Day: 22 September 2020

Jean Boivin, Head of BlackRock Investment Institute together with Mike Pyle, Global Chief Investment Strategist, Elga Bartsch, Head of Macro Research and Nicholas Fawcett, Member of Economic and Market Research group, all 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.

We see a higher inflation regime in the medium term after a decade of inflation persistently undershooting central bank targets. Three new forces are at play: rising global production cost, new central bank policy frameworks that allow for inflation overshoots and greater political pressure for keep rates low in a high-debt environment.

Forward-looking estimates may not come to pass. Sources: BlackRock Investment Institute and the Federal Reserve with data from Refinitiv Datastream, September 2020. Notes: The chart shows a market measure of what five-year inflation expectations based on the consumer price index (CPI) will be in five years’ time. We show it using the five-year/five-year inflation swap. The line is shifted forward five years. The orange dot shows the BlackRock Investment Institute’s current estimate of average U.S. CPI inflation for the same five-year period of 2025-2030.

 

We expect annual growth in the U.S. consumer price index (CPI) to average in the range of 2.5% to 3% between 2025 and 2030, as the chart shows. This is broadly consistent with inflation moderately above the Fed’s 2% target (CPI inflation tends to run above the Fed’s preferred gauge based on the personal consumption expenditures, or PCE, price index), and a jump from current market-implied inflation. Rising global production costs are the trigger. The Covid shock is driving up costs in contact-intensive services, and could speed up deglobalization and the remapping of supply chains for greater resilience against a range of potential shocks. Less offshoring could give domestic workers more bargaining power on wages, especially in places where the political pendulum is swinging toward addressing inequality. So-called superstar companies – many in the tech sector – could gain greater ability to pass on higher production costs to customers, having achieved dominant market shares.

Major central banks are evolving their policy frameworks and explicitly aim to let inflation overshoot their targets. After having persistently undershot its inflation goal, the Federal Reserve has adopted a new policy framework to deliberately push inflation above target to make up for past misses. The central bank also said it will be concerned only by the “shortfall” from full employment, with tight labor markets no longer a consideration. With the help of higher production costs, we expect the Fed to succeed in lifting inflation above 2%. The Fed essentially has given up two key reasons to raise rates that it previously had: inflation on track to overshoot the target and overheated labor markets. This reinforces our views about upside inflation risks –especially with rising political pressure to keep interest rates ultra-low.

The third force is the joint monetary-fiscal policy revolution we have just experienced – a necessary response to the Covid shock. We see a risk scenario where major central banks lose grip of inflation expectations relative to their target levels. This is not our base case – but could happen without proper guardrails and a clear exit plan from current stimulus measures. The blurring of fiscal and monetary policy means the decision to start tightening monetary policy will be more politicized. Significantly higher debt loads mean debt servicing costs will rise when monetary policy is tightened. The less tangible – but no less real – risk of loosening the grip on inflation expectations may be more politically appealing. On the flip side, a premature withdrawal of fiscal support — a risk we see in the U.S. – could forestall the reflationary path that is our base case.

Our inflation outlook represents an important shift in the economic backdrop for investing. Higher inflation is not yet reflected in market prices, opening a window of opportunity for long-term investors. Once higher inflation appears, it’s likely too late for investors to react – markets will have already moved to price in higher inflation expectations. In unconstrained portfolios, we are overweight inflation-linked bonds and underweight developed market nominal government bonds on a strategic basis. Building inflation protection comes with a cost when there is little inflation around, but it’s less costly now as the ballast role of nominal government bonds has diminished with their yields near effective lower bounds. We also like real assets, such as real estate, as potential diversifiers and sources of resilience. Selected equities may provide some inflation protection as well, complementing less liquid inflation-linked bonds and real assets. We prefer companies with strong market positions and the ability to pass on higher costs.

 

Market Updates

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, September 2020. Notes: The two ends of the bars show the lowest and highest returns versus the end of 2019, and the dots represent year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, MSCI USA Index, the ICE U.S. Dollar Index (DXY), MSCI Europe Index, Bank of America Merrill Lynch Global Broad Corporate Index, Bank of America Merrill Lynch Global High Yield Index, Datastream 10-year benchmark government bond (U.S. , German and Italy), MSCI Emerging Markets Index, spot gold and J.P. Morgan EMBI index.

Activity has started to normalize around the globe, albeit at different paces due to varying virus dynamics. Market volatility is returning after months of steady advances in risk assets, and we see elevated volatility ahead of the November U.S. election.  In addition, negotiations of a new U.S. fiscal package are dragging on, the pandemic is still spreading in many countries, and U.S.-China tensions are running high.

Week Ahead

• September 22nd: Euro area flash consumer confidence
• September 23rd: Flash composite PMI for Japan, euro area, the UK and U.S.
• September 24th: German ifo Business Climate Index
• September 25th: UK GfK consumer confidences

A spate of PMI data this week could help market participants assess the pace of the activity restart. So far the restart has been faster than expected in developed markets, but is moving at different speeds across countries driven by different virus dynamics. A potential focal point: Is the recent rise in Covid cases in parts of the euro area weighing on sentiment?

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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 September 21st, 2020 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. 

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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 and may be deducted from the invested amount therefore lowering the size of your 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 Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what their professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland, with an average of 15 years of experience 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

Equity markets treaded water last week, with a few factors giving investors cause for concern. In Europe, rising COVID-19 cases are weighing on sentiment, whilst the upcoming presidential election, delays over fiscal support, and some disappointment over the Federal Reserve’s (Fed’s) commentary at its latest policy meeting have all added to a “risk-off” tone in the United States. Overall market moves were muted, with the MSCI World Index unchanged last week, but there was some significant sector movement. The S&P 500 Index was down 0.6%, the Stoxx Europe 600 Index was up 0.6%, and the MSCI Asia Pacific Index was up 1.6%.

Rising COVID-19 Concerns in Europe

Towards the end of last week, a key theme for equity markets was rising fears over the increase in COVID-19 cases and another wave of potential lockdowns that could follow. Cases continue to rise sharply in a number of countries, including France, Spain and the United Kingdom. France saw the most daily cases since May and the European Union (EU) is set to overtake the United States in  the number of new daily cases. Whilst hospitalisations and death levels are still far lower than in the first wave back in March, they are starting to  trend higher, with the UK government is warning of a “very challenging winter”.

Various countries across Europe started to enforce new lockdown measures to stem the flow of new cases. The UK government  already brought in localised lockdown measures, and it was also reported that London Mayor Sadiq Khan, wants “fast action” on new measures given the situation is “clearly worsening”. UK authorities are reluctant to go back to a full lockdown as we saw in March, but tighter measures seem inevitable. New restrictions are being added in Holland, Denmark, Spain and France, to name a few.

The market reaction to the new lockdown measures has not been positive and, at the start of this week, the Stoxx Europe 600 Index traded lower. The travel and leisure space suffered the worst punishment, slumping 9% in the past two days.

Given these concerns, we believe market focus will turn to what further support governments will give this embattled sector. For example, there are reports UK Chancellor Rishi Sunak is set to extend UK-wide business support loans.

US Fed Underwhelms

Last Wednesday’s Federal Open Market Committee (FOMC) meeting saw interest rates remain on hold, but brought some confusion to the market, as some observers felt the commentary was not dovish enough. The Fed updated forward guidance to reinforce the message behind its policy framework shift, but it did not adjust the size or composition of its asset-purchase programme.

The FOMC signalled interest rates would remain near zero through 2023 while keeping quantitative easing at its current rate through Treasury and mortgage-backed securities purchases. It was interesting to see there were only two dissents and only one Fed official supported raising rates before 2023. The Fed “expects to maintain an accommodative stance of monetary policy” until it achieves inflation averaging 2% over time, and longer-term inflation expectations remain anchored at 2%.

This week will be interesting for the Fed, as a number of speakers including Chair Jerome Powell will be testifying before Congress to discuss pandemic relief efforts.

The Week in Review

 

United States

Last week was quiet for equities, with markets focusing on the FOMC meeting. Highlights from the meeting were minimal, but any takeaways were seen as marginally less dovish than anticipated by the market. Stocks sold off by the end of the week, with the S&P 500 Index finishing down 0.6%. The presidential race continues to be a market focus, with continued posturing from both sides.

Meanwhile, West Texas Intermediate (WTI) crude oil prices rebounded last week, up 10.1% after the previous week’s 6.1% decline. Hurricane Sally curbed North American production, and the International Energy Agency (IEA) cut its forecast for US production. The move in the price of oil meant US equities in the energy sector outperformed last week, up 2.9%. At the other end, communication services and consumer discretionary underperformed, both down 2.3%.

The US presidential race will be a key market driver in coming weeks, with Democrat Joe Biden leading Republican President Donald Trump in the national polls. However, as the 2016 race showed us, that does not guarantee victory at this stage. Also, with Trump gaining in pivotal swing states of late, the race could really be on a knife-edge.

US-China trade relations continue to simmer, with the focus now on the Chinese video-sharing app TikTok. President Trump had previously ordered that the app be banned in the United States given concerns around data security to its 100 million US users. Tiktok’s owner, ByteDance, has said it is neither controlled by nor shares data with the Chinese government. Nonetheless, the ban, which was expected to come over the weekend, seems to have been postponed for now after Trump gave his approval on a deal with US firms Oracle and Walmart to allow the app to continue operating in the United States. Oracle and Walmart confirmed they will hold 20% of the new TikTok Global business.

Also, a US judge thwarted the Trump administration’s attempt to ban Chinese messaging app WeChat, stating the ban would have implications for free speech.

The initial public offering (IPO) of US cloud software company Snowflake grabbed some headlines last week. The IPO was the largest-ever US software offering, raising US$2.2 billion. Whilst 2020 looks on pace to be the strongest year since 1990 for IPO activity, this move last week shows still just how much demand there is for US technology.

Europe

European markets saw muted performance last week, closing mildly higher. However, that didn’t do justice to what was really going on, as there was some notable divergence in the market, with EU momentum names higher while value declined. In terms of what was driving this, in our view, the index reweighting on Friday was certainly a factor. A number of Eurostoxx additions/deletions took place on Friday, and the huge repositioning exaggerated some moves.

Mergers & Acquisitions (M&A) in focus: M&A picked up in Europe this week. We had the merger terms for Caixabank and Bankia (BKIA/CABK), which is poised to create Spain’s biggest domestic bank. We also had press reports of a potential bid for Covestro (Apollo Global), Ontex reportedly looking to make an acquisition (Domtar Personal-Care Unit) and a bid for GFS (GardaWorld). A very positive thematic in Europe that continues and should aid Europe given valuation levels.

Capital Raisings: Capital raisings were also strong, with a bumper IPO from The Hut Group in the United Kingdom raising US$2.4 billion in Europe’s second-largest listing this year and the biggest on the London Stock Exchange since June 2017. In addition, there was US$2.6 billion raised in placings. So, a lot of supply soaked up over the week.

Brexit: The United Kingdom made moves to de-escalate tensions with the European Union (EU) on Brexit and domestically on the Internal Market Bill. In a clarification statement, the UK government agreed that powers in the Bill should be used in parallel with the appropriate formal dispute mechanism set up under the Brexit treaty. It also offered concessions to rebel Conservative members of parliament (MPs) to try to secure parliamentary approval for the Bill.

UK Prime Minister Boris Johnson agreed that MPs should have a vote to approve the implementation of ministerial powers to override the Northern Ireland protocol that forms part of the Brexit treaty. The part relating to the Northern Irish protocol in the Bill will be debated in the Commons on Tuesday and is likely to pass the House of Commons, after Johnson’s concession Johnson. The UK government said that the latest round of informal EU trade talks had been useful and European Commission President Ursula von der Leyen said she’s convinced a deal is possible. Talks are continuing.

Bank of England (BoE): Last week, the BoE voted to keep policy unchanged but struck a dovish tone on the back of increasing downside risks to the UK economy. These include an increase in virus cases and tightening restrictions weighing on activity, risks of a more persistent period of elevated unemployment as well as rising risks of no-deal Brexit. The BoE is also exploring how a negative bank rate could be implemented effectively, should the outlook warrant its use. Engagement on operational considerations will begin in the last quarter of 2020. This is a clear signal that, should a downturn materialise in the United Kingdom due to a no-deal Brexit or another national lockdown, the BoE seems likely to impose negative interest rates.

Asia Pacific

Asian equities were higher overall last week, with the MSCI Asia Pacific Index closing the week up 1.7%. There were limited macro headlines, with the focus primarily on stock-specific news. Chinese equities outperformed after a late rally on Friday on the back of reports around the deal for Tiktok, which soothed tensions with the United States.

In Japan, the Nikkei lagged after manufacturing data there remained poor, with the index closing the week down 0.2%. The Japanese yen strengthened to near levels last seen at the end of July, not helping the broader equity index in Japan. All sectors in Asia traded higher last week, with the skew favouring momentum stocks. The technology sector led the way, up 3.3%. Like in Europe, financials came under relative pressure, up just slightly.

In political developments, the newly elected Prime Minister of Japan, Yoshihide Suga, announced he will retain Taro Aso as finance minister. Suga also explained that the focus at this time is on the economy, rather than a snap election. Suga was formally appointed as prime minister last Wednesday following the resignation of Shinzo Abe.

Over the weekend, iron ore prices significantly declined following reports of rising supply and a wavering steel market in China. Inventories rose for the fourth week in a row in China and are at unusually high levels for this time of year.

The Week Ahead

Monday 21 September:

• Economic/Political: US Fed holds open meeting on Community Reinvestment Act; ECB’s Robert Holzmann speaks; focus on Italian regional elections

Tuesday 22 September:

• Economic/Political: Riksbank interest-rate announcement; BoE’s Andrew Bailey speaks; Fed’s Charles Evans speaks
• Data: Eurozone: (September, advanced) consumer conference; US: (August) existing home sales, (September) Richmond Fed manufacturing

Wednesday 23 September:    

• Economic/Political: Reserve Bank of New Zealand interest-rate announcement; Fed’s Loretta Mester, Charles Evans and Eric Rosengren speak
• Data: Global: (September) flash manufacturing & services purchasing managers indices– US/UK/France/Germany/Eurozone/Japan/Australia; Germany: (October) Gfk consumer conference; US: (18 September) mortgage applications

Thursday 24 September:    

• Economic/Political: Fed’s Jerome Powell and US Treasury Secretary Steven Mnuchin testify before US Senate banking committee; BoE’s Bailey speaks; ECB publishes economic bulletin; Norges Bank interest-rate announcement; Central Bank of the Republic of Turkey interest-rate announcement; Bank of Japan meeting minutes
• Data: US: (19 September) initial jobless claims, (August) new home sales; France: (September) manufacturing conference; Germany: (September) IFO

Friday 25 September:    

• Economic/Political: UK sovereign debt to be rated by Fitch; Fed’s Evans speaks
• Data: US: (August) durable goods orders; Eurozone: (August) M3 money supply; Italy: (September) consumer conference, manufacturing conference, economic sentiment

 

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All investments involve risk, including 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. Past performance is not an indicator or guarantee of future performance.

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 21st September 2020, 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 and may be deducted from the invested amount therefore lowering the size of your 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 Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.