Day: 26 October 2021

Alex Brazier, Deputy Head of BlackRock Investment Institute together with Wei Li, Global Chief Investment Strategist, Elga Bartsch, Head of Macro Research, Chris Weber, Head of Climate and Sustainability Research, BlackRock Sustainable Investing and Mark Everitt, Head of Investment Research and Strategy, BlackRock Alternative Investors 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.

Surging natural gas and coal prices amid a powerful economic restart have exposed a lopsided transition toward low-carbon power. We still see an orderly transition in the medium term – but with bumps on the way that could lead to growth and inflation volatility. We expect the transition to reinforce a shift to a higher inflation regime, supporting our new nominal theme that points to a more muted central bank response to rising inflation than in the past.

Sources: BlackRock Investment Institute, with data from Refinitiv, October 2021. Notes: Prices are based to 100 at the start of 2017. We use the European Energy Derivatives Exchange futures, ICE Rotterdam coal futures and Brent crude oil futures to represent natural gas, coal and Brent crude oil respectively. The dots show futures prices for contracts that expire in December 2022, December 2023 and December 2024.

 

The powerful restart has driven up oil prices to multi-year highs. Coal and gas prices have surged far more. See the chart above. Why? On top of the restart, a range of weather and geopolitical factors have restricted supplies of coal and renewable energy. It’s been difficult for other sources of power to be brought on stream. This is putting sharp pressure on prices of available sources of power. With governments looking to minimize carbon emissions, gas prices have risen even further than coal. All these events have exposed an underlying issue: The transition to net zero so far has been lopsided, as clean energy investment has not increased enough to make up for the decline in fossil fuel investment. Futures markets are pointing to lower coal and gas prices by the end of next year. Much depends on the temperature in the coming winter. And while the transition remains lopsided, we can expect more volatility of energy prices, inflation and economic activity in future.

For now governments may find themselves compelled to support greater use of fossil fuels – particularly gas – amid energy supply shortages. Natural gas may emit less carbon than oil or coal, but its largest component methane is another potent greenhouse gas. It too will ultimately need to be phased out if the world is to reach net-zero. The phase-out of natural gas and momentum toward net zero therefore rest on accelerating the development of clean energy supply.

There has been massive investment in clean energy – an average of $1 trillion a year between 2016 and 2020 according to the International Energy Agency (IEA). More is needed to build a clean, resilient energy infrastructure. A net-zero transition by 2050 will require an average annual investment of nearly $4 trillion between 2026 and 2030, says the IEA. A successful transition will not only need clean energy, but also new technologies to store and distribute clean energy, to decarbonize manufacturing, agriculture and transport, and to capture carbon emissions.

The pace and precise nature of the net-zero transition will be guided by government policy, which will vary across countries. More clarity on climate policies will help encourage the private sector to invest in clean energy and related technologies. That’s why commitments from governments at the upcoming United Nations climate summit (COP26) will be key to watch. The pace of transition around the world will vary by country, and emerging markets are in urgent need of funding for low carbon investment at scale.

The bottom line: An orderly – albeit lopsided – net-zero transition will have bumps along the way that could lead to greater inflation and growth volatility. We view the net-zero transition as modestly inflationary overall, and via higher inflation contribute to a new nominal environment (see our investment themes). The transition creates investment opportunities in both public and private markets. Over a strategic horizon we like the sectors that stand to benefit more from the transition, whether for being solution providers or by being less exposed to climate risks, such as tech and healthcare. We also see strategic opportunities in the infrastructure space that are related to the development of new technologies that are needed to reach net zero. We prefer inflation-linked bonds over their nominal counterparts over a strategic horizon due to the inflationary pressure.

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 Oct. 21, 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 USA Index , MSCI Europe Index, ICE U.S. Dollar Index (DXY), MSCI Emerging Markets Index, Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Refinitiv Datastream Italy 10-year benchmark government bond index, Bank of America Merrill Lynch Global Broad Corporate Index, Refinitiv Datastream Germany 10-year benchmark government bond index, Refinitiv Datastream U.S. 10-year benchmark government bond index and spot gold.

 

U.S. stocks rallied to all-time highs, boosted by better-than-expected corporate earnings. Nearly a quarter of S&P 500 companies have reported earnings so far, and more than 80% of them have beaten expectations, according to Refinitiv. Earnings season reaches a crescendo next week, with 164 companies representing 47% of the S&P 500 market cap due to report earnings, including most of the big-cap tech names. Crude oil prices hit multi-year highs.

Week Ahead

• Oct 26 – U.S. consumer confidence
• Oct27 – U.S durable goods
• Oct 28 – European Central Bank policy decision; U.S. advance Q3 GDP
• Oct 29 – Euro area flash inflation and GDP; U.S. personal income and outlays

Market attention this week will be on the flash estimates of GDP for the U.S., euro area and Germany. We will be looking out to assess the impact from supply disruptions on the growth outlook.

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 October 25th, 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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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. 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 back near record highs last week despite a series of headwinds. The MSCI World Index closed the week up 1.3%, and regionally, the S&P 500 Index closed the week up 1.6%, the STOXX Europe 600 Index was up 0.5% and the MSCI Asia Pacific Index closed up 0.9%.1 Tapering fears, concerns of peak growth, supply chain issues and Chinese property developer Evergrande’s potential default have been key market themes of late and they show little signs of abating. The focus shifted somewhat to the latest round of corporate earnings, which have been supportive overall so far.

Meanwhile, the CNN Fear and Greed Index is now firmly in “Greed” territory, moving from the “Extreme Fear” indicator just one month ago.

Central Bank Focus

Global equities have been very resilient in the face of some fundamental challenges relating to tapering fears, concerns of peak growth, and supply chain issues, Chinese interventionism and significant energy price rises have all contributed to the recent nervousness. When sentiment began to wobble in September, hedge funds loaded up on shorts, hoping for a downside correction. When this failed to materialize, they realized they needed to chase momentum once again. As we’ve noted over a number of months, the “TINA” (There Is No Alternative) theme persists in equity markets.

The focus as we progress through earnings season is around supply chains and inflation. A number of companies have already noted they have been able to pass cost increases onto customers, so where does that dynamic break down? European Central Bank (ECB) President Christine Lagarde continues to advise that inflation pressures are “largely transitory”, which is becoming increasingly less convincing. And recently, US Federal Reserve (Fed) officials have made a move away from using the word “transitory”.

Commentary from central bankers last week was notably hawkish, with Fed Chair Jerome Powell commenting Friday that he didn’t know how long it would take for inflation to abate, as supply chain bottlenecks remain persistent. He added that those bottlenecks, as well as energy price increases, had created an inflation framework that the Fed’s “patient” approach was not designed for and that the Fed was prepared to “use our tools to preserve price stability”.3 We also saw US rate volatility spike 14.9% last week, the highest level since February. The market now expects an 18 basis points (bps)4 hike by June next year.

Last weekend, Bank of England (BoE) Governor Andrew Bailey said that the UK central bank would “have to act” to deal with rising energy costs in Britain, which threaten a surge in consumer prices. UK money markets began to price in a hike before the end of the year. Markets began to price a 21 bps interest hike in November, which represented the first 15 bps hike, plus the possibility of a surprise hike of either 25 bps or 40 bps. Economists are split on whether it will ultimately be wage growth or inflation expectations which are the key driver behind any decision. We also cannot forget the impact Brexit is having on labour shortages, trade disruptions and goods checks and the resultant effect this has on particular data points which may impact monetary policy decisions.

On Thursday this week, we have the ECB meeting and interest rate decision. The market now prices in a 40 bps hike by the end of 2023. We have heard comments from committee members lately which suggest a slight shift in mindset around whether inflationary pressures are becoming less transitory. Thursday’s meeting will likely see the ECB set the foundations for the important decisions at the December meeting on asset purchases. We can expect Christine Lagarde to reassert her view that high inflation readings are likely to be temporary, but with inflation expectations now at 2% that view is becoming more difficult to maintain.

Given the evolving market conditions, we have seen a number of investment banks update their strategy notes on European equities over the last few weeks—with caution setting in amid corporate earnings season and stagflation a noted concern.

 

The Week in Review

Europe

The focus shifted last week in European equity markets towards the latest round of corporate earnings, but the same underlying themes persist. For the STOXX Europe 600 Index, 16% of companies reported earnings last week, and so far, earnings have surprised to the upside. Of those that have reported, 68% have beaten earnings-per-share (EPS) estimates, and revenue growth has also been better than anticipated.

This week, 35% of European companies are scheduled to report. So far, corporate earnings have painted a rosier picture for European equities at a time when a number of macro themes are keeping investor sentiment in check. Thus, there are many questions over what is next for European equities as markets continue to show resilience despite a series of headwinds. The defensive-led rally fuelled the STOXX Europe 600 Index to close the week up 0.5%.

Value stocks sold off last week as investors shifted into momentum. The European Value index closed the week down 3.0%, with momentum stocks up 0.4%. Another key theme was around the reopening trade with “going out” stocks down 4.3%, and “stay at home” stocks up 2% in Europe. As COVID-19 cases spike again in the United Kingdom, fears around a new variant of the virus has raised concerns around international travel over winter. Despite that, COVID-19-related newsflow continues to be encouraging overall.

There was a defensive skew to sector performance last week; defensives closed the week up 1.6% overall. Utilities, health care and personal and household goods were higher, whilst basic resources struggled; volatility continues in that space with China announcing intervention in the coal markets. Travel and leisure stocks also struggled on renewed COVID-19 fears.

Eurozone and UK Purchasing Managers’ Index (PMI) reports came in on last Friday. For the eurozone, services came in slightly behind expectations at 54.7, down from 56.2 previously. Manufacturing PMIs were better than expected at 58.4. UK PMIs came in better than expected, with the manufacturing PMI at 57.7 and services PMI at 58. October PMI data highlighted a robust increase in UK private sector business activity, with growth the strongest for three months.

United States

US equity markets showed resilience last week and pushed onto fresh all-time highs, with the S&P 500 Index up1.6%. Last week, focus was on commentary from the Fed, together with corporate earnings. Weekly fund flow data saw US equities’ largest inflow in five weeks and US markets had seven consecutive days of gains until a small pullback on Friday. With the move higher last week, the S&P 500 Index is comfortably above its 50-day moving average, a technical support level it had fallen through recently.

Sector performance was a mixed bag, with health care and financials the best performers, while communication services and consumer staples were the worst. Growth outperformed value (despite the strength in the financials) as some of the technology heavyweights outperformed—the FANG+ Index5 was up 3% on the week.

It seems equity investors are happy to look past recent concerns over inflationary pressures and focus on factors such as lingering central bank liquidity tailwinds, elevated profit margins, buybacks and strong corporate and consumer balance sheets. Earnings reports have been reassuring. With some 25.5% of the S&P 500 Index’s market capitalisation (cap) reporting, overall, earnings are beating estimates by 13.7%, with 83% of companies topping projections.

Looking to Washington DC, it appears that President Joe Biden’s administration is closer to a deal on a social spending package worth US$2 trillion. House leader Nancy Pelosi confirms that the Democrats are “pretty much there now” in terms of agreement on a social spending package.

On the inflation front, over the weekend, Treasury Secretary Janet Yellen said she expects price increases to remain high through the first half of 2022 and the current situation reflects “temporary” pain. In addition, she said: “I don’t think we’re about to lose control of inflation”.

Looking ahead, this week will see a glut of US earnings, with results from 156 companies representing over 43% of the S&P 500 Index’s market cap, including the largest five stocks (AAPL, MSFT, AMZN, GOOGL and FB).

Asia and Pacific

Asian equities were mixed overall last week, but the MSCI Asia Pacific Index still managed to close the week up 0.9%. Focal points included Chinese macroeconomic reports, Evergrande’s coupon payment and a surge in inflation in New Zealand to a 10-year high.

Chinese third quarter (Q3) gross domestic product (GDP) grew 4.9% year-on-year, missing expectations and lower than growth of 7.9% the previous quarter. Activity data was mostly softer than expected, with September industrial production coming in at 3.1% growth year-on-year, vs. 5.3% in August. Several categories are now in decline in China. Steel products, cement, autos and mobile communication devices were all lower.

Bloomberg reported economists have downgraded their forecasts for China’s economic growth for this year after a weak Q3, and there are signs a further slowdown could be ahead in the coming months. The biggest revisions are coming from those previously projecting 2021 growth in the upper 8% to low 9% range.

Evergrande avoided a technical default last week, as it repaid a missed interest payment on a dollar bond just days before a deadline that would have forced a formal default. Chinese state media reported on Friday that the real estate group had transferred a US$83.5 million interest payment to Citibank, the trustee, on Thursday, and that the funds would be paid to investors before the grace period expired at the weekend. Evergrande has four more payments due on dollar notes this year, while known proposals for major divestments to raise cash have so far fallen through. The company later said it had made no significant progress on asset sales.

In another sign that inflationary pressures persist, New Zealand’s Q3 Consumer Price Index (CPI) came in at a 10-year high of 4.9% year-on-year, up from 3.3% in the second quarter (Q2) and well above consensus expectations. Data has reinforced expectations of further Reserve Bank of New Zealand (RBNZ) tightening, likely coming next month. Housing-related costs were the biggest inflationary drivers there. Businesses continue to face elevated cost pressures amid economy-wide capacity constraints.

Week Ahead

Monday 25 October 2021:

• Germany IFO Survey
• Bank of England’s Silvana Tenreyro is due to speak on supply chains at an event hosted by CEPR and the central bank.
• US Dallas Fed manufacturing survey

Tuesday 26 October:

• Spain Producer Price Index (PPI)
• Japan PPI
• ECB’s Francois Villeroy de Galhau speaks at a sustainable finance event in Paris.

Wednesday 27 Wednesday:

• UK Budget
• France PPI
• France total jobseekers
• US Durable goods
• Chinese industrial profits
• Australia CPI

Thursday 28 October:

• ECB policy meeting
• Bank of Japan policy balance rate
• Spain CPI & unemployment rate
• Eurozone consumer confidence
• Italy PPI
• Germany CPI
• US GDP and jobless claims
• Japan retail sales

Friday 29 October:

• France GDP and consumer spending and CPI
• Spain GDP and retail sales
• Germany GDP
• Italy GDP
• Eurozone GDP

 

Franklin Templeton Key risks & Disclaimers:

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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 25th October 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.