The MSCI World Index traded up 0.2% last week, but this doesn’t tell the full story of what was an unsteady week for equity markets. Angst over familiar themes of inflation and central bank policy remains a key focus, thanks to the mid-week release of the Federal Reserve (Fed) minutes. Volatility in a number of asset classes, including cryptocurrencies, also unsettled investors at times. Looking at the regions, the S&P 500 Index lagged, down 0.4%, while Europe’s STOXX Index traded up 0.4% and the MSCI Asia Pacific Index outperformed, up 1.6%.1
The debate around rising inflation and the potential impact on central bank policy has been the key driver for financial markets of late, and last week was no exception.
In the United States, the latest Federal Reserve (Fed) meeting minutes showed members felt the economy remained far from the committee’s maximum employment and price stability goals to make any policy changes. Risks to the outlook were no longer elevated as in previous months. On inflation specifically, policymakers said that after the current transitory effects of factors fade, generally expected measured inflation would ease.
Looking further ahead, the Fed expected inflation to be at levels consistent with achieving the Committee’s objectives over time. A number of members suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases. Some felt concerned about the upside risk to inflation should underlying drivers be more “persistent than expected”.
In Europe, European Central Bank (ECB) President Christine Lagarde played down talk of the ECB tapering its asset purchasing programme, stating it was “far too early and it’s actually unnecessary to debate longer term issues….policymakers need to provide the right bridge across the pandemic, well into the recovery”.2 She also played down current inflationary pressures, saying they are “of a temporary nature” and she feels inflation will “return to lower levels” next year.
Aside from central bank commentary, there was some inflation data last week, which saw increases. These included the Japanese April Producer Price Index (PPI) +3.6%; US Empire manufacturing prices paid hit 83.5 month-over-month (M/M) (record level); the Philadelphia Fed Index’s prices paid index hit the highest in 41 years; UK Consumer Price Index (CPI) +1.5% M/M, and house prices +10.2% year-over-year (Y/Y); Canadian April CPI +3.4% Y/Y.
Commodity prices declined last week (iron ore -5%, copper -3.7%, aluminium -4%, wheat -4.7%, soy -3.8%) with China vowing to curb “unreasonable” price increases. This helped ease some fears over input costs and with that, we did see some respite for growth stocks, which started to see some outperformance versus value, also a sign of easing inflation concerns.
Europe in Focus
It was quite interesting to see Europe’s equity benchmark (STOXX Europe 600 Index) has now sneaked ahead of the US S&P 500 Index, as well as the MSCI Asia Pacific and MSCI Emerging Markets Indexes as the best-performing year to date; this is the first time European equities have outperformed US equities over the first five months of a year since 2017.3 Signs of easing lockdowns, economic reopenings and a ramp-up in vaccination programmes have all helped boost sentiment for European equities.
The monthly Bank of America (BofA) Global Fund Manager Survey came out last week, and amid some decent performance vs. other regions, investors remain positive on European outlook. Of the respondents, 93% expect European growth to improve over the next 12 months, with fiscal policy deemed the most stimulative since 2010.
Inflation is seen as the biggest tail risk: inflation expectations remain elevated, with 82% of respondents believing inflation is set to rise over the coming 12 months, only moderately below the record 94% reached in March.
Investors polled in the BofA survey do not expect a peak for European equities until next year: only one out of 10 investors expect European equities to reach a peak this quarter, with a plurality thinking a peak is unlikely to be reached until next year.
We also saw some investment banks pushing European equities again, with drivers including positive economic momentum, more attractive valuations, stronger earnings growth and economic support from the EU Recovery Fund.
Week in Review
A choppy week for European equity markets as the STOXX Europe 600 Index stalled after making all-time highs at the start of the month. As has been the way recently, it felt like we really took our lead from events in the United States rather than European- specific catalysts. Focus remains on inflation after the US data last week—last week, we had inflation data points from the European Union (EU) (CPI at 1.6% YoY) and the United Kingdom (CPI at 1.5% YoY).
With investor nerves rattled on Wednesday (19 May) after a global de-risking and a meltdown in cryptocurrency, it’s not surprising to see defensive names outperform in Europe (health care +1.7%, utilities +1.4%). Automobiles also fared well after positive commentary from Daimler.
The laggards were the basic resources (down 3.6% on the week) amid comments out of China on stabilising the market. Crude oil declined a bit as easing restrictions bring Iran came back on tap. Having said that, the sector is still a strong year-to-date performer.
European Data: Another Upside Surprise
Monetary stimulus, fiscal measures, and a pickup in demand globally continue to drive the recovery from the COVID-19 recession in Europe. Outside of the inflation data, which was less exciting from Europe, the Purchasing Managers’ Index (PMI) for May were the focal point last week. Readings in the eurozone showed a speedy recovery in the services sector as well as impressive growth in manufacturing, with the manufacturing PMI remaining close to the record level hit in April.
Services hit a new 35-month high of 55.1, and as the vaccination effort continues to ramp up, we would anticipate further gains in the coming months. Demand is strong, with the increase in new orders accelerating to its highest reading since June 2006. The employment index was also better for the fourth consecutive month. The flash composite output PMI for the region came in well ahead of consensus, hitting a 39-month high at 56.9.
The UK picture was even better, with the composite output PMI for May hitting 62.0, its highest level since January 1998. This was from an already-elevated 60.7 in April and has benefited from a huge gain in the Manufacturing PMI, which hit a record 66.1 in May.
We also saw an impressive bounce in UK April retail sales. It will be interesting to see how central banks react, especially since there are signs that the recovery is creating capacity issues and causing disruption to supply chains, adding to pricing pressures. However, inflation pressures in the eurozone remain less severe than in the United States, meaning the ECB should still be able to move cautiously. As mentioned above, Lagarde again dismissed concerns over inflation, saying that inflationary pressures driven by the economic rebound were of a “temporary nature”.
Volatility crept back into US equity markets last week with a variety of factors providing the push and pull. Inflation, COVID-19 case trends, economic reopenings, commodity price moves and the infrastructure bill have all been cited as drivers of market moves.
April Federal Open Market Committee (FOMC) minutes showed the Fed talked about tapering, though economists don’t seem to be changing their tapering timeline. Despite the volatility, the S&P 500 Index closed last week down just 0.4% after rallying in the latter half of the week and recovering most of its losses.
The CBOE VIX Index, a measure of market volatility, nearly hit 26 on Wednesday (19 May).4 US equities saw their smallest inflow in seven weeks of US$1.2 billion. On a sector basis, the defensives were among the outperformers last week with real estate investment trusts (REITs) up 0.9%, health care up 0.7% and utilities up 0.3%. At the other end, industrials and energy lagged, down 1.7% and 2.8% respectively, as commodity prices dipped.
The selloff in cryptocurrency also garnered attention, with Bitcoin -23% last week.
Potential tax increases to pay for US President Joe Biden’s US infrastructure plan remain a point of contention in the United States, with gaps between corporate rates across the globe also causing some friction.
The US Treasury Department stressed importance of multilateral cooperation to end the pressures of global corporate tax competition and corporate tax base erosion, underscored that 15% is a floor and that discussions should continue to be ambitious and push that rate higher.
Looking at the CNN Fear & Greed index as of 21 May, it suggests underlying market sentiment is not great and deteriorating, with a stronger FEAR reading versus the prior week.5
Asia and Pacific
Asian equities were higher last week, with the MSIC Asia Pacific Index closing up 1.7%. Cryptocurrency, commodity prices and COVID-19 cases were the key themes for investors. In terms of sectors, consumer discretionary stocks were strong, up 3%, followed by technology, up 2.7%. Like in the United States and Europe, basic materials were weak and the only sector to close in the red in Asia, down 0.7% as commodity prices fell.
On Wednesday (19 May), the People’s Bank of China’s (PBOC) comments around the use of cryptocurrency garnered attention, sending the crypto market into a spiral. The PBOC issued a statement on its WeChat account reiterating digital tokens cannot be used as a form of payment. The Chinese government also warned financial institutions and payment providers against offering cryptocurrency services such as registration, trading and settlement. This marks the latest attempt by China to crack down on cryptocurrencies after shutting down its local exchange in 2017, and in 2019 blocking access to all domestic and foreign crypto exchanges.
Iron ore prices fell last week as China intensified efforts to rein in surging raw material prices. Chinese steel prices extended declines amid further government curbs.
The Week Ahead
Monday 24 May
- Bank holidays in a number of European markets (including Germany and Switzerland).
- European Council leaders’ summit in Brussels
- Key speakers: Fed’s Loretta Mester, George and Raphael Bostic; Lael Brainard
Tuesday 25 May
- German gross domestic product (GDP) and Institute for Economic Research (IFO) Survey
- Key speakers: Fed’s Randal Quarles gives semi-annual testimony before the US Senate Banking Committee; Bank of England’s (BOE) Silvana Tenreyro; Bank of Japan’s (BoJ) Haruhiko Kuroda; ECB’s Philip Lane
Wednesday 26 May
- French Consumer Confidence
Thursday 27 May
- US GDP
- Bank of Korea policy decision
- Chinese Industrial Profits
Friday 28 May
- French CPI, PPI and GDP
- G7 finance ministers and central bank governors meet
- US President Joe Biden’s fiscal year 2022 budget request is scheduled for release
Important Legal Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the team and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.
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.
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. The companies and/or case studies shown herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
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.
Buying and using blockchain-enabled digital currency carries risks, including the loss of principal. Speculative trading in bitcoins and other forms of cryptocurrencies, many of which have exhibited extreme price volatility, carries significant risk. Among other risks, interactions with companies claiming to offer cryptocurrency payment platforms or other cryptocurrency-related products and services may expose users to fraud. Blockchain technology is a new and relatively untested technology and may never be implemented to a scale that provides identifiable benefits. Investing in cryptocurrencies and ICOs is highly speculative and an investor can lose the entire amount of their investment. If a cryptocurrency is deemed a security, it may be deemed to violate federal securities laws. There may be a limited or no secondary market for cryptocurrencies.
Past performance is not an indicator or guarantee of future performance. There is no assurance that any estimate, forecast or projection will be realised.
Links to External Sites
Franklin Templeton is not responsible for the content of external websites.
The inclusion of a link to an external website should not be understood to be an endorsement of that website or the site’s owners (or their products/services).
Views You Can Use
US President Joe Biden recently announced an ambitious new US$2 trillion infrastructure plan, which touches many areas of the US economy. Jennifer Johnston, director of research, Franklin Templeton Municipal Bonds, outlines some highlights of this sweeping legislation, and how it could impact the muni market. Read More.
Technological disruptions continue to transform global society in many ways, and emerging markets have embraced them. In certain industries, these technological innovations are driving economic growth and presenting compelling new opportunities for investors. Franklin Templeton Emerging Markets Equity Institutional Portfolio Manager Nicole Vettise shines a spotlight on one of these powerful new opportunities right above our heads—solar. Read More.
Blockchain has the potential to launch a new global digital renaissance, transforming financial services, supply chains, healthcare, backend offices, and more. Our Chief Market Strategist Stephen Dover outlines how we continue to evaluate its risks and opportunities as active investors. Read More.
From digital factories to plant-based clothing, climate change investing is much more than just investing in renewable energy, according to Templeton Global Equity Group. The team peels back the multiple layers of the investible climate change universe, and considers how companies can contribute to reducing carbon emissions on a global scale. Read More.
1. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
2. Source: Reuters, “ECB’s Lagarde Says Too Early to Discuss Life After Emergency Support”, 21 May 2021.
3. Source: Bloomberg. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. See www.franklintempletondatasources.com for additional data provider information.
4. The CBOE Market Volatility Index measures market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Indices are unmanaged, and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance.
5. CNN’s Fear & Greed Index tracks seven indicators of investor sentiment. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.