Day: 10 August 2021

Jean Boivin, Head of BlackRock Investment Institute together with Elga Bartsch, Head of Macro Research, Wei Li, Global Chief Investment Strategist and Nicholas Fawcett, Member of the Economic and Markets Research Team all forming 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.

The restart of economic activity is real and broadening. This supports our pro-risk stance and our underweight in government bonds as we believe their low yields don’t reflect the restart’s momentum. We see the U.S. passing the baton to Europe and other DMs in leading the restart, whereas the delta variant may challenge some EMs lagging in vaccinations. This supports our tactical overweight in European equities and our recent downgrade of EM equities and debt to neutral.

Sources: BlackRock Investment Institute, with data from Haver Analytics, August 2021. Notes: The chart shows the monthly Markit composite purchasing managers’ index (PMI) for the U.S., euro area and emerging markets. Emerging markets include Brazil, China, Czech Republic, Egypt, India, Indonesia, Kenya, Lebanon, Malaysia, Mexico, Nigeria, Philippines, Poland, Russia, Saudi Arabia, South Africa, Thailand, Turkey, United Arab Emirates and Vietnam, as defined by IHS Markit. 

 

Global economies will be going through two distinct phases. Right now, the restart of economic activity causes a spurt in growth. Eventually, we see this settling into an expansion around trend growth. Beyond that point we see an unusually wide range of potential outcomes. The U.S. is still in the first phase. Growth likely peaked in the second quarter, but last week’s strong jobs report showed the restart is still in full swing. Growth momentum in the euro area appears to be catching up now, as indicated by purchasing managers’ index (PMI) data on the chart. In contrast, the EM PMI this year has trended lower toward 50 – a reading below which suggests stagnation – reflecting challenges in many EMs where renewed outbreaks threaten lockdowns and more dire public health outcomes. China’s potential slowdown, exacerbated by renewed outbreaks, may also spill over to EMs, in our view. Over the long term, we see a greater risk of permanent damages in some EMs due to slow vaccinations and more limited policy space.

China is the only major economy that has surpassed the pre-Covid projections of its growth trend. Consensus expectations see the U.S. returning to trend in the fourth quarter of 2021, and point to a return to pre-Covid trend by the end of 2022 for Europe – with growth rates similar to those over the last decade. Even though the pace toward a complete restart differs, we see some common drivers across DMs, such as pent-up consumer demand, especially in the hardest-hit services sectors.

The uneven pace of the restart is reflected in regional corporate earnings. Nearly 90% of S&P 500 companies have reported second-quarter results by August 6, and 87% of them had beat forecasts on both profit and sales – the highest since 2011. Yet stocks that have beaten expectations have on average not been rewarded, while those that undershot have been punished. We see this as consistent with the restart dynamics: very strong earnings – but just for the duration of the restart. About 90% of MSCI Europe companies have reported earnings, with just over half of them beating estimates. The earnings revision ratio – the share of earnings estimate upgrades vs. downgrades – has been rising in Europe and catching up with that in the U.S. This supports our overweight on European equities and neutral position in U.S. equities on a tactical basis.

The unprecedented restart has also led to unusual supply and demand dynamics – and volatility in growth and inflation data. This has manifested in recent market behavior, notably rising stocks and falling bond yields in the U.S. Record-high stocks may have priced in much of the powerful restart, and we believe the current yield levels are too low given the strength of the restart. The mixed market signals highlight a key question among investors: What lies beyond the restart? We see an unusually wide range of potential outcomes – and believe it’s all the more important to have an anchor. We stick to our new nominal investment theme: Major central banks are slower to respond to rising inflation than in the past, keeping nominal bond yields lower and real rates negative – a positive for risk assets.

The bottom line: The leadership of global restart looks set to pass on from the U.S. to Europe and other DMs, and we see a risk that the restart could stall in some EMs due to worsening virus dynamics and more limited policy room. This supports our tactical overweight on European equities and recent downgrade of EM assets to neutral. We also believe current government bond yield levels do not reflect the powerful momentum of the economic restart, and this supports our underweight in government bonds.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream as of August 5, 2021. 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, in descending order: spot Brent crude, MSCI Europe Index, ICE U.S. Dollar Index (DXY), MSCI USA Index, Bank of America Merrill Lynch Global High Yield Index, MSCI Emerging Markets Index, Refinitiv Datastream Italy 10-year benchmark government bond index, J.P. Morgan EMBI Index, Refinitiv Datastream Germany 10-year benchmark government bond index, Bank of America Merrill Lynch Global Broad Corporate Index, Refinitiv Datastream U.S. 10-year benchmark government bond index and spot gold.

 

U.S. stocks hit record highs, and U.S. 10-year government bond yields climbed to the highest level in two weeks after better-than-expected nonfarm payrolls data. Treasury yields have been driven by a mix of factors, and the rise in yields and real yields after the strong jobs data reinforces our tactical underweight. Even if real yields rise, they remain well in negative territory, supporting equities and our pro-risk tactical stance. Among the nearly 90% of S&P 500 companies that had reported second-quarter earnings by August 6, 87% of them have exceeded expectations on both profits and revenues.

Week Ahead

• August 9 – China inflation
• August 10-17 – China total social financing and new yuan loans
• August 11 – U.S. consumer price index
• August 13 – University of Michigan Surveys of Consumers

Investors will try to gauge the fiscal pulse from China’s lending data. Chinese authorities have signaled a near-term dovish shift as growth momentum slows, yet over the longer term we expect them to maintain a hawkish stance, key to their focus on the quality of growth. The University of Michigan consumer sentiment survey could shed light on the state of the restart amid rising concerns over the spread of the delta variant.

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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 August 11th, 2021 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. 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

Global equities were higher last week, with each major region trading in the green. Europe’s STOXX 600 Index outperformed, closing the week up 1.8%, while the S&P 500 Index closed the week up 0.9% and the MSCI Asia Pacific Index closed up 1.4%. The focus for investors remains on the latest round of corporate earnings, which continue to show upgrades to estimates. Macroeconomic releases were mixed through the week, but still showed strength.

Last week, the Bank of England (BoE) announced signs of a path to tapering. Also, the US monthly employment report was closely watched as usual, with July nonfarm payrolls coming in at 943,000, beating expectations. Interestingly, there was a risk-off theme to global fund flows last week with the greatest amount going into cash, while gold flows were also notable.

COVID-19 Concerns on the Rise Again

It had seemed like COVID-19 trends in Europe were showing signs of progress, but last week brought further concerns about infection rates in the United States and Asia. Cases are trending higher in the United States as the country fights the Delta variant. Meanwhile, countries across Asia continue to see sharp rises in cases, causing renewed shutdowns.

On Friday 6 August, the United States recorded over 100,000 COVID-19 cases for the first time since February 2021. Even more worryingly, hospital admissions increased 40% in the space of a week, bringing strain to the healthcare system in some hotspots. Hospitalisations and deaths are skewed largely to the unvaccinated as the Delta variant is spreading quickly. The state of Mississippi has been particularly hard-hit, and we saw reports of only eight free intensive care unit (ICU) beds in the entire state on Thursday of last week.

US government focus is on areas where vaccination rates are low. There has been a recent uptick in vaccines being administered, with states such as Tennessee seeing a 90% increase in jabs over the last two weeks. A number of US companies have announced they will be requiring employees to be vaccinated ahead of any return to the office.

COVID-19 cases are also on the rise across Asia. Concerns about a potential outbreak in China have resulted in a tightening of restrictions there. Reported cases in China remain relatively low; however, the Delta variant is active and has been detected in the major cities. The country has gone into testing overdrive as the Chinese government tries to contain the most recent spread and Hong Kong also began to tighten restrictions again. Many companies in the region have begun to rethink their return-to-office projections.

Meanwhile, commodity prices took a hit following the news of increased restrictions in China. West Texas Intermediate crude oil closed last week down 7.7%, whilst copper was down 3% and iron ore down 5.1%.

The picture does appear to be improving in Europe for now, with vaccination rates high in the United Kingdom and continuing at a good pace across the eurozone. The United Kingdom has vaccinated 75% of its adult population, outpacing Spain, France, Italy and Germany. There continues to be no real signs of excessive strain on healthcare systems across Europe; however, ICU bed usage has seen an uptick in the past week. In the United Kingdom, where the Delta variant was rampant a few weeks ago, infection rates are dropping and hospitalisations and deaths remain at relatively low levels.

Schools are due to return from summer holidays over the next few weeks so that will be the next test for managing the spreads among a predominantly unvaccinated group.

The big question is what this all means for the global economy. Some analysts see a continued economic resurgence as herd immunity is reached amid the rise in cases and vaccination rates, while others see the recent rise in the COVID-19 cases stalling growth.

Week in Review

 

Europe

European equities traded higher overall last week amid a heavy week of corporate earnings, with the STOXX Europe 600 Index up 1.8%. Around 75% of European companies have now reported quarterly earnings, with 67% beating estimates on earnings-per-share (EPS), so the picture remains largely supportive. Outside of earnings, the BoE announcement last Thursday was a focus, but came in largely in line with expectations. In terms of the country indices, the French CAC 40 Index outperformed (up 3.1%), following strength in some of its key constituents; the UK FTSE 100 Index lagged despite sterling weakness and energy sector strength, but still finished up 1.3%.

For the second week running, the Goldman Sachs Going Out basket (up 3.2%) outperformed the equivalent Stay at Home basket (down 0.9%), as countries around Europe move closer to relaxing COVID-19-related restrictions. Over the course of last week, cyclicals marginally outperformed defensives. In terms of sectors, the banks, oil and gas and financial services were all strong, while the travel and leisure sector struggled but still posted a minor gain. In terms of the laggards, food and beverage and basic resources stocks finished in the red.

Last week, BoE kept its key interest rate at 0.1%. The committee also voted by a 7-1 majority to maintain its current asset-purchasing programme at £895 billion. Policymakers believe that inflation will now peak higher than expected around the 4% level. Despite the hawkish tilt to the announcement, officials stated that the hiking cycle and unwinding holdings of £900 billion of government bonds would be modest and at a gradual pace.

Interestingly, on UK fiscal spending, the Financial Times reported on Friday that there are growing tensions between UK Prime Minister Boris Johnson and the Chancellor Rishi Sunak. The article notes that Johnson seems content with spending more, whilst Sunak frets about possible rising inflation and interest rates, which would pile on the costs of servicing the UK’s £2.2 trillion debt.

United States

US equities continued their march higher last week, with the S&P 500 Index making new all-time highs and ending the week up 0.9%. There were similar gains for the Dow Jones Index (+0.8%), Nasdaq (+1%) and Russell 2000 Index (+1%). Although many market participants were out on vacation, there was plenty to focus on last week. With the market firmly focused on the Federal Reserve (Fed) policy at the moment, Friday’s July employment data was the main talking point as Fed Chair Jerome Powell has said the labour market is key to the Fed’s decision on tapering.

The July employment data was strong, with 943,000 new non-farm payroll jobs added.  There was also a sharp drop in the unemployment rate to 5.4%, which was stronger than anticipated and better than the June reading of 5.9%. With a tighter labour market, there were signs of wage inflation as average hourly earnings rose 4.0% year-on-year (Y/Y), also higher than expected and higher than the previous reading of 3.7%

In terms of other key reports, earlier in the week the Institute of Supply Management (ISM) service figure was also strong at 64.1, which was likewise better than expected.

Given the stronger data, pressure will inevitably grow on the Fed to outline plans to taper its quantitative easing (QE) programme. There were a few interesting comments from Fed speakers last week. Fed’s Christopher Waller (voter) said: “My outlook is very much that the economy’s going to recover. We will potentially be able to pull back our accommodative monetary policy potentially sooner than others may think.” In addition, after the US employment data, Kaplan (non-voter) called for a gradual, balanced tapering to start soon.

In this context, all eyes are on the central banker conference on 26-28 August in Jackson Hole, Wyoming, as a platform for a potential outline of tapering plans.

With the strong employment print we saw value sectors outperform, with financials strengthening last week thanks to rising bond yields. In addition, the stronger data last week helped eased concerns we are at “peak growth”, further supporting value sectors. The defensive consumer staples sector lagged, down last week.

Aside from the macro news, corporate earnings remain a focus. As it stands now, we have seen a strong second-quarter earnings season. With more than 400 companies reporting results, the majority have beat both earnings and sales expectations. The largest beats have been in the consumer discretionary and financials spaces.

Finally, we note that investment-grade credit yields are at record tight levels, showing no sign of concern in the credit market despite the run equity markets have had to current all-time highs. As ever, it is important to keep an eye on credit markets as they are a good barometer for sentiment.

Asia-Pacific

Last week saw some respite for Asian equity markets after a tough time recently, and the MSCI Asia Pacific Index traded up 1.4%. The focus was on China with so much noise around the government’s recent crackdown on technology stocks. Officials did soften their stance a little last week, for example, a scathing article on the Chinese video gaming company Tencent, was softened and the description of gaming as “spiritual opium” was removed. There was also some reassuring macro data as China’s Caixin services Purchasing Managers’ Index (PMI) rose to 54.9 in July from 50.3, putting the composite at 53.1, up from 50.6. With that, Chinese stocks trading in Shanghai were up 1.8% last week and Hong Kong’s major benchmark was up 0.8%. Other indices in the region performed well too, with the Nikkei Index up 2%, KOSPI up 2% and the ASX up 2%.

Earnings season dominates in the region as well. In Japan, the majority of companies in the TOPIX index that have reported so far have also beat earnings-per-share estimates.

In South Korea, July export data came in at 29.6% year-over-year. Total exports rose for nine straight months and have risen over 20% for four back-to-back months for the first in 10 years.

Despite a better week for Asian equities, they still lag their global peers year-to-date.

This Week’s Highlights

So far this week, we’ve had the latest producer price index (PPI) and Consumer Price Index (CPI) readings out of China. The PPI grew 9%, quickening from 8.8% in the previous month and beating consensus. Consumer prices also topped estimates with a 1% rise.

Key Events Ahead

Tuesday 10  August: Germany ZEW survey

Thursday 12  August: UK gross domestic product (GDP) quarter-on-quarter; euro-area Industrial Production (IP) month-on-month

The Week Ahead

Monday 9 August

• Germany trade balance & current account balance
• US JOLTS job openings
• China CPI & PPI

Tuesday 10 August

• Germany ZEW survey
• US National Federation of Independent Business (NFIB) Small Business Optimism
• US unit labour costs
• US nonfarm business productivity
• Japan trade balance

Wednesday 11 August 

• Germany CPI
• Italy CPI
• US CPI
• US federal budget
• Japan machine tool orders

Thursday 12 August

• UK GDP, trade balance and government spending
• UK IP, manufacturing production
• UK RICS house price balance
• Italy trade balance
• Eurozone IP
• US jobless claims
• US core PPI
• Japan PPI

Friday 13 August     

• France ILO unemployment rate
• France CPI
• Spain CPI
• Eurozone trade balance
• US import price

 

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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 9th August 2021, 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. 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.