Day: 28 November 2023

Jean Bovin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment Strategist, Vivek Paul – Global Head of Portfolio Research and Devan Nathwani – Portfolio 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

Quarterly strategic update: We turn more positive on short- to medium-term developed market (DM) sovereign bonds in our latest strategic update. We trim DM stocks to neutral.

Market backdrop: Ten-year U.S. Treasury yields steadied after their drop from 16-year highs. We think yields will stay volatile but ultimately resume their climb in the long term.

Week ahead: U.S. PCE inflation data out this week should gauge if price pressures are cooling further. We don’t see inflation coming down to the Fed’s 2% target long term.

We think granularity is key as government bond yields hit multi-year highs. We turn more positive on short- and medium-term DM bonds as we factor in high interest rates for longer in our strategic views of five years and over. We stay underweight long-term bonds, leaving us neutral DM bonds overall in our latest quarterly update. We like inflation-linked bonds and cut DM stocks to neutral on valuations. We remain underweight credit, preferring income in private markets.

We had been underweight DM government bonds since March 2020 as we expected yields to rise. We gradually trimmed the underweight as our view played out, increasingly preferring shorter-dated bonds. Now with yields even higher, we explicitly carve out an overweight on DM short- and medium-term government bonds. We stay underweight long-term bonds as we see room for long-term yields to climb again. Why? Investors will demand more term premium, or compensation for the risk of holding these bonds across DMs, in our view. See the chart. This is due to more uncertain and volatile inflation spurring heightened bond market volatility. We also see weaker demand for bonds amid rising debt levels. Central banks are no longer reinvesting the proceeds of maturing bonds as part of quantitative tightening, and investors are struggling to digest a flood of new bonds.

The path to higher long-term yields is unlikely to be straight in the next five years. Indeed, we recently went neutral long-term Treasuries from a tactical, six-to-12-month view because we see more even odds of yields swinging in either direction. Inflation-linked bonds remain our highest-conviction overweight on the strategic horizon. Sure, inflation is falling in the near term as pandemic-era mismatches unwind, with consumer spending shifting back to services from goods. But in the long run, we see inflation well above 2% central bank policy targets. The reasons are big structural shifts constraining supply: slowing labor force growth, geopolitical fragmentation and the low-carbon transition. That’s why we see central banks keeping interest rates high for longer. Our updated strategic views bake in the impact of this.

Staying nimble and selective

We also turn neutral DM equities, with U.S. stocks remaining our largest portfolio allocation. We had been overweight since the end of Western pandemic lockdowns due to attractive valuations. Bond and stock markets have been moving toward our view of high-for-longer rates in fits and starts, and long-term valuations for stocks now look about fair to us. This is why we have turned neutral on the broad asset class – and look for opportunities within. The new regime has created uncertainty, resulting in greater dispersion of sector and individual security returns. How to capture these potential opportunities to generate above-benchmark returns? Nimble portfolios, getting granular and investment skill are part of the answer, we think.

These changes demonstrate why we think it’s important to be agile with strategic views. This new, more volatile regime means the relative attraction of different assets is shifting faster than we have been used to for a generation. Credit is a case in point. Just a year ago, we were overweight investment grade credit because spreads looked attractive versus our long-run expectations. Then spreads tightened materially, and we turned underweight as we expect them to widen in the long run. High-for-longer rates will likely eat into corporate margins and earnings, in our view, especially as companies refinance debt. We see private credit lenders benefitting from refinancing activity as banks curb lending due to high rates reshaping the financial industry. That said, private markets are complex and not suitable for all investors. And private credit is not immune to the tough economic backdrop, but we think current yields compensate investors for the risks.

Bottom line

High rates are a core tenet of the new regime. We carve out a strategic overweight on shorter-term DM bonds and stick to our preference for inflation-linked bonds. We go neutral DM stocks but see granular opportunities.

Market backdrop

The S&P 500 hit a four-month high, taking its gains to about 11% from the October lows on a holiday-shortened trading week. The tech-heavy Nasdaq 100 hit its highest level since January 2022. Ten-year U.S. Treasury yields inched up back toward 4.5% but are still down about 50 basis points from their October peak. We think yields will stay volatile but resume their march as investors start to demand more term premium – a key part of our view on both tactical and strategic horizons.

We are monitoring U.S. PCE inflation data – the Fed’s preferred measure of inflation – due this week to gauge if inflation is on track to fall to 2%. We think U.S. inflation will near the Fed’s 2% policy target in the second half of 2024 but will not stay there long term. We think euro area inflation will also head back to target next year as economic activity stagnates.

Week Ahead

Nov. 29: Germany CPI

Nov. 30: U.S. PCE; euro area flash CPI and unemployment

Dec. 1: U.S. ISM manufacturing PMI

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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 27^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.

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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

US Thanksgiving holiday week is traditionally a quiet one for equity markets globally, and last week proved to be just that. There were very little in terms of market catalysts, and equities slowly grinded higher. The MSCI World Index closed up 1.0%, the STOXX Europe 600 Index closed up 0.9%, the S&P 500 Index was up 1.0%, and the MSCI Asia Pacific was up 0.4%.

US stock markets were closed on Thursday and volumes were very quiet again in a shortened session on Friday. The release of the latest Federal Open Market Committee Meeting (FOMC) minutes was largely a non-event; however, there was a suggestion that disinflation could reverse if the conflict in the Middle East were to escalate.

On Wednesday, Reuters reported that Chinese government advisors would recommend a gross domestic product (GDP) growth target for 2024 of 4.5%-5.5%, which would require further stimulus.

In the United Kingdom, the Chancellor’s Autumn Statement garnered some interest, with some tax and pension changes, but nothing particularly market-moving. Oil prices fell after the OPEC+ meeting. It had been postponed a week, implying a lack of consensus amongst members.

Last week was largely uneventful for European equity markets, with trading volumes in Europe slumping into the US market holiday. The path of least resistance in this quiet environment was higher, with the STOXX 600 Index up 0.9% on the week. With that, European equities are now up 6.1% so far in November, on track for their best monthly performance this year.

Spain’s equity market outperformed last week, up 1.8%, as the new government was formed. Swedish equities also did well, up 1.4%, as the Riksbank kept interest rates on hold (the market had been expecting a hike). Meanwhile, Italy’s FTSE MIB lagged, down 0.6%.

European equities overall remained out of favour, with US$32 million worth of outflows in the week ended 21 November—the 37^th week in a row of outflows.

European Purchasing Managers Index (PMI) data remain in contraction territory (below 50), although the November reading was ahead of estimates at 47.1 vs. 46.5 previously. The pace of decline in New Orders also slowed, coming in at 45.1 in November.

In the United Kingdom, Thursday’s PMI data garnered some interest during the week’s doldrums. The Composite PMI came in ahead of expectations at 50.1, in expansion for the first time since July. UK Consumer Confidence also rose, coming in at -24 in November vs. -30 in October. On Wednesday, Chancellor Jeremy Hunt delivered his Autumn Statement, where he announced cuts to personal and business taxes in order to stimulate growth. However, in conjunction with the Statement, the Office of Budget Responsibility published its economic and fiscal outlook which slashed its projection for 2024 GDP to +0.7% from +1.8%.

On Friday morning, Germany’s GDP report came out, falling 0.1% quarter-over-quarter. The German IFO Business Climate survey showed the business outlook improved for a third month in November, which is encouraging given fears about the German economy and the ongoing budget issues for the government. On that subject, the German government announced it will suspend a constitutional limit on net new borrowing for a fourth consecutive year, after Chancellor Olaf Scholz’s government was forced into a radical budget overhaul by a ruling last week from the nation’s top court.

Turning to politics elsewhere, the Dutch election last week gave the market a bit of a shock, with far-right Geert Wilders and his PVV party winning, picking up 37 seats. Now, he needs to find coalition partners to get to the 76-seat majority required to form a government, and he has spoken about moderating his stance in order to do so. Watch this space.

In a holiday-shortened week in the United States, market volumes were poor. The S&P 500 and the Nasdaq indices both managed to log a fourth straight week of gains All sectors finished the week in the green, with health care and consumer staples outperforming. Energy stocks were higher, but a dip in oil prices weighed on the market.

Market volatility was lower again, with the CBOE VIX Index dropping to levels last seen in 2020, pre-COVID.

There were very few market catalysts last week. The FOMC meeting minutes didn’t provide much new for equity markets—revealing all participants voted to keep the federal funds funds rate unchanged at the last meeting. Members noted that rates would need to remain restrictive at current levels “for some time”, which didn’t represent anything particularly new. They did note the risk of an escalation in the Israel-Palestine conflict and what that would mean for inflation in the United States  through rising global oil prices.

In terms of data, the latest US Composite PMI data came in unchanged overall at 50.7 in November. Manufacturing dropped to 49.4 in November vs. 49.4 in October, but this was offset by an upturn for the services sector, up to 50.8 vs. 50.6 previous.

Asia

Asian markets were somewhat muted last week after a couple of good weeks prior. The MSCI Asia Pacific closed the week up 0.37%, with South Korea’s market the outperformer, up 1.08%, and Thailand’s equity market the underperformer, down 1.27% last week.

Looking ahead, most markets in Asia started this week off on relatively low volumes after the US Thanksgiving holiday and a slow half-day session in US markets on Friday; markets in India and the Philippines are closed for holidays on 27 November.

Central banks in South Korea, Thailand and New Zealand are expected to keep interest rates on hold at their policy meetings this week. China will release its official PMI data, which is expected to point to a continued recovery in economic activity, but the Caixin manufacturing number due later this week may paint a more subdued picture. Markets will also be watching for news about a Chinese government rescue package for the beleaguered property market.

Japan

The Nikkei closed last week just in the green, up 0.12% in a holiday-shortened week (Japan’s market was closed Thursday), with volumes unsurprisingly light. On Monday, the Nikkei hit 33853.46, its highest level since 1990, helped by recent earnings and better sentiment toward the US interest rate outlook. Japan’s Consumer Price Index (CPI) accelerated for the first time in four months in October, rising 2.9% year-over-year, further underlining speculation that the Bank of Japan (BoJ) will likely start to tighten soon. There was also a Nikkei article last week highlighting that dividend reinvestment was supporting the market, as September dividend payments started peaking around the end of November to the beginning of December.

Semiconductor stocks were in focus last week, with Nvidia posting strong results. Sector-wise, shipping, insurance and services were the best performers, while autos, trading houses and refiners slumped.

China

The Shanghai Composite Index closed down 0.44% last week despite a slew of somewhat bullish property sector-related headlines and government initiatives, which include:

• Chinese regulators are drafting a whitelist of 50 developers eligible for a range of financing, and state-owned enterprises (SOEs) and private developers will be treated equally.
• Shenzhen rolled out two new homebuying measures, including lowering the down-payment ratio for second homes to 40% from as much as 80% and relaxing the definition of so-called “ordinary housing”, or non-luxury homes, that qualify for lower down payments.
• China may allow banks to offer unsecured short-term loans to qualified developers for the first time.

Not surprisingly, property developers were strong last week, whilst bank stocks were lower. Renewables, including solar and lithium names, sold off in a week of broad renewables “risk off”. Notably, BYD shares fell, dragging the electric vehicles sector lower amidst price cut reports.

On the economic front, Chinese banks left their one and five-year loan prime rates unchanged, as expected, after the People’s Bank of China (PBOC) kept its medium-term lending rate on hold.

Looking ahead, PMI and industrial profits numbers will be closely watched, as a gauge of China’s industrial recovery.

Hong Kong

The Hang Seng Index closed up 0.6% last week after China stepped up its support for the distressed real estate sector. A slew of positive policies were announced (see above) that sent shares of Chinese developers surging. Chinese internet names traded mostly higher, after Baidu and Kuaishou reported better-than-expected margins.

Week ahead

Macro highlights

Eurozone inflation figures will be closely watched this week. Also, the latest MSCI rebalance on Thursday will likely provide a liquidity shot in the arm for equity markets. Friday’s US ISM Manufacturing report will also garner some interest late in the week.

Upcoming December central bank policy meetings (all expected to hold rates steady) include the FOMC on 13 December, European Central Bank on 14 December, and Bank of England on 14 December.

Eurozone reports to watch

Tuesday 28 November: Euro-area M3 Money Supply

Wednesday 29 November: Sweden GDP; Spain HICP Inflation; UK Mortgage Approvals; Germany HICP Inflation

Thursday 30 November: France HICP Inflation; Italy HICP Inflation; Euro-area CPI Inflation Estimate

Friday 1 December: UK Nationwide House Prices

Global data calendar for the week ahead

Monday 27 November 

• US New Home Sales; Dallas Fed Manufacturing Activity

Tuesday 28 November                     

• Euro-area Monthly Credit Data
• Germany – GfK Consumer Confidence
• France – INSEE Consumer Confidence
• US FHFA House Price Index and House Price Purchase Index; Conference Board Consumer Confidence; Richmond Fed Manufacturing Index and Dallas Fed Services Index

Wednesday 29 November

• Sweden third quarter GDP
• Spain HICP Inflation
• UK Mortgage Approvals
• Germany HICP Inflation
• Italy ISAE Business Confidence
• Eurozone Consumer Confidence
• Japan Retail Sales
• US Mortgage Applications; Wholesale Inventories; Advance Goods Trade Balance; Retail Inventories; GDP (revision); Personal Consumption (revision); GDP Price Index (revision); Beige Book

Thursday 30 November   

• France HICP Inflation; third quarter GDP
• Italy HICP Inflation
• Euro-area CPI Inflation Estimate
• Germany Unemployment Rate
• Japan Unemployment Rate
• US Personal Income; Personal Spending; Initial Jobless Claims; Continuing Claims; Real Personal Spending; Personal Consumption Expenditures (PCE) Deflator and PCE Core Deflator; MNI Chicago PMI; Pending Home Sales

Friday 1 December

• UK Nationwide House Prices
• US PMI-Manufacturing (revision); Construction Spending; ISM-Manufacturing; ISM-Prices Paid/Employment/New Orders

 

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This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 27th 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.