Day: 16 October 2023

Jean Bovin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment Strategist, Alex Brazier – Deputy Head, and Michel Dilmanian – Investment Strategist 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.

Key Points

U.S. Treasury view: We turn tactically neutral long-term Treasuries as markets price high-for-longer policy rates but stay underweight strategically. We cut high quality credit again.

Market backdrop: U.S. stocks steadied last week as Q3 earnings season started. Ten-year Treasury yields dipped. U.S. core CPI reinforced why we see the Fed holding policy tight.

Week ahead: China GDP and Japan inflation are in focus this week. We see China on a lower growth path and higher inflation in Japan paving the way for a policy change.

We have been underweight long-term U.S. Treasuries since late 2020 as we saw the new macro regime heralding higher rates. U.S. 10-year yields at 16-year highs show they have adjusted a lot – but we don’t think the process is over. We now turn tactically neutral as policy rates near their peak. The next step is not overweight: we see investors demanding more compensation for bond risk and stay underweight on a long-run, strategic horizon. We downgrade high grade credit further.

We’ve long said higher interest rates are a key part of the new regime. Why? Supply constraints make inflation persistent; bond supply is swelling due to high deficits; and macro and geopolitical volatility abound. That’s why we went underweight long-term Treasuries on a six- to 12-month tactical horizon when yields were below 1%. We expected investors to demand more compensation, or term premium, for the risk of holding bonds. That has started to occur in recent months, but the repricing of Federal Reserve policy rates has been a big part of the yield move (orange area in chart) since the Fed’s first hike in 2022. We see the yield surge driven by expected policy rates nearing a peak. Rising term premium will likely be the next driver of higher yields. We think 10-year yields could reach 5% or higher on a longer-term horizon. Yet the gap between investment grade credit and 10-year bond yields hasn’t widened as we expected, so we further downgrade credit.

We now see about equal odds that Treasury yields swing in either direction. In other words, we see two-way volatility ahead. One reason: The Fed is likely nearing the end of its fastest hiking cycle since the 1980s after raising rates into restrictive territory. We see policymakers shifting to assessing financial conditions. Fed officials said last week that tightening financial conditions due to surging long-term yields are likely doing some of the Fed’s work for it. The U.S. economy has already stagnated for the past 18 months after averaging GDP and gross domestic income – which adds up incomes and profits of households and firms. Further damage from rate hikes will likely become clearer over time. We think these conditions bring us closer to when the “politics of inflation,” or pressure on the Fed to curb inflation, will turn into pressure to stop hurting economic activity with tight monetary policy. We still see the Fed holding policy tight to lean against inflationary pressures.

Yield focus

We think long-term yields have not fully adjusted yet. They will eventually resume their march higher as term premium gradually rises, in our view, to account for greater macro volatility, persistent inflation plus large fiscal deficits and debt issuance. In the near term, inflation is easing as pandemic mismatches unwind from consumers shifting spending back to services from goods. We see inflationary pressures on a rollercoaster ride beyond the near term as an aging population shrinks the workforce, fueling wage and overall inflation. That backdrop begs the question: What will be the neutral policy rate that neither stimulates nor slows activity? Drivers of further yield jumps and tightening financial conditions are up for debate, too. These uncertainties are set to create more volatility in the near term, without yields moving in a clear direction.

We fund our tactical upgrade by further downgrading IG credit tactically after recently going underweight last month. Why cut IG and not the lower quality high yield credit? We have expected U.S. credit spreads to widen due to rate hikes. Yet the IG spread has tightened since the Fed’s first hike, while high yield has widened. We also opt to further downgrade IG rather than high yield to avoid reducing our portfolio risk levels and exposure to risk assets.

Bottom line

We turn tactically neutral long-term Treasuries but stay underweight strategically. Instead of IG credit, we tap into quality in short- and long-term Treasuries and U.S. agency mortgage-backed securities (MBS). Agency MBS carry minimal default risk given the implicit protection offered by the U.S. government.

Market backdrop

U.S. stocks steadied for a second week, while 10-year Treasury yields retreated from 16-year highs hit earlier in the month. We think the volatility in long-term yields is likely to persist, even as central banks have likely reached peak policy rates. Fed comments this week that higher longer-term yields were doing the policy tightening work for them helped confirm this. But a renewed surge in U.S. core services CPI excluding housing reinforced why we think the Fed will hold tight on policy.

Asia is in focus this week: China faces weak consumer and export demand and the economic restart from Covid lockdowns is sputtering. We see the economy resetting lower than the pre-pandemic trend growth rate. Inflation has returned in Japan. We see risks of spillovers to global bond markets as the central bank faces pressure to change its ultra-loose policy.

Week Ahead

Oct. 17: UK unemployment, U.S. retail sales

Oct. 18: UK CPI; China Q3 GDP

Oct. 19: Japan trade data

Oct. 20: Japan CPI

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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 16^th October, 2023 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.

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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 Information Document (KID), which may be obtained from MeDirect Bank (Malta) plc.

Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what our professional traders and analysts are watching in the markets. As part of Templeton Global Investments Group, the European equity desk is manned by a team of professionals based in Edinburgh, Scotland, 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 closed higher last week, with a number of moving parts impacting financial markets. The MSCI World Index closed the week up 0.6%, whilst regionally, the Stoxx Europe 600 Index closed up 1.0%, the S&P 500 Index closed up 0.4%, and the MSCI Asia Pacific Index closed up 1.6%. Dovish Fedspeak from two usually more hawkish members, as well as Chinese stimulus hopes, were the key catalysts behind the market rally.

On Monday, Federal Reserve (Fed) Vice Chair Philip Jefferson said that the Federal Open Market Committee (FOMC) could “proceed carefully” following the recent rise in Treasury yields, whilst Dallas Fed Bank President Lorie Logan said the surge in long-term bond yields may mean less need for further tightening. This, paired with headlines on Tuesday suggesting the Chinese government was set to unleash a new round of stimulus measures, sent equities higher through the first half of the week.

Thursday’s US headline Consumer Price Index (CPI) figure came in slightly higher than expected at 0.4% month-over-month in September, showing that inflation remains sticky. With that, risk assets sold off and bond yields rallied back towards the highs. Market sentiment remains very precarious, with indicators retreating further into bearish territory last week.

Fund flows last week were bearish, with another US$16.9 billion inflow into money-market funds and US$8.2 billion out of global equities. European equity funds recorded their 31st consecutive weekly outflow, shedding US$0.7 billion.

Week in review

Europe

European equities traded higher overall last week, but on relatively low volumes (last week was the third-worst week of the year for Stoxx 600 Index volumes). Dovish central bank chatter out of the United States buoyed the market, along with renewed China stimulus hopes. On Tuesday, a basket of China-exposed European names had its best day since 2 June and second-best day of the year. Markets then pared some of the week’s gains through Thursday and Friday, as the US September CPI report kept inflation concerns front and centre.

Markets have also been absorbing and assessing news out of the Middle East regarding the catastrophic escalation in geopolitical tensions between Israel and Palestine. The unexpected Hamas terror attack, followed by Israel’s heavy military response, has left many observers questioning whether the latest escalation will spill over into the rest of the region. This sent oil prices higher last week with the inference being that Iran may become embroiled in the conflict, which could impact global oil supplies. A report on Bloomberg estimates that if Iran is drawn into the war, crude oil could reach US$150 a barrel and cut about US$1 trillion off global economic output. As expected, we did see European aero and defense stocks trade higher last week.

Sector performance divergence was wide last week. Oil and gas stocks outperformed last week amidst higher oil prices. Also, European gas prices were up 45% on the week after a leak was discovered on a pipeline connecting the Finnish and Estonian grids. Utilities were also higher last week, bouncing after underperformance the previous week. In terms of the laggards, personal and household goods struggled as luxury stocks came under pressure following an earnings miss from LVMH. For the same reason, retail stocks struggled, also closing down on the week. Travel and leisure stocks were also weaker, weighed on by higher oil prices, flight cancellations in Israel and some weak stock-specific updates.

United States

US equities traded broadly higher last week, as dovish Fedspeak and positive earnings proved to be stronger forces than the CPI beat. The S&P 500 Index closed the week up 0.4%, the Dow Jones Industrial Average closed up 0.8% and the Nasdaq Index up 0.1%. The small-cap Russell 2000 Index underperformed on the back of the inflation report, closing the week down 1.5%.

As noted, the latest Fed rhetoric provided risk assets with a shot in the arm early last week, as two of the usually more hawkish Fed members provided comments which the market perceived as dovish. They suggested that the Fed would consider the impact of higher yields on the need to tighten policy once again, emphasising the need for the FOMC to proceed with caution. Some additional Fed members supported these comments, noting that the recent increase in bond yields could substitute for increases in the federal funds rate. This series of comments effectively locked in the market expectation of no hike in November. Expectations for December’s meeting are not so clear, however, with the market pricing in a 36% chance of a 25 basis point (bps) hike at that meeting.

The September US headline CPI report complemented the idea that the Fed may have more work to do on interest rates and inflation, as it came in ahead of expectations, rising 0.4% on the month. The core CPI was in line with expectations at 0.3%. Rising shelter costs drove the headline CPI, as primary rents were up 0.49%. There was also a large boost in hotel prices, up 3.7%. Services were also strong, with core service ex-housing up 0.61% on the month. Used car prices were down 2.5%; however, this is not expected to continue.

We saw whipsaw moves in US credit markets on the back of the inflation report last week. Thursday saw the largest one-day move in the US 30-year Treasury yield in 3.5 years (since the outbreak of COVID-19 in March 2020). On the face of it, the move in yields did seem like an over-reaction to a print which was only slightly above market expectations. However, a weak 30-year Treasury auction on Thursday also pushed yields higher. Finally, the US dollar rebounded on the back of the CPI report.

Third quarter earnings season was in full swing last week in the United States, with a number of high-profile banks reporting. JPM, Wells Fargo and Citi all reported on Friday, and they reported upbeat earnings overall. This week will be big for market sentiment too, with Tesla, Bank of America, Goldman Sachs, Morgan Stanley, Netflix, among others, reporting. In total, 55 of the S&P 500 Index stocks will report this week.

Asia

Asian equities finished higher overall last week, but performance was mixed across the region.

Chinese markets reopened last week after being closed for the Golden Week holiday. The Shanghai Composite Index closed the week down 0.7%, with investors unimpressed with travel and consumption data over the holiday week, suggesting the COVID-19 recovery is stalling once again. Reports that the government is considering the issuance of 1 trillion yuan of additional sovereign debt for spending on infrastructure were in focus. However, domestic investors were sceptical that such measures would help boost household and private sector consumption demand.

Hong Kong’s Hang Seng Index snapped a five-week losing streak, helped by headlines around potential China stimulus. Banks were stronger overall, as China’s sovereign wealth fund increased its holdings in the nation’s four largest state-owned banks for the first time since 2015. The auto sector was also strong, following a September sales beat.

Japan’s Nikkei Index outperformed, closing last week up 4.3% amidst the dovish US central bank rhetoric. It is likely that short-covering drove some of the gains.

Week ahead

Macro week ahead highlights

Earnings will be a clear focus for markets this week, as third quarter reporting kicks into gear in Europe and the United States. Events in the Middle East will also be closely watched. In terms of data, highlights include Chinese gross domestic product (GDP) and Industrial Production on Tuesday, as well as US Retail Sales; Eurozone and UK CPI on Wednesday; and a US Manufacturing Survey on Thursday.

Euro-area key events:

Tuesday 17 October: UK unemployment rate; Germany ZEW Survey expectations

Wednesday 18 October: UK CPI inflation; Euro-area final CPI inflation

Friday 20 October: UK Retail Sales; Germany Producer Price Index (PPI)

Monday 16 October

• Norway Trade Balance
• Germany Wholesale Price Index
• Eurozone Economic Survey; Eurozone August Trade Balance
• France Economic Survey
• Spain Economic Survey
• Italy CPI EU Harmonised
• Japan Industrial Production
• US Empire State Manufacturing Survey

Tuesday 17 October                   

• UK September Jobless Claims, Average Weekly Earnings, ILO Unemployment Rate
• Eurozone ZEW Survey Expectations
• Germany ZEW Survey Expectations
• China GDP, Industrial Production, Retail Sales, Property Investment
• US Retail Sales; Industrial/Manufacturing Production; Business Inventories; Housing Market Index

Wednesday 18 October

• UK Retail Price Index; CPI; House Price Index
• Italy Trade Balance
• Eurozone CPI; Construction Output
• US Housing Starts and Building Permits

Thursday 19 October    

• Switzerland Imports and Exports
• France Business/Manufacturing Confidence, Production Outlook Indicator
• Spain Trade Balance
• Eurozone Current Account
• Japan CPI
• US Philadelphia Fed Manufacturing Survey; Initial Claims, Continuing Claims; Existing Home Sales

Friday 20 October

• UK Retail Sales Incl Auto Fuel; Public Finances, Central Gov NCR, Public Sector Net Borrowing
• Sweden Unemployment Rate
• Germany PPI
• Eurozone EU27 New Car Registrations
• Sweden Economic Survey
• Norway Economic Survey

 

Franklin Templeton Key risks & Disclaimers:

What Are the Risks?

All investments involve risks, including the 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.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

Past performance is not an indicator or guarantee of future performance. There is no assurance that any estimate, forecast or projection will be realised.

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 16th October 2023, 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 Information Document (KID), which may be obtained from MeDirect Bank (Malta) plc.