Market Updates

Hotter inflation has materialized and market volatility is rising as the economic restart gathers pace. This is playing out in line with BlackRock’s view that the economy is in a “restart” – not a traditional recovery. BlackRock prefer to look through any volatility and see a later “lift-off” from zero rates than markets expect. This means higher-than-expected inflation in the medium term, and underpins their pro-risk stance.

Last week was unsteady for equity markets with much of the focus on inflation data our of the United States and China. A further easing of restrictions in parts of the UK and Europe will help build the recovery.

Markets are pricing in a liftoff from near-zero policy rates as early as next year, even though the Fed through its new framework has committed to stay behind the curve on inflation. BlackRock caution against extrapolating too much from strong near-term activity data amid a powerful restart. BlackRock see a high bar for the Fed to change its policy stance and believe this may be underappreciated by markets.

Inflation looks set to overshoot the Fed’s target as BlackRock expected. Yet BlackRock see uncertainties around the near-term persistence of the overshoot as the restart leads to unusual supply and demand dynamics. BlackRock have closed their tactical overweight in inflation-linked bonds as inflation expectations have risen sharply but favoured them strategically as they see medium-term inflation still underpriced.

Global equities traded marginally lower last week, with much of the focus at a company level as first quarter (Q1) earnings season progresses. Despite strong earnings and record beats, there was lackluster price action, with significant divergence in each region.

A powerful economic restart is underway in the U.S. – with Europe and emerging markets (EMs) set to follow. At the same time BlackRock’s new nominal theme has been playing out, with a hefty jump in inflation expectations but a more muted rise in nominal yields. Against this backdrop, BlackRock reiterate their pro-risk stance and refine our tactical views in response to adjustments in market pricing and valuations.

Equities globally were lacklustre last week, with Europe underperforming amid a position-driven selloff. Outside of the obvious continuing focus on the pandemic and vaccine rollouts, there was little in the way of broad market themes, which in turn saw focus shifting to technical factors and company specifics amidst the first-quarter earnings season.

Blackrock see the economic restart and greater stability in U.S. government bond yields – as indicated by their new nominal theme – supporting emerging market assets over coming months. These valuations appear relatively attractive in a world of low yields after a choppy start to the year. Risks to Blackrock’s view include potential policy tightening and sluggish vaccine rollouts in some EMs.

The spread of COVID-19 infections in continental Europe and how governments are managing it continues to contribute heavily to the market push and pull we’ve seen in recent weeks and months.

Oil and industrial metals have rallied since late-2020 on expectations for a swift economic restart, sparking talk of a new commodity “supercycle.” BlackRock sees a more nuanced outlook – with a divergence across different commodities. The lift for oil from the economic restart is likely to be transitory, while some metals may benefit from structural trends such as the “green” transition for years to come, in their view.