Market Updates

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.

Market attention to geopolitical risks has fallen to four-year lows. BlackRock believe this is justified, as investors appear more focused on the economic restart and inflation outlook and less concerned about geopolitics since the change in U.S. administration. Yet it’s worth watching specific risks as flareups can catch investors off guard when attention is low.

The debate around rising inflation and the potential impact on central bank policy has been the key driver for financial markets of late, and last week was no exception.

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.