Notes from the Trading Desk – Franklin Templeton

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 equities sold off last week, pulling back sharply at the start of the new month. The MSCI World closed the week down 2.3% after finishing July up 3.3%, while regionally, the S&P 500 Index closed down 2.3%, the STOXX 600 Europe Index was down 2.4%, and the MSCI Asia Pacific was down 2.1%. Ratings agency Fitch downgraded US credit from its AAA status to AA+, which weighed on equity markets. The Bank of England (BoE) raised rates by 25 basis points (bps), less than the 50 bps some feared, which tempered losses a bit.

As we head into August, risk assets face a series of headwinds. Firstly, seasonality is not in favour of risk assets in Europe—August-September represents the worst period of the year historically for returns in the region. In addition, if we look back at both March and the start of July, when the US 10-year Treasury note moved up to 4% or beyond, stocks have sold off, and we saw similar action play out last week. Finally, equity market performance has been strong of late, and many investors may feel it’s time to take some profits; globally, stocks haven’t had a >1% daily loss since May.

Fund flows were mixed last week, according to the latest Bank of America “Flow Show” report. US equity funds received another inflow (although small) of US$0.3 billion. Emerging market funds saw a fourth consecutive weekly inflow, US$4.1 billion in the latest period. However, European-focused equity funds saw their 21st consecutive week of outflows, shedding US$3.3 billion. European funds have now lost nearly US$38 billion overall year-to-date.

European equities had rallied into month-end in July, and with some fanfare too, as the Euro Stoxx 50 Index traded firmly through 4400 for the first time since 2007. It became apparent that a so-called  “de-grossing” amongst the hedge fund community was a primary market driver, with these participants largely covering short positions in the market.

Week in review

Europe

Last week, European equities pulled back quite sharply from recent highs, with the STOXX 600 Index closing the week down 2.4%. In terms of data, eurozone second-quarter gross domestic product (GDP) was up 0.3%, higher than expected. The eurozone July preliminary Consumer Price Index (CPI) reading was up 5.3%, in line with expectations, while the eurozone June Producer Price Index (PPI) deflated more than expected, down 3.4% on the year. This suggests that producers are passing on the effects of declining prices to customers. The decline in retail sales slowed in June, down 1.4% year-on-year vs. the drop of 2.4% in May.

Corporate earnings also market drove moves last week, as 80 of the STOXX 600 Index companies reported. Almost all European sectors finished in the red last week, with oil and gas the only sector to finish higher overall.

As noted, the BoE lifted interest rates 25 bps to 5.25% as expected. The Monetary Policy Committee (MPC) vote was split 6 to 3, with two voting for 50 bps and one on hold. The MPC also kept its forward guidance, stating: “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”

BoE terminal rate expectations have fallen again, with the market now anticipating a peak of 5.71% for March 2024. That compares with the expectation of a peak of 6.50% from back at the start of July.

Sentiment on European equites remains fairly cautious. The Financial Times ran an article last week suggesting European assets had fallen out of favour with investors titled: Investors turn gloomy over Europe’s economic outlook.”

Looking at upcoming European macro events, the eurozone CPI will be released 18 August and GDP on 16 August. There is no European Central Bank (ECB) meeting in August—the next ECB meeting is on 14 September.

United States

US equities sold off last week, paring nearly all of July’s gains. The S&P 500 Index closed last week down 2.3% after finishing July up 3.1%. Corporate earnings were in focus again and over 80% of the companies in the S&P 500 Index have now reported, with the majority beating expectations. The Fitch US debt downgrade from AAA to AA+ garnered the most attention last week, spooking investors a bit and causing the S&P 500 Index to close down 1.4% on Wednesday.

Fitch had warned that it was considering a downgrade back in May as it highlighted the ballooning fiscal deficit, which has increased by US$1.39 trillion year-to-date, up 170% vs. the same period in 2022. Based on projections from the Congressional Budget Office, US public debt is expected to rise $5.2 billion every day for the next 10 years, and sovereign debt of US$52 trillion by 2033.

Last week, the US July employment report also caught market attention. Non-farm payrolls increased by 187,000 in July, which was slightly lower than anticipated, but the unemployment rate ticked down to 3.5% vs. 3.6% in June, representing one of the lowest rates of unemployment in decades. On balance, the positive news in the unemployment rate and only a small increase in hourly wages seemed to offset the slowing in headline payroll gains and the downward revision to prior months. Note, we are due another employment report before the next Federal Reserve meeting and interest-rate decision in September.

Looking at market sectors, similar to Europe, all sectors apart from energy closed last week in the red. The VIX Index was up sharply off the lows last week, rising 28%.

Asia

Last week was poor for equities in Asia, with the MSCI Asia Pacific Index down 2.11%, mainly on the back of last week’s US credit ratings downgrade, the Bank of Japan’s (BoJ’s) recent relaxation of its yield curve control (YCC) and the market’s disappointment in the lack of tangible government support for the Chinese economy.

Japan

The Nikkei Stock Average closed last week down 1.73% despite some decent earnings releases during the week.

The BoJ’s announced tweaks to YCC policy remained in focus. As a reminder, on 28 July the BoJ announced it would “conduct yield curve control with greater flexibility” with the ranges “as references, not as rigid limits” and said it would offer to purchase Japanese government bonds (JGBs) at 1.0% every business day. The BOJ kept its actual YCC parameters unchanged, holding the target band for the 10-year JGB yield at around 0% +/- 0.5 percentage points. But in practice, the band’s ceiling has now been raised to 1.0%, with the BoJ offering to buy debt at that rate every day. As a result, last week the yield on the 10-year JGB rose to 0.655%, near a nine-year high. The Japanese yen also weakened versus the US dollar.

China

Last week saw equities in mainland China close fairly flat (just into the green), as speculation of more government support for the economy outweighed some bearish economic data.

Numerous state bodies have released statements indicating help and support for the economy with measures that include:

  • boosting demand in electric vehicles and housing;
  • cutting taxes for small and medium enterprises;
  • attracting foreign investment;
  • helping employment of the young; and
  • easing local government debt risk.

However, there has been little hard evidence of actual support (so far), which seems to be holding markets back.

There was some softer economic news last week, with the Official and Caixin Manufacturing Purchasing Managers Index (PMI) readings coming in at 49.3 and 49.2 respectively, both dropping below the important 50 level, which separates growth from contraction.

Sector-wise, brokers and stock trading software companies rallied last week as local investors were enthusiastic about the possibility that China may allow day-trading for some A-share stocks.

Forecasters are anticipating July’s export data will show a double-digit decline and could sound another alarm to China’s struggling economy.

Hong Kong

The Hang Seng Index closed down 1.89% last week as many investors found the Chinese government’s measures to stimulate the economy a bit disappointing. Despite the announcements stating the intention to stimulate (as noted above), the market perception has been that there have been few details and even less cash to translate the plans into an economic impact.

The People’s Bank of China said that it would step up its counter-cyclical measures to support the economy and create new tools if necessary, pledging especially to support property companies. However, it is not clear how far that support will extend in financial terms. Despite the pledges of support, Chinese property companies closed lower last week.

Inflation figures coming out this week are expected to show the Chinese economy fell further into disinflation. In addition, observers anticipate a sharp drop in aggregate financing and new loans.

Chinese five-year and 10-year bond yields now are near their lowest levels since March 2020.

Week ahead

Holidays: Friday 11 August: Japan

Monday 7 August

  • Switzerland unemployment rate
  • Germany Industrial Production
  • Sweden Budget Balance
  • Norway Industrial Production
  • Euro Zone Sentix Investor Confidence
  • US Consumer Credit
  • China Trade Balance

Tuesday 8 August                     

  • Netherlands CPI
  • Germany CPI
  • France Trade and CA Balance
  • US NFIB Small Business Optimism; US international trade balance
  • China CPI; PPI

Wednesday 9 August

  • Norway average monthly earnings
  • UK RICS House Price Balance

Thursday 10 August   

  • Netherlands Industrial sales and Manufacturing Production
  • Sweden Industrial Orders
  • Norway CPI
  • Italy CPI EU Harmonized
  • US CPI and Jobless claims; US Federal budget

Friday 11 August

  • France ILO Unemployment Rate
  • UK GDP and Manufacturing and Industrial Production
  • France CPI
  • Spain CPI
  • Italy Trade Balance Total
  • US Core PPI

 


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 7th August 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.

BlackRock Commentary: Opportunities in globalization rewiring

Wei Li – Global Chief Investment Strategist of BlackRock Investment Institute together with Ben Powell – Chief Investment Strategist for APAC, Axel Christensen – Chief Investment Strategist for Latin America, and Catherine Kress – Head of Geopolitical 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

EM resiliency: We see emerging markets better withstanding volatility and benefiting as supply chains rewire. We switch our EM debt preference to hard currency from local.

Market backdrop: Developed market stocks slid last week and long-term bond yields jumped as markets focused on U.S. fiscal challenges. We see long-term yields rising more.

Week ahead: All eyes are on U.S. inflation this week after softer-than-expected data in the last CPI print. We see persistent wage pressure keeping core inflation sticky

Last week’s bond yield jump and stock tumble underscore we’re in a new regime of greater volatility. A renewed focus on U.S. fiscal challenges and surprise policy tightening in Japan have stirred up volatility in developed markets (DM). We think emerging market (EM) assets have an edge as their central banks cut rates and some benefit from rewiring supply chains. What’s in the price is key. We rotate our EM bond preference to favor hard currency and stay granular in EM stocks.

Trade activity between nations dipped between World War One and World War Two (yellow shaded area in chart) before surging in the decades after World War Two as globalization took shape. Yet trade as a share of global GDP has plateaued (orange line) since the 2008 global financial crisis – one sign that globalization is under pressure. We see a world of fragmentation ahead: Competing defense and economic blocs are emerging. Multi-aligned nations are set to grow in power and influence, and we expect many major EMs to fall into this camp. As global fragmentation plays out, countries and companies are increasingly prioritizing security and resiliency – through industrial subsidies, export controls and other tools – over maximum efficiency. We see this shift in priorities accelerating the rewiring of supply chains as nations aim to bring production closer to home. All this favors selected EMs, in our view.

Against that structural backdrop, we also favor broad EM exposures over DMs in the short term. DMs are experiencing bouts of volatility and we see risk of more. The Fitch Ratings downgrade of the U.S. credit rating last week and the U.S. Treasury’s sizable borrowing needs put a spotlight on the challenging U.S. fiscal outlook. We think EMs are relatively better positioned to withstand some of this volatility. That’s partly due to EM central banks nearing the end of their rate hiking cycles. Some have started to cut policy rates, like in Chile and Brazil. Yet they’re not immune from a sharp hit to risks assets, in our view.

EM angle

We put our new playbook in action again by gauging what’s in the price. We flip our overweight to EM local currency debt to neutral and turn overweight EM hard currency debt on a six- to 12-month tactical horizon. We had been overweight EM local currency debt since March on attractive yields from EM central banks nearing the end of their hiking cycles and a broadly weaker U.S. dollar. We began to reassess our view on local currency in July: Yields have fallen closer to U.S. Treasury yields. Rate cuts seem largely priced in and could put downward pressure on EM currencies, dragging on local currency returns.

EM hard currency debt – issued in U.S. dollars and thus cushioning returns from any local currency weakness – looks more attractive. Hard currency debt is more diversified than local currency, based on J.P. Morgan indexes, and it could benefit from the rewiring of globalization. We also think lower credit ratings in EM hard currency debt are priced in given that yields are at a near 14-year high versus local currency bond yields, Refinitiv data show.

We prefer EM bonds and stocks as we see a rewiring of supply chains benefiting select countries that offer valuable commodities and supply chain inputs. That includes oil from the Gulf states; India’s chemicals and industrial manufacturing; South Korea’s battery and memory supply chain businesses; Indonesia’s nickel and cobalt; and Chile’s lithium. Some, like Mexico, could benefit from U.S. and other DM efforts to reshore production closer to home. That push includes the making of semiconductors – the technology powering artificial intelligence (AI) and a key part of major EM tech sectors. Yet as an investment opportunity, the AI mega force may be bigger within DM, supporting revenues and margins across sectors.

Bottom line

We are in a new regime of greater volatility – and we see EMs better positioned to withstand it, for now. We harness mega forces to find opportunities based on what’s in the price. We stay overweight EM debt overall but switch our preference to hard currency on its high yields. We like EMs that may benefit from rewiring globalization.

We’re watching July U.S. CPI inflation this week after softer-than-expected data in June. We expected the normalization in consumer spending to lead to a decline in goods prices. The key for us: persistent service price pressures from wage growth in a tight labor market. Payrolls data last Friday confirmed that tightness, with unemployment still near historical lows.

Week Ahead

Aug. 8: China trade data

Aug. 9: China CPI, PPI

Aug. 10 – 17: China total social financing; U.S. July CPI (Aug. 10)

Aug. 11: UK GDP; U.S. PPI, Michigan consumer sentiment survey


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 7th August, 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.


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.

Using cards safely

Over the years, paying for goods and services has become progressively easier. The processing of card payments is no exception, even more so with the advent of contactless technology and virtual cards for use both in store and online.

With the launch of its own free card services, MeDirect now also offers these benefits to all its clients. It is important, however, to always keep in mind that any technology has its risks. Card theft and fraud are a real threat but by following a few steps, you can make sure the risk is minimised.

Keeping your cards safe

Keeping your cards physically safe is a clear first step. Make sure you know where your card is and check regularly to see that it has not been moved, tampered with, or stolen. Do not disclose the PIN linked to your card to anyone, including the Bank or the Police, and do not write it down anywhere. It is also important to not disclose the card number or any other sensitive data on the card, such as the expiry date and CVV2, to any third party except when reporting an actual loss or theft.

Tips for using your cards safely

When using physical or virtual cards there are a number of things you can do to minimise the risks of theft or fraud. When withdrawing cash from an ATM, check the machine you are using for any obvious signs of tampering and be wary of any unsolicited offers of help. If you are shopping online, make sure the website you are using is secure and has an SSL certificate, which is indicated by the closed lock icon next to the web URL. Finally, when shopping in store, make sure no one is looking if you do need to enter your PIN to complete a purchase. Never let your card out of your sight.

Information at your fingertips

Information always plays a vital role in combatting card theft and fraud. Use the mobile app or the online banking platform to regularly check your accounts and make sure there have been no unexpected transactions. Check your statements to ensure these match your actual purchases.

Layers of protection

Of course, card providers and banks are also constantly working to improve the safety and security of cards. Like may financial services providers, MeDirect also requires customers to authenticate and authorise online payments through a two-factor authentication process via the Mobile Banking Application and/or by means of your password and an SMS issued by the Bank which will contain a one-time password. Daily, weekly and monthly limits on the amounts that can be withdrawn or spent are also used to help protect customers.

Take action

If your card is lost or stolen or if you think its security has been compromised for some reason, contact the bank immediately. You can do this by calling on +356 2557 4400, via the mobile application or the online banking platform. The quicker this is done, the faster the Bank will be able to stop the card, minimising your risk of losses. Avoid using email to alert the bank about a lost or stolen card, as this may not be picked up immediately.

Enjoy the freedom to use your money as you wish

Wherever there is money to be made, hackers and thieves will always try to find a way to compromise data and payments processes. By taking sensible precautions and using the technology and information available to you, these risks can be greatly minimised, leaving you free to enjoy your hard earned money in whatever way you wish.

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