Day: 25 September 2023

Jean Bovin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment Strategist, Alex Brazier – Deputy Head, and Nicholas Fawcett – Macro 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

Yield surge: Bond yields are surging as the volatile macro regime brings uncertainty over central bank policy and risks ahead. We get granular in bonds and equities.

Market backdrop: The 10-year U.S. Treasury yield jumped to 16-year highs and stocks slumped over 2% last week. We think yields can go higher but see regional opportunities.

Week ahead: U.S. and euro area inflation is in focus this week. Inflation has cooled as pandemic mismatches resolve, but we see demographics starting to bite.

Yields on benchmark 10-year U.S. Treasuries last week briefly rose to 16-year highs above 4.50% as major central banks paused rate hikes but left the door open for more. Markets are coming around to our view that rates will stay high – and now even exceed our expectations in Europe. Rising long-term bond yields show markets are adjusting to risks in the new regime of greater macro and market volatility. We get granular in bonds and equities.

All eyes initially were on monetary policy last week amid a blitz of central bank decisions. Then the main story quickly became surging 10-year bond yields to 16-year highs (dark orange line in chart) – even as the Fed and other central banks left policy rates unchanged (yellow line). We think the market is adjusting to the new regime and its implications – especially higher macro volatility. This is bringing to light just how uncertain the outlook is as well as the risks to longer-term bonds. As markets adjust to the new regime, we see opportunities. We’ve turned positive on long-term UK gilts and European government bonds, where that adjustment is more advanced. But we’re not yet ready to jump back into long-term U.S. Treasuries. We think term premium – the compensation investors seek to hold long-term bonds – can return and push yields higher still, as can quantitative tightening and the step-up in Treasury issuance.

Rate hikes are weighing on economies. Major central banks are administering the medicine of tighter monetary policy and economies have slowed. The medicine is still working its way through the system – and effects have varied across regions. PMI data across Europe has shown stagnation. GDP data suggest activity has held up in the U.S. But we think activity has actually stagnated there as well. That seems to have gone under the radar: a stealth stagnation. The average of GDP and another official measure of activity, gross domestic income, shows the U.S. economy has flatlined since the end of 2021.

Central bank blitz

The market narrative hasn’t been one of U.S. stagnation though. One reason: We’ve avoided the short and sharp drop of recession for now. Instead, it’s felt like a rolling effect of hikes rippling through the economy – that may be why the market feels different, too. The weakness we’re seeing isn’t a normal business cycle slowdown, in our view. Unemployment is still low. That suggests something structural is at play, so we don’t think a purely cyclical lens applies. We’ve long said we’re in a world shaped by supply – and this is playing out. We see constraints on supply building over time – especially from a shrinking workforce in the U.S. as the population ages. Central banks need to keep a lid on growth to avoid resurgent inflation once pandemic-era mismatches unwind. That’s why we see them holding tight, not cutting rates like they did in past slowdowns.

Our long-held underweight to long-term U.S. Treasuries has served us well as yields climb. Markets have come around to our view on policy rates. Yet there is still little term premium. We prefer short-term Treasuries given comparable income to high-quality credit without the same credit or interest-rate risk. We also like long-term bonds in Europe and the UK. Ten-year yields there are around three percentage points higher than the pre-pandemic average, versus about two in the U.S.

Japan stands apart. First, the Bank of Japan is seeking to ensure it has got inflation up sustainably to 2%. Keeping policy unchanged last week suggests it would rather hike too late than risk being too early. Japanese bond yields have been relatively stable, but we expect a jump as suggested in market pricing with the BOJ loosening its yield cap over time. Second, Japan is not suffering the same structural downshift in growth – and corporate reforms are taking shape. We think strong growth can boost earnings and shareholder-friendly actions may keep attracting foreign investors to Japanese equities.

Bottom line

Bond yields are surging as the market adjusts to the implications of the new macro regime. We tactically prefer short-term bonds in the U.S. for income, long-term bonds in Europe and the UK – and Japanese stocks.

Market backdrop

The 10-year U.S. Treasury yield jumped to 16-year highs and U.S. stocks slumped over 2% last week – with the S&P 500 steadying some on Friday after its worst day since the March banking tumult. The Fed, the Bank of England and BOJ all kept rates unchanged. We think surging bond yields show markets reassessing the greater uncertainty and volatility in the new macro regime. We expect persistent inflationary pressures to play into this as demographic changes start to bite.

U.S. and euro area inflation is in focus this week, including the Fed’s preferred PCE gauge. Inflation has cooled as the spending shift back to services helps resolve some the pandemic-era mismatches in supply. But we expect core inflation to stay on a rollercoaster as aging populations keep the labor market tight and keep up inflationary pressures.

Week Ahead

Sept. 26: U.S. consumer confidence

Sept. 29: Flash euro area inflation; U.S. PCE

Sept. 30: China 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 25^th September, 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.

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 Investments 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

Last week was tough for global equities, with most major indices trading lower following a “hawkish pause” from the Federal Reserve (Fed), sending Treasury yields and the US dollar higher. Elsewhere, there were several other central bank meetings, including the Bank of Japan (BoJ), Bank of England (BoE), Swiss National Bank (SNB), and the Riksbank. For the week, the MSCI World Index declined 2.7%; the STOXX Europe 600 Index declined 1.9%; the S&P 500 Index declined 2.9%; and the MSCI Asia Pacific declined 2.3%.

Week in review

United States

US equity indices were lower across the board last week, with a risk-off tone following the Fed meeting. The S&P 500 Index closed below its 50 and 100-day moving averages and well below 4400, where the index had found some support in recent months. The Dow Jones Industrial Average fell 1.9%, the Nasdaq 100 Index was down 3.3%, and Russell 2000 was down 3.8%. With that, most US indices have now seen three weeks of declines.

As noted, the Fed decided to pause, keeping its key interest rate steady at 5.25%-5.5%. It adopted a more hawkish stance by revising its “dot plot” of projections higher, signalling a longer period of elevated interest rates. Fed Chair Jerome Powell’s comment that the Fed was “fairly close…to where we need to get” was inferred to mean that they weren’t “there” yet.

The latest quarterly projections show that 12 of the 19 Federal Open Market Committee (FOMC) participants favoured another rate hike in 2023. In another hawkish slant, the committee members now project the fed funds rate at 5.1% by the end of 2024, up sharply from a 4.6% projection back in June, and above market estimates of around 4.9%. Furthermore, the 2025 projection also showed a more hawkish outlook, rising to 3.875% from the prior 3.375% forecast.

Following the Fed meeting Treasury yields pushed higher, with the US two-year yield at 5.1%. In the equity markets, a risk-off theme was clear, with consumer discretionary stocks declining whilst defensive sectors held up the best, including health care and utilities. Tech stocks declined sharply as a higher rate environment means higher funding costs. Investor sentiment within the CNN Fear & Greed Index slumped well into “Fear” category.

In terms of weekly fund flows, US equities saw US$16.9 billion from stocks (the largest since December 2022).

Finally, the auto industry continues to suffer from the ongoing United Auto Workers union strikes, which have expanded to further sites.

Europe

European equities finished last week lower, with the Fed’s “hawkish hold” spooking investors.

Thursday was the big day for central bank action in Europe. The BoE decided to keep rates on hold at the 5.25% base rate. At the start of the week, a hike was viewed as very likely, but the release of the August Consumer Price Index (CPI) on Wednesday (which saw the heading reading at 6.7%) reduced the probability of that down to a coin toss. The vote to keep rates on hold was close at 5-4. The reasoning for the hold centred on a weakening labour market, moderating wage pressures, and easing headline and services inflation.

UK domestic stocks traded higher on the BoE headline but pared those gains into the end of the week. Sterling closed the week down 1.0% vs. the US dollar. We would note that the surprise central bank rate hold has raised questions of a policy error, given that US core inflation is at 4.3%, whilst UK core inflation is still at 6.2% (as of August). Oil prices have moved higher since August, and so inflation is very likely to persist, meaning further action will likely need to be taken.

Also on Thursday, the SNB kept interest rates on hold. The Swedish Riksbank and the Norges Bank both raised by 25 basis points, in line with market expectations.

Last week, European value stocks continued to outperform European growth. Bank stocks were amongst the outperformers in Europe, along with telecommunications, food and beverage stocks, as defensives were generally favoured over cyclicals. Travel & leisure stocks notably lagged last week.

Looking to fund flow data, European equity outflows picked up again, with US$3.1 billion in outflows, the region’s 28th consecutive week of outflows.

UK assets in focus

Following last week’s UK CPI decline and BoE hold, UK equities are back in focus—and some analysts are suggesting they look undervalued.

We noted a couple of weeks ago that the United Kingdom recorded the largest year-to-date outflows in Europe (US$23.5 billion), so it would not be a surprise to see a bit of a rebound.  

On the data front, the UK consumer remains resilient, as the latest UK GfK Consumer Confidence Index rose four points to -21 in September, the strongest level since January 2022 before the Russian invasion of Ukraine triggered a surge in energy bills. However, some are questioning how sustainable this consumer resilience is, particularly given that UK credit card debt continues to move higher.

The August UK Purchasing Managers Index (PMI) came out at 46.8, further supporting the idea the BoE is reaching peak rates. The BoE took the unusual step of stating it looked at this data before it was published when making its decision to pause.

Asia

Asian equities declined last week, with the hawkish Fed weighing on the markets.

Friday’s BoJ announcement was in focus, but there was very little to be taken from it. The central bank kept rates on hold at -0.1% and noted no immediate change in existing policy, maintaining interest rate settings and forward guidance. In his press conference, Governor Kazuo Ueda’s comments were taken as dovish, as he noted the need to be patient as the goal of sustainable 2% inflation was not yet in sight. He commented that that the BoJ is still some distance away from being able to adjust from the negative rates. Ueda also said that the bank would remain data-dependent and that when 2% inflation was foreseen then yield curve control may be concluded.

The Japanese yen fell once again versus the US dollar. Foreign investors have turned negative on Japanese stocks recently, as evidenced in large outflows.

Chinese developers remain in focus. Last week, some executives from Evergrande’s wealth management unit were detained, and the company cancelled its key creditor meeting at the last minute and said it must revisit its restructuring plan. Headlines of overdue loan payments, defaults and liquidations continue to plague the sector. Last week, the Shanghai Composite actually managed to close last week up 0.5% as some investors speculated that the government would roll out new stimulus. Conversely, the Hang Seng Index closed the week down 0.7% as big tech names sold off.

Week ahead

This week looks like somewhat of a lull, with no central bank decisions of note and corporate earnings season still a few weeks off. There are a few Fed speakers though on the calendar, including Fed Chair Powell, which will be interesting to watch. In terms of macro data, highlights include eurozone inflation data, US and UK gross domestic product (GDP) data, China Industrial Profits and PMI reports, as well as Japanese Industrial Production. Next week is Golden Week, so a number of Asian markets will be closed.

Monday 25 September

• Spain Producer Price Index (PPI)
• Germany IFO Business Climate
• UK CBI Retailing Reported sales
• US Dallas Fed manufacturing survey

Tuesday 26 September

• Sweden PPI
• US FHFA home prices; New home sales

Wednesday 27 September

• Euro-area M3 Money Supply
• Norway unemployment rate trend
• Germany Consumer Confidence
• Sweden Trade Balance; Consumer & Manufacturing Confidence
• France Consumer Confidence
• US Durable Goods
• China Industrial Production

Thursday 28 September

• Netherlands Producer Confidence Index
• Norway Retail Sales w/auto fuel
• Spain CPI & Retail Sales
• Italy Consumer & Manufacturing Confidence Index; PPI
• Eurozone Consumer & Industrial Confidence
• Germany CPI
• US GDP & Core Personal Consumption Expenditures Index prices

Friday 29 September

• Netherlands Retail Sales & CPI
• Sweden Retail Sales
• UK GDP & government spending & CA balance; UK mortgage approvals
• France CPI & Consumer Spending
• Germany unemployment change
• Spain Current Account Balance
• Norway unemployment rate
• Eurozone CPI estimate
• Italy CPI; Industrial sales
• China Caixin Manufacturing PMI
• Japan Industrial Production (month-over-month)

 

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 18^th September 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.