing; Industrial Production; TIC

Friday 16 June

• Euro-area final CPI Inflation
• Italy Foreign Trade
• Japan BoJ rate decision
• US University of Michigan Sentiment Survey

 

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.

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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 12th June 2023, 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 Information Document (KID), which may be obtained from MeDirect Bank (Malta) plc.