Day: 1 December 2020

Mike Pyle, Global Chief Investment Strategist, together with Elga Bartsch, Head of Macro Research, Scott Thiel, Chief Fixed Income Strategist, and Beata Harasim, Senior Investment Strategist, 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 have closed our tactical underweight in EM debt as easy monetary policy is expected to stay, against the background of an improved 2021 outlook. Positive news on Covid vaccine development has boosted the case for an accelerated global restart in 2021. This latest view change reflects our barbell approach between quality and cyclicality – with a tilt to cyclicality in our credit exposures.

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, November 2020. Notes: The indexes used are the Bloomberg Barclays Global High Yield Index, JPMorgan EMBI Global Diversified Index and JPMorgan GBI-EM Composite Index. Performance is indexed to 100 on Jan. 1, 2020.

 

EM assets have underperformed their developed market (DM) peers for most of 2020, and have been playing catchup in recent weeks. A string of positive news reports on Covid vaccines boosted confidence in an accelerated restart during the course of 2021, setting up a positive overall backdrop for risk assets. Encouraging early results on the effectiveness of a Covid-19 vaccine that may offer lower costs and easier distribution bode particularly well for the EM world, in our view. Most EM assets have now delivered positive year-to-date returns after the recent rally. EM local-currency debt has lagged the market recovery in U.S. dollar terms, dragged down by heavy currency depreciation in many emerging markets. See the chart above. Yet we see potential for EM local-currency debt to catch up as EM currencies stabilize thanks to a stable or moderately weaker U.S. dollar. We also expect EM hard-currency debt to keep pace with high yield credit in developed markets, as higher yielding debt looks attractive to investors in search of income.

The U.S. dollar is a key driver behind EM local-currency debt. We see risk appetite and interest rate differentials in turn driving the dollar’s moves. More positive risk appetite as a result of the improved economic outlook should limit the demand for perceived safe-haven assets such as the dollar, in our view. At the same time, we see declining real rates as inflation firms and the Federal Reserve caps any gains in nominal bond yields. The likely result is a moderately weaker dollar. This should support EM currencies and local-currency debt. We also expect more predictable foreign affairs and trade policies under the Biden administration to provide an improved backdrop for the EM world. Our BlackRock geopolitical risk dashboard – tracking market attention to the top 10 geopolitical risks – shows attention to global trade tensions has dropped sharply from recent peaks after staying at elevated levels for much of the past three years.

China is an important part of EM growth dynamics. The world’s second-largest economy is leading the global restart in activity, with its growth already at, or very close to, its pre-Covid trend. This bodes well for the rest of the EM world. Yet EM economies are also susceptible to the policy direction of China. Any aggressive tightening of monetary policy in China to prevent the economy from overheating – not our base case – could be negative for the rest of the EM complex, in our view. Another risk for some emerging markets: structural growth challenges and sharply rising debt levels in the wake of the Covid shock. Yet we do not see this as a near-term market risk due to ample global liquidity. Tactically we are overweight Asia fixed income as this region leads the global economic recovery. We view valuations in this market as attractive – and believe investors are well compensated for the risks. We are also overweight high yield – on both tactical and strategic horizons – as it provides attractive income in a yield-starved world.

The bottom line: We expect global growth to rebound strongly in 2021 with the rollout of Covid vaccines. This is why we prefer to tilt more toward cyclicality in our credit views as we take a barbell approach to allocate risk exposure to both quality and cyclical assets. We have upgraded both local-currency and hard-currency EM debt to neutral, after having upgraded EM equities to overweight. Meanwhile we have downgraded global investment grade credit as its valuations have increased and we prefer more cyclical exposures such as high yield.

 

Market Updates

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged It is not possible to  invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, November 2020. Notes: The two ends of the bars show the lowest and highest returns at any point this year to date, and the dots represent current 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 gold, Datastream 10-year benchmark government bond (U.S. , German and Italy), MSCI USA Index, Bank of America Merrill Lynch Global Broad Corporate Index, MSCI Emerging Markets Index, J.P. Morgan EMBI index, Bank of America Merrill Lynch Global High Yield Index, the ICE U.S. Dollar Index (DXY), MSCI Europe Index and spot Brent crude.

Positive news on vaccine development and the formal start of U.S. President-elect Joe Biden’s transition to the White House drove global stocks to record highs. The expected nomination of former Fed Chair Janet Yellen as the Treasury Secretary also helped lift the mood. Yet the rally fizzled after disappointing jobs data pointed to a slowing of the restart as the virus surges around the U.S. We still expect the cumulative economic hit from the Covid shock will be just a fraction of that seen in the wake of the global financial crisis.

Week Ahead

• December 1: Manufacturing purchasing managers’ index (PMI) for Japan, China, the euro area, U.S. and UK
• December 3: Services PMI for Japan, China, the euro area, U.S. and UK
• December 4: U.S. nonfarm payrolls

This week’s U.S. labor market report will be in focus, especially after recent weeks’ disappointing jobless claims data. A string of recent data has shown signs of activity flattening out in the U.S., even before some states tightened restrictions. Brexit could be back in the spotlight as markets await a potential trade deal with the European Union this week.

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 November 30th, 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. 

Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.

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 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

Last week saw a quiet end to a memorable month, as the US Thanksgiving holiday brought lower global trading volumes. That said, there was a bit of noise around Brexit, signs of a more orderly transfer of power in the United States, and more vaccine headlines to keep market watchers busy. Last week, the MSCI World Index traded +2.4%, the S&P 500 Index +2.3%, the STOXX Europe 600 Index +0.9% and the MSCI Asia Pacific +2.2%.

Record November

Markets saw a remarkable rally in November as vaccine news gave us light at the end of the COVID-19 tunnel and some uncertainty ended around the US election outcome. The MSCI World Index had its best monthly performance on record, +13%, as did the STOXX Europe 600 Index, +14%. Other global indices also saw impressive gains, with the S&P 500 Index +11% and MSCI Asia Pacific Index +12.5%.

As we have highlighted in recent weeks, the rotation out of growth/momentum names and into beaten-up value names has been stark. In Europe, value names were +13% month-to-date versus momentum -20% month-to-date.

Commodities also saw notable gains, with West Texas Intermediate crude oil +23% month-to-date and copper +13%.

With month-end today, it will be interesting to what extent we see any profit taking now or into the new month. Asian markets did give up some ground today. The moves in the next few days will be a good barometer of investor sentiment going into the end of the year.

Brexit Update

There was little meaningful progress last week in talks between the United Kingdom and European Union (EU), with the issues of fishing rights, level-playing field business rules and enforcement still outstanding. There was some excitement earlier in the week following reports the fishing rights issue could be resolved by using ‘review clauses’ to break the deadlock, with the possibility that parts of the deal could be revisited several years after they take effect.

We’ve had mixed signals from the EU, with EU Commission Chief Ursula von der Leyen stating ‘genuine progress’ had been made on several issues ‘with an outline of a final text’. To temper that enthusiasm, EU Chief Negotiator Michael Barnier said last Friday the ‘same significant divergences persist’, but at least he is in London for talks (the EU team is now out of COVID-19 quarantine). Over the weekend, UK Foreign Secretary Dominic Raab stated we are in the ‘last leg’ of talks.

European Banks: Dividend D-Day on 10 December

It’s been a busy week for newsflow on the European banks’ ongoing dividend debate: Will they or won’t they? Could they or should they? Various European Central Bank (ECB) members continue to signal a desire to relax the current dividend ban—Fabio Panetta (ECB), François Villeroy de Galhau (Bank of France Governor) and Luis de Guidos (ECB) have all made supportive comments over the past 24 hours ahead of the next ECB meeting on 10 December .

It seems that many investors have tended to err on the side of caution, and thus the current rally across the sector has perhaps been driven by other factors, as opposed to simply increased optimism on a resumption of payouts. However, there is no doubt that a consensus is forming around the return of payouts, albeit capped at around 20%-30% of 2020 earnings in the first instance, with the situation being reviewed at the half-year stage post the next Stress Test, which will start on 21 January and published 21 July.

As things stand, a number of banks have excess capital of 30% and upwards of current market capitalisation, and have been reserving 2019 payouts in additional to accruing out of current year earnings.

In next week’s meeting, the ECB could opt to extend the dividend freeze, lift the ban entirely, or limit dividend payouts. Given the recent comments by various senior euro bank officials and the +5% move in the sector this week (although still -32% year-to-date), we think there may be some light at the end of the tunnel. A likely outcome is that the ECB will lift the ban, but perhaps only for some of the better-capitalised banks and with some restrictions, and to allow dividends to be announced with fiscal year 2020 results. If that happens, then the key beneficiaries should be the French and Benelux banks, as well as Intesa Sanpaolo.

Finally, British regulators have signalled to banks that they will consider softening their resistance to dividends payouts on a case-by-case basis by early next year, as Bloomberg reported earlier this month. Elsewhere, the United States opted for the more pragmatic option of capping bank payouts while Switzerland asked banks to split them over two payments spread over 2020.

The Week in Review

United States

US markets outperformed their European counterparts in a holiday-shortened week, with the Dow Jones Industrial Average hitting a record 30,000 and all major indices higher. Factor rotation continued, with the energy sector the week’s clear outperformer, up 8.9% on the week, also boosted by gains in crude oil, although we would note that the sector remains down 37% year-to-date. The financials also outperformed. Defensives underperformed again last week, with real estate investment trusts (REITs) down slightly, but utilities and health care able to make small gains.

US President Donald Trump’s legal efforts to overturn the recent election results continue to prove unsuccessful, and Trump finally said that he would relinquish the presidency if the Electoral College affirms President-elect Joe Biden, but  also signalled he may never ‘formally’ concede defeat and may skip the inauguration. With this, Joe Biden has now started to plan for his transition into the White House.

Janet Yellen looks likely to be Biden’s Treasury Secretary. Yellen in particular has a high level of support amongst the Democrats (as well as some Republicans), having proven her level of command over economic issues during her time at the Federal Reserve (Fed).

Current Fed Chair Jerome Powell would likely keep monetary policy easy, which would tie up well with Yellen’s approach and allow Biden to go on a large stimulus drive. There is also speculation that the (historically) even more dovish Lael Brainard could potentially head up the Fed. This combination would see monetary and fiscal policy working well within sync. With these options on the table, it looks like the US reflation trade might be back in play. Last week saw the US Treasury 10-year yield up 1.4 basis points, with gold down 4.5%.

Macro data was supportive last week, with the November Flash Purchasing Managers’ Index (PMIs) coming in stronger than expected. The manufacturing reading was 56.7, whilst services stood at 57.7.

Europe

European equities traded higher overall over what was a much quieter week in terms of both trading volumes and news flow. There were very few market-moving headlines throughout the week, with the Brexit stalemate persisting and with markets generally quieter due to the US Thanksgiving holiday.

One of the more notable headlines came on Thursday, with reports that pharmaceutical company AstraZeneca’s COVID-19 vaccine may require further testing if it is to be approved by regulators.

Factor rotation continued last week, with European value stocks up 2.3%, whilst momentum stocks were down 4.1%. The Italian FTSE MIB and the Spanish IBEX outperformed, up 3.0% and 2.7% respectively, both helped by the strength of the banks. The UK FTSE 100 Index lagged once again, up just 0.3%. Its large health care weighting and UK sterling strength didn’t help matters.

Given the factor rotation, the year’s underperformers led the way last week. Oil and gas stocks were up 6.2% on the week amid a rally in crude oil (up 6.7%). Banks and travel and leisure stocks were also strong, with a potentially successful vaccination programme across Europe helping sentiment. Health care stocks underperformed, weighed on by the weakness in AstraZeneca.

There continues to be a cloud over the AstraZeneca COVID-19 vaccine. Last week, Bloomberg reported the company may need an additional trial to investigate the use of a lower dose schedule. The company reported interim phase III data on Monday, but given a lack of clarity on the trial results, AstraZeneca’s CEO Pascal Soriot suggested the US Food and Drug Administration (FDA) will not likely approve the current dosing schedule, but that the European Medicines Agency (EMA) and the United Kingdom may still do so. On Thursday, he suggested the company will perform an additional trial. It isn’t yet clear what impact potential further testing by AstraZeneca will have on the timescale of the vaccination programme globally.

The number of COVID-19 cases continues to show signs of improvement across Europe. Restrictions are expected to be eased in the United Kingdom, France and elsewhere this week. However, though daily case counts are trending lower across the region, we now head into winter with temperatures set to drop again after what has been a reasonably mild autumn.

Also, a break to restrictions over Christmas has been a hot topic across Europe. Restrictions are likely to be eased to allow households to mix more freely than they have been used to in recent weeks and months. It has been suggested that this is especially risky at this time, and we may pay for this brief relaxation with even tighter measures again in January and February.

The UK Spending Review was also announced last week. UK Chancellor Rishi Sunak set out how much money the government would be spending on public services on the year from April 2021. This particular review comes at a time of significant fiscal challenges for the government. Sunak presented a miserable outlook for the UK economy and public finances. Of note, Sunak announced spending on ‘economic infrastructure’ such as roads, railways and broadband totalling £27 billion in 2021-22. The Review also noted that the United Kingdom is forecast to borrow £394 billion this year, equivalent to 19% of gross domestic product (GDP) and the highest recorded level in peacetime.

Asia Pacific (APAC)

Equities in the APAC region also took part in last week’s rally, with the MSCI APAC Index +2.2%. Japan’s Nikkei Index was a regional leader, up 4.4%. As we saw in the United States and Europe, energy and materials names outperformed, whilst the defensive REITs, utilities and consumer staples saw more muted gains.

Helping sentiment was an announcement midweek that China and Japan have agreed to resume business travel by the end of December. The two nations have also agreed to move ahead with multilateral trade deals in an attempt to strengthen their relationship ahead of the start of the new US administration.

COVID-19 cases continue to rise in certain areas, with Hong Kong now set to suspend all in-person classes at schools as of Wednesday, while South Korea tightened virus restrictions outside of Seoul. Japan kept its view of economic conditions as ‘severe’ for a fifth month. It raised its outlook for production but lowered it for capital expenditure as new cases there also rise to record levels.

Diplomatic friction and trade tensions between China and Australia remain a potential headwind for the region. Relations have soured amid Chinese President Xi Jinping’s leadership, as Australia has pushed back against Xi’s more aggressive foreign policy and after Canberra called for an inquiry into the origins of the pandemic. On Friday, Beijing announced it would impose tariffs on Australian wine imports. This comes as 82 ships with cargo of Australian coal remain marooned off China’s coast, due to apparent concerns from China over ‘environmental standards’. Australia has warned that it may seek retaliation at the World Trade Organization.

Stock market gains were more muted in Australia, with some disappointing macro data also weighing on sentiment. Business investment fell 3% in the third quarter from the previous one, following a revised 6.4% decline in the prior period. Total spending fell 13.8% year on year, including a 15% drop in expenditure for buildings and a 12.3% decline for plants and equipment.

In last week’s quarterly report, the People’s Bank of China (PBOC) pledged to stick to normal monetary policy for as long as possible, while making it more flexible and targeted. There have been concerns recently over a bout of bond defaults in China. This prompted the PBOC to inject US$30.4 billion of 1-year liquidity in order to soothe nerves.

The Week Ahead

At the start of this week, we saw Chinese PMI data. The composite figure come in solidly at 52.1, pushing the index to its highest level since October 2017. A rise in domestic orders and increased raw materials prices helped drive the better-than-expected figure.

Any news on Brexit talks will be crucial for UK and EU sentiment. Another potential catalyst for markets is any news around vaccine approval.

Monday 30 November

– Euro-area finance ministers meet, with all 27 EU ministers gathering on 1 December

– The Organization of Petroleum Exporting Countries (OPEC) meeting: final decision on whether a production supply hike should proceed as scheduled in January is expected (through 1 December)

– North Atlantic Treaty Organization (NATO) foreign ministers meet

– Key speakers: ECB’s Christine Lagarde (@ European Policy Centre Forum); Bank of England’s (BoE’s) Silvana Tenreyro

– Data: China PMIs; Japan industrial production, retail sales; Spain consumer price indices (CPIs); Italy CPIs; Germany CPIs; US pending home sales

Tuesday 1 December

– OPEC+ meeting

– The Organisation of Economic Development publishes its latest economic outlook

– Key speakers: ECB’s Christine Lagarde

– Data: Japan jobless rate, vehicle sales; eurozone manufacturing PMIs, CPI; Germany unemployment; Italy GDP; US manufacturing PMI, ISM manufacturing, ISM new orders, ISM employment, construction spending

Wednesday 2 December

– US Federal Reserve release Beige Book

– England’s national lockdown end and tiered restrictions are introduced

– Key speakers: ECB’s Lane; BoE’s Haskel

– Data: UK Shop Price Index; Japan CPIs; Germany retail sales; Eurozone unemployment

Thursday 3 December

– Data: Global PMIs; Eurozone retail sales; US jobless claims

Friday 4 December

– Data: Germany factory orders, Italy retail sales; UK car registrations; US November unemployment rate and monthly non-farm payrolls

 

Franklin Templeton Key risks & Disclaimers:

What Are the Risks?

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 1st December 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. 

Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML is authorised and regulated by the Financial Conduct Authority.

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.