Day: 21 November 2023

Jean Bovin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment Strategist, Alex Brazier – Deputy Head, Fundamental Equities, and Vivek Paul – Global Head of Portfolio Research 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

Volatile new regime: We see volatility as a constant in the new regime. We’re neutral long-term U.S. Treasuries because risks are more balanced after three years of rising yields.

Market backdrop: Stocks and bonds rallied last week on milder-than-expected U.S. inflation data. We see the U.S. economy on a weak growth path, with policy rates staying high.

Week ahead: Global PMI data this week will likely confirm that higher interest rates are causing business activity to stagnate. We don’t expect rate cuts this year.

The plunge in long-term U.S. Treasury yields last week on news of slowing U.S. inflation shows volatility is persistent in the new regime of greater macro uncertainty. Compounding this is a disconnect between the latest cyclical market narrative of a strong expansion – and the reality we have just climbed out of a deep economic hole caused by the pandemic. This disconnect risks obscuring the new regime’s opportunities – a key conclusion of our 2024 Outlook Forum last week.

Stocks rallied, and yields on 10-year U.S. Treasuries tumbled 19 basis points last week – the biggest one-day move since the March U.S. banking turmoil. The drop came after news of a slower-than-expected pace of inflation. This is keeping bond volatility at much higher levels than before the pandemic, as the chart shows. The current market narrative: Inflation is falling while growth is holding up. We agree with the first part – for now. We see core inflation hitting the Fed’s 2% target in the second half of 2024. The problem: Inflation is falling because rapid rate rises to combat it have pushed U.S. growth trend below pre-Covid levels. We think more of the same is needed to keep inflation down as price pressures resume amid slowing labor force growth and geopolitical shocks. Markets appear to miss this bigger picture, and we see more volatility ahead as they swing between hopes for a “soft landing” and fears about higher rates and recession.

We upgraded long-term Treasuries to neutral on a tactical, six-to-12-month horizon last month because we now see even odds of yields swinging in either direction in this volatile environment. That’s in part because the Fed seems to be at the end of its rate hike cycle. Yet looser fiscal policy and slowing labor force growth will likely force the Fed to keep rates high for longer. Long-term yields should eventually resume their march higher. Why? We expect the term premium, or the compensation investors demand for the risk of holding long-term bonds, to keep rising amid greater macro volatility, large fiscal deficits and high debt issuance.

Looking ahead

Indeed, U.S. fiscal challenges have already contributed to volatility, and we see that playing out further. The U.S. government ramped up spending to restart the economy from pandemic lockdowns and launched other stimulus such as the Inflation Reduction Act. Bond issuance ballooned as a result. Higher interest rates are feeding into this cycle by raising government borrowing costs and adding to the debt burden. If borrowing costs stay near 5% as we expect, the U.S. government is poised to spend more on interest payments than on Medicare in a few years time. Investors are struggling to absorb the bond supply. Their indigestion spurred another surge in bond yields earlier this month after an auction for 30-year Treasuries saw historically weak demand.

Higher rates and volatility took center stage at our semi-annual Investment Outlook Forum held last week in New York. Some 100 BlackRock portfolio managers, executives and experts spent two days pinpointing investment opportunities and risks. Adapting portfolios to higher interest rates and mega forces – structural shifts such as geopolitical fragmentation and demographic divergence – were top of mind. Participants debated how to go beyond the obvious beneficiaries of mega forces, and highlighted granular opportunities within sectors and countries such as Japan. There was consensus that the new regime calls for selective and dynamic investment strategies, rather than static and broad exposures. And many saw wider dispersion of security returns – a feature of the new regime – and greater volatility opening opportunities to generate above-benchmark returns. Look for the details in our 2024 Global Outlook slated to come out in early December.

Bottom line

Volatility is a constant in the new regime, with markets quick to extrapolate single data releases. We believe the Fed is ending its hiking cycle – and is set to keep rates high for longer. This underpins why we have turned neutral long-term Treasuries and are overweight short-term Treasuries and European government bonds for income.

Market backdrop

U.S. stocks jumped about 2% last week, and 10-year U.S. Treasury yields slid sharply after the U.S. CPI data showed inflation slowing more than expected. Long-term U.S. yields have swung sharply – a reflection of the volatile new regime – after reaching 16-year highs last month as markets hope for sharp Fed rate cuts next year. We don’t think that is likely and see the Fed only starting to trim rates in the second half of 2024.

Global manufacturing and services PMI data out this week will likely confirm that higher interest rates are causing global production and business activity to stagnate. We think most developed market central banks will keep policy rates high for longer to lean against inflationary pressures – even as activity slows.

Week Ahead

Nov. 23: Euro area, UK flash PMI

Nov. 24: U.S. flash PMI; Japan flash PMI, 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 20^th November, 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

Last week global equities advanced amidst lower-than-expected inflation data, which helped fuel the narrative interest rates in the United States are at a peak. In addition, relations between the United States and China took a more constructive tone, as President Xi Jinping visited the United States and met President Joe Biden and US business leaders. Bond yields fell and equity markets pushed ahead, with The MSCI World Index up 2.9%, the STOXX Europe 600 Index up 2.8%, the S&P 500 Index up 2.2%, and the MSCI Asia Pacific Index up 3.2%.

Softer-than-expected US and UK inflation data

United States: Last Tuesday the October US Consumer Price Index (CPI) reading decelerated at a faster-than-expected rate, fuelling hopes for a dovish pivot from the Federal Reserve (Fed). The US CPI decelerated to +3.2% year-on-year from the previous month’s reading of +3.7%. Core CPI also saw a modest decline to +4.0%, down from +4.1% last month. The following day, the October Producer Price Index (PPI) data came out, with the month-on-month reading at -0.5%, indicating deflation.

Market expectations are now pricing in a Fed rate cut by May or June 2024, with all eyes on the next Fed meeting (13 December) to see if the wording “additional policy firming that may be appropriate” is dropped. The market is now pricing in 92.5 basis points (bps) worth of cuts by the end of 2024, up from 70.2 bps at the end of last week. However, some market observers were not getting too excited yet—whether the Fed is done raising rates is still up for debate.

United Kingdom: The United Kingdom also saw softer-than-expected October CPI inflation data, coming in at +4.6%, versus the prior month’s reading of +6.7%. The core reading stood at +5.7%, down from the previous month’s +6.1%. UK wage growth also slowed to +7.9% (compared to +8.2% in the prior month), with the ex-bonus reading at +7.7% (compared to +7.8%). These figures contribute to the notion that inflation seems to be easing.

The market is currently pricing in two 25 bps cuts from the Bank of England by September 2024, reflecting 51.1 bps of cuts. The UK 10-year yield declined by 23.1 bps last week, settling at around 4.10%.

Week in review

United States

The S&P 500 Index saw a third consecutive week of gains, trading up 2.2% the Dow Jones Industrial Average was up 1.9%, The Nasdaq Index was up 2% and the Russell 2000 Index surged 5.5%.

A decline in Treasury yields supported equities. The US 10-year yield decreased by 21.6 bps to around 4.44%, marking its lowest level since September, while the two-year yield dropped to 4.80% at one point in the week.

Sector-wise, it was unsurprising to see gains across the board. Falling yields drove rate-sensitive real estate investment trusts (REITs), materials and consumer discretionary stocks higher. The defensive consumer staples lagged a bit but were still higher overall.

West Texas Intermediate crude oil fell 1.7% last week, entering bear market territory (down 20% from the September highs). Inventory data continues to reveal builds amidst concerns over demand in a weakening macro environment.

Turning to geopolitics, Xi and Biden met in the United States for the first time in six years, and the tone was seen as positive. They reached an agreement to better manage tensions and convey to Americans that China seeks friendship, not war. In discussions with US business leaders, Xi pledged additional “heartwarming” measures to enhance China’s appeal to companies.

Elsewhere, the US House of Representatives passed a resolution to avoid a government shutdown.

Investor sentiment picked up sharply last week, with the CNN Fear & Greed Index swinging from “Fear” to “Greed.”

The latest weekly fund flow data saw the second-largest inflow of the year into global equities and the largest inflow into US large cap stocks since February 22.

Europe

Last week was similarly strong for European equities. Rate-sensitive cyclicals and technology companies outperformed as bond yields declined on the latest US and UK inflation data.

Positive sentiment around China also helped drive market optimism in light of the Biden/Xi meeting as well as some positive Chinese macro data.

Another interesting market dynamic last week was the outperformance of small-cap stocks with the EStoxx SC Index (SCXP) up 4.1% last week. Likewise, the FTSE 250 Index outperformed the FTSE 100 Index.

In terms of fund flows, global equity funds attracted US$23.5 billion of inflows in the latest week; US equities saw US$25.8 billion of inflows, but European equities saw a 36^th consecutive week of outflows.

Despite comments from a few European Central Bank (ECB) officials suggesting that rate cuts were not imminent—including ECB President Christine Lagarde—money markets have priced in a full percentage point of interest rate cuts in 2024.

Asia

Last week good week for Asian equities, with all major indices in the green. The MSCI Asia Pacific index was up 3.21% last week, with Japanese equities once again outperforming in the region.

Looking ahead to this holiday-impacted week (with markets closed in  the United States and Japan on Thursday), all eyes will be on the Fed, ECB and Reserve Bank of Australia (RBA) meeting minutes, the US Treasury bill auction, and some Japanese inflation data.

Japan

in Japan, stocks shrugged off earlier losses earlier in the week to close higher on Friday. Despite a softer-than-expected third quarter gross domestic product (GDP) number and yen weakness, the Bank of Japan’s (BoJ’s) decision the prior week to maintain a loose monetary policy for now kept market sentiment afloat.

Looking ahead, Japanese markets will be closed on 23 November for Labour Thanksgiving Day.

China

The Shanghai Composite Index closed last week up 0.51%, as some mixed economic data dampened sentiment.

October Industrial Production and Retail Sales figures were better than expected, while Property Investment data was a bit disappointing. October home prices saw the largest decline since 2015, while the overall sales value stayed low, indicating a worsening situation. Unemployment remained steady in September.

Last week, the Peoples Bank of China injected CNY1.45 trillion into the banking system via its medium-term lending facility (MTLF) vs. CNY850 billion in maturing loans, its largest net injection since December 2016. The MTLF rate was left unchanged, as expected. Liquidity injections are seen as a part of the bank’s ongoing efforts to counter economic headwinds.

The feedback from the Biden/Xi meeting at the APEC Summit last week seems to be overall positive, with the tone from both sides conciliatory. The Chinese media gave quite positive comments regarding Xi’s visit, hinting at progress in chip exports curbs, investment restriction and tariffs.

Worth noting, the upcoming Central Economic Work Conference, usually held in mid-December, sets the policy tone for the next year. Stronger fiscal measures are expected to be adopted for 2024, while a higher deficit ratio and more direct funding from the central government to help support property sector and local governments are possible.

Hong Kong

Hong Kong’s benchmark equity index rose 1.46% last week on the back of the softer US inflation data, as well as hopes for the Chinese economy after strong data on consumption and new government stimulus.

Chinese developer stocks rose after China’s government announced plans to provide at least CNY1 trillion (US$137 billion) of low-cost financing to the nation’s urban village renovation and affordable housing programs. However, data showing that China home prices fell the most in eight years in October caused stocks to retreat somewhat.

Internet stocks in China traded mixed amid a busy earnings week.

The week ahead

News that Javier Milei won the Argentine presidential election kicks off this week. He took 56% of the votes. Milei has advocated some unconventional reforms, including replacing the peso with the dollar and getting rid of the central bank.

It will be quieter week, with US markets closed on Thursday and Friday afternoon for Thanksgiving. In addition, Japan is also closed on Thursday. That said, we have a few events to keep things interesting. The Fed October meeting minutes will be released this week, and will no doubt garner some interest. Global Purchasing Managers Index (PMI) data will also be worth watching. In the United Kingdom, Chancellor Jeremy Hunt will give the Autumn Statement. Asia looks quieter in terms of macro data, but Japanese CPI is worth watching this week.

Monday 20 November 

• Germany PPI
• Eurozone Construction Output
• US Leading Economic Indicators

Tuesday 21 November                     

• UK Public Finances (PSNCR)
• Switzerland Swiss Watch Exports
• US Existing Home Sales

Wednesday 22 November

• UK Autumn Statement
• Eurozone Consumer Confidence
• US Durable Goods & Continuing Claims; US FOMC minutes

Thursday 23 November   

• Riksbank Policy Rate Decision
• Euro-area Flash Composite PMI
• UK Flash Composite PMI
• ECB Monetary Policy Account
• France Manufacturing Confidence & Production Outlook
• US Thanksgiving (market closed)
• Japanese CPI

Friday 24 November

• UK GfK Consumer Confidence
• Germany Ifo Expectations Survey; Q3 GDP
• Sweden PPI
• Spain PPI
• US S&P/Markit Manufacturing & Services PMI; US November PMI survey; US early close for equity market

 

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.

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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 20th November 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.