Day: 7 November 2023

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

Stock selectivity: Developed market (DM) central banks have signaled high-for-longer policy rates. We stay selective in DM equities and prefer international stocks.

Market backdrop: U.S. stocks bounced 6% last week as 10-year Treasury yields plummeted on the Fed’s pause and slowing wage growth, underscoring the new regime’s volatility.

Week ahead: This week’s slew of macro data will likely show muted economic activity in China on weak consumer spending and exports. We’re neutral emerging stocks.

Markets rallied last week from multi-month lows after central banks kept rates steady and signs emerged of slowing U.S. wage growth, highlighting the volatility of the new macro regime. What got lost in the shuffle: Central banks have signaled policy rates are staying high for longer. As markets adjust, we find that granular opportunities abound. We stay selective in DM stocks and bonds, tapping markets like Japanese stocks on the back of corporate earnings and reforms.

We see regional stock markets facing diverse policy, inflation and growth prospects – affecting corporate earnings. That variety is reflected in the wide dispersion in excess compensation investors receive for the risk of holding stocks over bonds – or earnings yield minus bond yield – in different DMs. That divergence creates opportunities to be selective, in our view. The excess yield is compressed in the U.S. (dark orange line). We remain underweight U.S. stocks – still our largest portfolio allocation – on a six-to-12-month, tactical horizon. We get exposure to the tech sector, which has outperformed the broader U.S. stock market, through an overweight to the artificial intelligence (AI) theme in DM stocks. The compensation is higher for the UK (green line) but we see diminished growth prospects there. We’re neutral UK stocks. The excess yield is slightly higher for Japan (yellow line) where we are overweight.

Ten-year Treasury yields saw their largest weekly drop in a year last week. We went neutral long-term Treasuries last month because we saw equal odds of Treasury yields swinging in either direction after their surge to 16-year highs. That two-way volatility is playing out now in large daily moves – and yields are still sharply higher since the start of the year. U.S equities have bounced up after a stretch of losses – even when stripping out the impact of the largest public companies. Higher valuations have pinched the earnings yield gap over higher bond yields. Yet U.S. corporate earnings growth has sputtered in the past year as economic activity has broadly slowed. We stay cautious on DM stocks. U.S. Q3 corporate earnings have slightly beat muted expectations on modest revenue growth, pointing to an expansion of profit margins. But we think higher interest rates and financing costs will crunch earnings and profit margins.

Other DMs

We assess what’s in the price for both stocks and bonds in other DM markets. We recently went overweight euro area government bonds and UK gilts to lock in higher yields as markets price in rates staying higher than even we expect. We stay underweight euro area stocks: Even with attractive valuations versus U.S. stocks, expectations for high single digit earnings growth over the next year look too rosy to us. Euro area corporate margins face pressure from higher rates and slower global growth. We upgraded UK stocks to neutral in July and stay there as attractive valuations better reflect the weak growth outlook and hit from rate hikes. Yet we don’t see a catalyst for turning more positive.

We’re underweight Japanese government bonds. We see their yields rising further: The Bank of Japan took a step away from its ultra-loose monetary policy last week when it loosened the cap on 10-year yields even while reserving the option to intervene if yields rise too fast by making 1.0% the “reference rate.” We still see a supportive backdrop for Japanese corporate earnings and stocks thanks to stronger growth and reduced policy uncertainty. We stay overweight after upgrading them from neutral in July. Corporate reforms such as bigger share buybacks and dividends are also shareholder friendly.

Bottom line

Markets are starting to price in the volatile new regime of higher rates and lower long-term growth. We see greater dispersion – and opportunities – as a result. DM stocks are the major building block of portfolios. We get selective across regions based on valuations, earnings prospects and what’s in the price. We’re overweight short-term Treasuries and recently upgraded long-term bonds to neutral. We are also overweight euro area government bonds and UK gilts.

Market backdrop

U.S. stocks jumped 6% this week on the drop in long-term yields. Ten-year U.S. Treasury yields fell around 0.3 percentage points this week – the largest weekly drop in a year – and are nearly 0.5 percentage points below the 16-year high hit last month. We think these sharp yield swings reflect the more two-way risk for bonds as the Fed nears the peak in policy rates. While data revealing slowing wage growth is a step in the right direction, we don’t see in rate cuts until later next year.

China takes center stage this week. A slew of macro data will help gauge how subdued activity remains. Two key challenges weigh on China’s economy: sluggish consumer spending and weak demand for its exports. Crucially, spending lags its pre-pandemic pace. We revised our 2023 growth expectations down to around 5% as a result.

Week Ahead

Nov. 7: U.S. trade data; China trade data

Nov. 9: China CPI, PPI; U.S. initial jobless claims

Nov. 10: University of Michigan consumer survey; UK GDP

Nov. 10-17: China total social financing

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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 6^th November, 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 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

The new month started with an impressive rebound for equity markets. Softer macro data and no change in interest rates from both the Federal Reserve (Fed) and Bank of England (BoE) raised hopes rates may be at a peak. In that context, bond yields sharply contracted and equity markets rose.

In addition, market commentators continue to highlight that seasonality is an important consideration, as the fourth quarter has been a strong period for equities in recent years. Context is key, too. Given a weak October and third quarter, a rebound seemed due at some point, but whether the equity market recovery can be sustained into year-end is a question mark.

Last week markets saw their largest five-day rally since January, with the MSCI World Index up 5.6%, the STOXX Europe 600 Index up 3.4%, the S&P 500 Index up 6%, and the MSCI Asia Pacific Index up 3%.

Week in review

United States

A Fed “pause” and some softer macro data all played into the narrative that the interest rates may have peaked, which sent bond yields tumbling lower and equities squeezing higher. The S&P 500 Index had its best weekly performance since November 2022, ending last week up 5.9% at 4358. This takes the index comfortably above 4200 and also back above both its 200-day and 50-day moving averages. Other US indices also did well, with the Dow Jones Industrial Average up 5.1%, the Nasdaq up 6.5% and Russell 2000 Index up 7.6%.

Some respite in crude oil prices, which were down 5.9% last week, also created a tailwind for the equity markets. Oil traded lower as the risk that the Israel-Palestine war would escalate into a conflict throughout the region appears to have fallen. Record-high US oil production also weighed on prices.

Earnings remains a theme, although the third-quarter season is nearing an end. Attention this week will be on media heavyweight, Disney.

Fed watching

A key focus was the mid-week Fed meeting, where the central bank kept rates on hold as expected and Chair Jerome Powell struck a more dovish tone. Notably, he appeared to distance himself from the “dot plot” of Fed projections, which suggests one more rate hike seems likely this year. He stated that “the efficacy of the dot plot decays over three months” and suggested the importance of considering various factors that could alter the forecast and policy trajectory.

The probability of a December hike has fallen to 4.8% from 16.8% at the end of the previous week, and market pricing for June 2024 has decreased to 4.9% from 5.1% at the week’s end.

With that, Treasury yields contracted sharply. The five-day decline in the US 10-year yield was large enough that it would have been the second-largest decline of the decade proceeding COVID-19.

Macro data: US macro data was softer, which added weight to the view the Fed will be more comfortable pausing rate hikes. The October employment report saw 150,000 job additions, slightly below expectations. In addition, the Institute for Supply Management (ISM) Manufacturing index hit a three-month low of 46.7, also below expectations.

A slightly weaker-than-expected US Treasury quarterly refunding announcement also weighed on bond yields. The Treasury plans to reduce the pace of auction size increases in November, especially for longer maturities. This reduces supply of US Treasuries.

Unsurprisingly, investor sentiment improved, as we saw the Fear and Greed Index close to “Neutral” territory.

Europe

European equities finished broadly higher last week. The STOXX Europe 600 Index closed the week up 3.4%, its best week since the first quarter. Several factors pushed risk assets higher, including the Fed and the BoE expected pauses, and the US Treasury refunding announcement. Government bond yields have retraced quite firmly from recent highs. Corporate credit default spreads were tighter—the XOVER Index fell back to mid-September levels.

All sectors traded higher last week, apart from oil. Unsurprisingly, with short-covering likely at play and in the context of lower interest rates, the debt-laden real estate sector outperformed last week. Retail stocks were also stronger amidst hopes of peak rates as well as and supportive labour market data. At the other end, oil and gas stocks were lower on Friday on hopes the war in Middle East seemed less likely to spread.

European equities suffered their 34^th consecutive week of outflows, totalling US$1 billion in the week ending 1 November.

End of BoE tightening cycle?

As expected, the BoE kept the bank rate unchanged at 5.25%. With no change for two meetings in a row, many observers hope its tightening cycle has come to an end. The vote split was 6-3.

Regarding the updated guidance and projections, the central bank has kept the door open for more hikes, but in practice a potential sharp drop in inflation later this month and an economy facing the prospect of recession will reduce chances of more tightening. Governor Andrew Bailey stated that there are still “risks” to upside inflation, and many traders expect the first cut to come in September 2024. Markets will be watching the October Consumer Price Index (CPI) inflation data, which is released on 15 November.

Asia

Last week was a good week for Asian equities overall, with the MSCI Asia Pacific index closing the week up 3.02%, despite mainland China’s market gains of just 0.43% on the week.

Japan

Japanese equities had a strong week, despite being closed on Friday for Culture Day. The benchmark Nikkei was up 3.09%.

The biggest focus this week was on the Bank of Japan (BoJ) decision on Tuesday and, despite the BoJ tweaking its yield curve control (YCC) framework, monetary policy remained highly accommodative, supporting sentiment. The central bank decided to introduce flexibility to the 10-year YCC operations, stating the upper limit of 1% “as a reference”, and also removed the 10Y YCC band of +/-50 basis points (bps).

The government also announced approximately US$110 billion worth of stimulus this week in an attempt to boost growth and help households cope with the rising cost of living as inflation moves higher.

Going onto 2024, it sets up an interesting picture as the government will be stimulating the economy, but the BoJ may be slowly aiming to tighten financial conditions.

The Japanese yen weakened versus the US dollar after the BoJ announcement but strengthened over the rest of the week, closing the week at 149.39.

China

Last week was a rather subdued week for markets in China, with the Shanghai Composite Index closing the week up 0.43%, as broader concerns about the country’s slowing growth offset speculation that US interest rates may have peaked.

At the start of the week, there was hope for some new policy announcements out of the Central Financial Work Conference, chaired by President Xi Jinping. However, not much news came out of the event.

Real estate concerns continued last week, as new home sales by the country’s top 100 developers fell 27.5% in October year-over-year (y/y) and real estate loans declined y/y in September.

The latest data also indicates contraction in factory activities, as China’s Manufacturing Purchasing Managers Index (PMI) fell to 49.5 in October, while the non-manufacturing PMI dropped to 50.6 from 51.7 prior. China’s October Caixin Manufacturing PMI also missed expectations, coming in at 49.5.

Finally, according to an American official, US and Chinese officials have agreed (in principle) on a meeting between US President Joe Biden and China’s Xi Jinping during the Asia-Pacific Economic Cooperation summit in November. This could be the first meeting between the two presidents since the G-20 in Bali last year.

Elsewhere, South Korean equities traded higher today, ending the session up 5.5% after regulators announced a short selling ban.

The week ahead

The calendar this week is quieter compared to recent weeks. In terms of central-bank decisions, the Reserve Bank of Australia holds its policy meeting on Tuesday and markets anticipate its key interest rate will be lifted by 25 bps after a four-month pause. It could prove an interesting contrast versus the picture developing elsewhere, as the European Central Bank, Fed and BoE all remained on hold at recent meetings.

Corporate earnings remain a theme to watch in the United States and Europe.

In terms of geopolitics, headline risk from the Middle East remains an ever-present risk for markets. In the United States, the Republican party holds its third presidential candidate debate.

In terms of macro data, highlights include UK gross domestic product (GDP) and German Industrial Production. In the United States, the University of Michigan’s sentiment survey and trade balance data will be worth watching. In Asia, the Chinese CPI report stands out.

Monday 6 November

• Germany Manufacturing Orders
• Euro PMI Composites
• Japan all household spending

Tuesday 7 November

• Germany Industrial Production
• China Trade Balance
• US Trade Balance
• RBA rate decision

Wednesday 8 November

• Eurogroup Meeting
• Germany CPI (revision)
• France Foreign Trade

Thursday 9 November

• ECOFIN meeting of EU finance minsters
• China CPI
• US Initial Jobless Claims/Continuing Claims

Friday 10 November

• UK GDP; Industrial Production
• Italy Industrial Production
• US University of Michigan consumer 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.

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 6th November 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.

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MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Information Document (KID), which may be obtained from MeDirect Bank (Malta) plc.