Market Updates

Global equities were mixed last week across the regions, reflecting unwinds and relative exposures to value versus growth. COVID-19 themes were evident as fears regarding the spread of the Delta variant hit investor sentiment given potential travel restrictions.

BlackRock see equities in developed markets (DMs) outside the U.S. as better positioned to capture the economic restart over the tactical horizon, as the powerful restart broadens out. Potentially higher taxes and more regulations could pose challenges to the strong performance of U.S. stocks, yet BlackRock would expect the eventual tax increases to be less than proposed by the administration.

The European economy is recovering fast from the COVID-19 recession. The relaxation in COVID-related restrictions has resulted in sharp growth in both services and manufacturing. The reflation trade appeared to be re-emerging.

The Fed surprised markets by embracing higher inflation and heralding a lift-off from zero rates in 2023, rather than 2024. BlackRock think this could add to its new framework’s credibility as long as last week’s fall in inflation expectations does not persist. Ultimately, the Fed’s outlook implies a more muted response to rising inflation than in the past. This and the economic restart keep them pro-risk.

The primary focus for investors last week was the Fed meeting and the market impact thereafter. As expected, the Fed kept rates unchanged, but did give new guidance for their expected path of rate hikes (the ‘dot plot’) and revised their inflation expectations.

BlackRock’s senior executives and portfolio managers gathered virtually at BlackRock’s midyear outlook forum at a critical juncture in markets – with a pro-risk consensus over the tactical horizon. Beyond the near-term restart, they expressed a wide range of views on topics including growth and inflation, and identified a few key long-term investment themes including the climate transition, China and policy.

Given the presence of some temporary factors driving inflation data, the markets are telling us investors are happy to run with the Federal Reserve’s narrative that inflationary pressures are transitory. We see this view reflected across asset classes.

BlackRock expect the ECB to maintain its current pace of asset purchases even as the economic restart gains traction. They wouldn’t view a decision to slow purchases as a hawkish policy signal, as the ECB is focused on keeping financing conditions easy. This, and a Federal Reserve that BlackRock see keeping policy easy, provides a positive backdrop for risk assets including European equities.

Improving macro data and continuously dovish central banks have kept equity markets well supported. Given the push and pull, the market continues to react to specific headlines and announcements, rather than the reopening trade as a general theme.

The powerful policy revolution implies a lower future path of interest rates than markets are pricing in, even amid rising inflation over the medium term, as captured in BlackRock’s new nominal investment theme. Lower rates – even compared to their previous expectations – lift expected returns across asset classes over the strategic horizon and reinforcing BlackRock’s preference for equities over bonds.