Sticking with risk through turbulence
Market take
Weekly video_20240812
Devan Nathwani
Opening frame: What’s driving markets? Market take
Camera frame
Unwinds of stretched positions, heightened geopolitical risk and policy uncertainty have spurred sharp market swings in thin trading conditions.
Title slide: Sticking with risk as volatility flares up
We had warned of risk sentiment shifts driving bursts of volatility. That played out last week as Japan stocks suffered their worst three-day stretch ever.
1: Unwinds driving volatility
The Bank of Japan's unexpected policy shift to bolster the yen led to a rapid unwind of carry trades that use low-yielding currencies to buy other assets.
Unwinding of equity dispersion trades that sell index volatility and buy single-stock volatility further amplified the turbulence.
2: Reaffirming our Japan view
We reaffirm our positive view on Japan, where a virtuous circle of mild inflation is boosting wages and corporate earnings.
3: Why we’re still positive on the US
We think US recession talk is overdone and see a slowdown instead. Unemployment has ticked up from historically low levels. However, total US payrolls are growing well above the usual pre-recession levels.
US corporate earnings, especially in tech, have been stronger than expected.
Outro: Here’s our Market take
Rather than dialing back risk, we stay overweight Japanese and US stocks and favor the AI theme.
Closing frame: Read details:
www.blackrock.com/weekly-commentary
Looking through volatility
Recent extreme market volatility shows the impact of sudden sentiment shifts and sharp position unwinds. We lean into risk and our high-conviction ideas.
Market backdrop
US and Japanese stocks clawed back after a record three-day slide in Japan. The yen slipped back after surging to seven-month highs against the dollar.
Week ahead
The July US CPI is in focus. Recent inflation and jobs data stoked expectations of sharp rate cuts. We see cuts ahead but rates settling higher for longer.
We had warned risk sentiment shifts and stretched positioning could lead to market air pockets of volatility. That played out as the yen surged and Japanese stocks suffered their worst three-day stretch ever, forcing the Bank of Japan to walk back a hawkish policy shift. We stay overweight Japanese equities as a result. In the US, macro data shows a slowdown, not a recession, in our view. We keep our overweight to US stocks and are encouraged by upbeat tech earnings.
Paragraph-2,Image-1,Paragraph-3
Paragraph-4,Advance Static Table-1,Paragraph-5,Advance Static Table-2,Paragraph-6,Advance Static Table-3
A resurgent yen
US dollar/yen exchange rate & US-Japan real yield spread, 2022-2024
Past performance is not a reliable indicator of current or future results. Source: BlackRock Investment Institute, with data from LSEG Datastream, August 2024. Notes: The chart shows the exchange rate of US dollars to Japanese yen and the difference between the real US five-year Treasury yield and the real Japanese five-year government bond yield.
Unwinds of stretched positions, US recession fears and policy uncertainty have sparked big market swings – exacerbated by thin trading activity. The BOJ’s sudden willingness to incorporate the yen as a factor in setting policy accelerated an unwind of carry trades that use the low-yielding yen to buy other assets. Speculators scrambling to close their short-yen positions drove one of the largest unwinds in yen futures on record in the past few weeks, according to CFTC data. Just how much of the carry trade has unwound is hard to quantify given the over-the-counter nature of many yen-funded positions. Yet the sharp closing of the gap between currency and rate spreads – see the chart – and rapid cutting of futures positions suggest a major unwind. Another position unwind – equity dispersion trades tied to index and single-stock volatility – magnified the stock slide.
Up until recently the BOJ had been deliberate in trying to normalise policy without jeopardizing Japan’s return of inflation. Then came its sudden rate hike in July and blurring of its policy framework, including the yen as a factor. The rise of a BOJ policy misstep prompted us to reconsider our positive view on Japan. Yet we felt the BOJ would be forced to walk back – and did. We think the BOJ will now proceed cautiously on policy, so we stay overweight Japanese stocks on a currency-unhedged basis. Further carry trade unwinding and yen strengthening is a risk. Yet we like the virtuous circle of inflation driving wage growth – and thus corporate pricing power and earnings. Corporate reforms aimed at adding shareholder value are also key.
Slowdown, not recession
While Japan bore the brunt of last week’s turbulence, US recession fears sparked the latest slide after US payrolls data for July showed an uptick in the unemployment rate. Yet the unemployment rate is still remarkably low by historical standards – and it’s rising because of a growing labor force tied to immigration, not because of job losses. Total US payrolls have grown more than 1 million over the past six months, well above usual pre-recession levels. The latest jobless claims, ISM services data and Fed bank lending survey all paint the picture of an economy that is slowing, not approaching recession, in our view.
Stronger-than-expected US corporate earnings, especially in tech, reaffirm our positive US view. To date, Q2 earnings growth for tech versus non-tech sectors sits at 20% and 5%, respectively – up from expectations of 18% and 2% at the start of earnings season, according to LSEG Datastream data. While tech is leading the charge, non-tech sectors are poised to log their first earnings growth since late 2022, a sign strong earnings may be broadening out. Easing cost pressures and moderating inflation have benefited US corporates. We stay overweight US stocks and the artificial intelligence (AI) theme.
Our bottom line
We could still see air pockets of volatility in thin summer trading conditions. Rather than dialing back risk, we lean into our highest-conviction ideas. We stay overweight Japanese and US stocks, and favor the AI theme in the US
Note: The Global weekly commentary will resume on Tuesday, Sept. 3. But we will be responding to market volatility if it resumes, such as with our recent BlackRock Bulletin.
Market backdrop
US stocks were flat last week, clawing back losses from Monday’s slide when Japan’s Topix plunged 12% for a record three-day drop. US 10-year Treasury yields rose roughly 30 basis points from 14-month lows hit Monday during the worst of the tumult. Lower-than-expected US weekly jobless claims helped alleviate recession fears, which we had flagged as overdone anyway. The yen eased from seven-month highs against the US dollar, easing pressure on the unwind of carry trades.
July US CPI is in focus this week. Inflation below expectations and soft July US payrolls data have radically shifted the Fed and market narrative. Both services and shelter inflation have come down materially in recent data, and wage inflation has eased to its softest pace since 2020. Yet we are not convinced inflation will ultimately come down in line with the Fed’s 2% target.
Week ahead
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 LSEG Datastream as of Aug. 8, 2024. Notes: The two ends of the bars show the lowest and highest returns at any point 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 US dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE US Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (US, Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.
Aug. 13
UK labor market release
Aug. 14
US CPI; UK CPI
Aug. 15
Philadelphia Fed business index; UK GDP; Japan GDP
Aug. 12-19
China Total Social Financing
Read our past weekly commentaries here.
Big calls
Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, August 2024
| Reasons | ||
|---|---|---|
| Tactical | ||
| AI and US equities | We have high conviction that AI can keep driving returns in most scenarios. We see its buildout and adoption creating opportunities across sectors. The AI theme has driven US stock gains and solid corporate earnings, making us overweight US stocks overall. | |
| Japanese equities | A brighter outlook for Japan’s economy and corporate reform are driving improved earnings and shareholder returns. We think the Bank of Japan will now be cautious in normalising policy after its misstep in July. | |
| Income in fixed income | The income cushion bonds provide has increased across the board in a higher rate environment. We like quality income in short-term bonds and credit. We’re neutral long-term US Treasuries. | |
| Strategic | ||
| Private credit | We think private credit is going to earn lending share as banks retreat – and at attractive returns relative to public credit risk. | |
| Fixed income granularity | We prefer intermediate credit, which offers similar yields with less interest rate risk than long-dated credit. We also like short-term government bonds, and UK long-term bonds. | |
| Equity granularity | We favor emerging over developed markets yet get selective in both. EMs at the cross current of mega forces – like India and Saudi Arabia – offer opportunities. In DM, we like Japan as the return of inflation and corporate reforms brighten our outlook. | |
Note: Views are from a US dollar perspective, August 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.
Tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, August 2024
Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.
| Asset | Tactical view | Commentary | ||||
|---|---|---|---|---|---|---|
| Equities | ||||||
| United States |  |
We are overweight given our positive view on the AI theme. Valuations for AI beneficiaries are supported as tech companies keep beating high earnings expectations. We think upbeat sentiment can broaden out. Falling inflation is easing pressure on corporate profit margins. | ||||
| Europe |  |
We are underweight relative to the US, Japan and the UK – our preferred markets. Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet political uncertainty could keep investors cautious. | ||||
| UK | |
We are overweight. Political stability and a growth pickup could improve investor sentiment, lifting the UK's low valuation relative to other DM stock markets. | ||||
| Japan |  |
We are overweight. A brighter outlook for Japan’s economy and corporate reform are driving improved earnings and shareholder returns. We think the Bank of Japan will now be cautious in normalising policy after its misstep in July. | ||||
| Emerging markets |  |
We are neutral. The growth and earnings outlook is mixed. We see valuations for India and Taiwan looking high. | ||||
| China | |
We are neutral. We see risks from weak consumer spending, even with measured policy support. An aging population and geopolitical risks are structural challenges. | ||||
| Fixed income | ||||||
| Short US Treasuries | |
We are overweight. We prefer short-term government bonds for income as interest rates stay higher for longer. | ||||
| Long US Treasuries | |
We are neutral. Markets have cut expectations of Fed rate cuts and term premium is close to zero. We think yields will keep swinging in both directions on new economic data. | ||||
| Global inflation-linked bonds | |
We are neutral. We see higher medium-term inflation, but cooling inflation and growth may matter more near term. | ||||
| Euro area government bonds | |
We are neutral. Market pricing reflects policy rates in line with our expectations and 10-year yields are off their highs. Political uncertainty remains a risk to fiscal sustainability. | ||||
| UK Gilts | |
We are neutral. Gilt yields have tightened to US Treasuries and market pricing of future yields is in line with our view. | ||||
| Japan government bonds |  |
We are underweight. Stock returns look more attractive to us. We see some of the least attractive returns in JGBs. | ||||
| China government bonds | |
We are neutral. Bonds are supported by looser policy. Yet we find yields more attractive in short-term DM paper. | ||||
| US agency MBS | |
We are neutral. We see agency MBS as a high-quality exposure in a diversified bond allocation and prefer it to IG. | ||||
| Short-term IG credit | |
We are overweight. Short-term bonds better compensate for interest rate risk. We prefer Europe over the US | ||||
| Long-term IG credit | |
We are underweight. Spreads are tight, so we prefer taking risk in equities from a whole portfolio perspective. We prefer Europe over the US | ||||
| Global high yield | |
We are neutral. Spreads are tight, but the total income makes it more attractive than IG. We prefer Europe. | ||||
| Asia credit | |
We are neutral. We don’t find valuations compelling enough to turn more positive. | ||||
| Emerging market - hard currency | |
We are neutral. The asset class has performed well due to its quality, attractive yields and EM central bank rate cuts. We think those rate cuts may soon be paused. | ||||
| Emerging market - local currency | |
We are neutral. Yields have fallen closer to US Treasury yields, and EM central banks look to be turning more cautious after cutting policy rates sharply. | ||||
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. The statements on alpha do not consider fees. Note: Views are from a US dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Euro-denominated tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, August 2024
| Asset | Tactical view | Commentary | ||
|---|---|---|---|---|
| Equities | ||||
| Europe ex UK | |
We are underweight relative to the US, Japan and the UK – our preferred markets. Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet political uncertainty could keep investors cautious. | ||
| Germany | |
We are neutral. Valuations and earnings momentum are supportive relative to peers, especially as global manufacturing activity bottoms out and ECB rate cuts ease financing conditions. | ||
| France | |
We are underweight given modestly supportive valuations. The result of France’s parliamentary election could impact business conditions for French companies. Yet only a small portion of the revenues and operations of major French companies are tied to domestic activity. | ||
| Italy | |
We are underweight. Valuations dynamics are supportive relative to peers, but recent growth and earnings outperformance seems largely due to significant fiscal stimulus in 2022-2023 that cannot be sustained over the next few years. | ||
| Spain | |
We are neutral. Valuations and earnings momentum are supportive relative to other euro area stocks. The utilities sector looks set to benefit from an improving economic backdrop and advances in AI. | ||
| Netherlands | |
We are underweight. The Dutch stock markets' tilt to technology and semiconductors, a key beneficiary of higher demand for AI, is offset by relatively less favorable valuations and a weaker earnings outlook than their European peers. | ||
| Switzerland | |
We are underweight, in line with our broad European view. The earnings outlook has brightened, but valuations remain high versus other European markets. The index’s defensive tilt will likely be less supported as long as global risk appetite holds up, we think. | ||
| UK | |
We are overweight. Political stability and a growth pickup could improve investor sentiment, lifting the UK's low valuation relative to other DM stock markets. | ||
| Fixed income | ||||
| Euro area government bonds | |
We are neutral. Market pricing reflects policy rates in line with our expectations, and 10-year yields are off their highs. Political uncertainty remains a risk to fiscal sustainability. | ||
| German bunds | |
We are neutral. Market pricing reflects policy rates broadly in line with our expectations, and 10-year yields are off their highs. | ||
| French OATs | |
We are neutral. The EU has already warned France for breaching fiscal rules and had its sovereign credit rating downgraded earlier this year. Elevated political uncertainty, persistent budget deficits and a slower pace of structural reforms remain challenges. | ||
| Italian BTPs | |
We are neutral. The spread over German bunds looks tight given its budget deficits and debt profile, also prompting a warning from the EU. Other domestic factors remain supportive, with growth holding up relative to the rest of the euro area and Italian households showing solid demand to hold BTPs at higher yields. | ||
| UK gilts | |
We are neutral. Gilt yields have tightened to US Treasuries and market pricing of future yields is in line with our view. | ||
| Swiss government bonds | |
We are neutral. The Swiss National Bank cut policy rates twice this year amid reduced inflationary pressure. But it is unlikely to cut rates much further from here. | ||
| European inflation-linked bonds | |
We are neutral. We see higher medium-term inflation, but cooling inflation may matter more near term. Short-term breakeven inflation rates fell further after recent inflation data, making euro area inflation-linked bonds less attractive. | ||
| European investment grade credit | |
We are neutral European investment grade credit, with a preference for short- to medium-term paper for quality income. We maintain our regional preference for European investment grade over the US given spreads are not as tight. | ||
| European high yield | |
We are overweight. We find the income potential attractive. We still prefer European high yield given its more appealing valuations, higher quality and lower duration than in the US Spreads compensate for risks of a potential pick-up in defaults, in our view. | ||
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, August 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Meet the authors
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist — BlackRock Investment Institute
Devan Nathwani
Portfolio Strategist – BlackRock Investment Institute
Carolina Martinez Arevalo
Portfolio Strategist – BlackRock Investment Institute
Beleggen gaat altijd gepaard met een zekere mate van risico. In het verleden behaalde resultaten bieden geen garantie voor de toekomst. De waarde van uw beleggingen kan sterk schommelen als een gevolg van het beleggingsbeleid en het is niet zeker dat u uw oorspronkelijke inleg terug ontvangt. De waarde van de beleggingen die blootgesteld zijn aan vreemde valuta kan worden beïnvloed door valutaschommelingen.
Bronnen: Bloomberg, tenzij anders aangegeven
DIT MATERIAAL IS BEDOELD VOOR VERSPREIDING ONDER PROFESSIONELE CLIËNTEN EN ER MAG NIET OP WORDEN VERTROUWD DOOR ANDERE PERSONEN.
De hier geuite visies en meningen vormen geen beleggingsadvies of andersoortige aanbeveling en kunnen aan verandering onderhevig zijn. Ze weerspiegelen niet altijd de gezichtspunten van een bepaalde onderneming binnen de BlackRock Group of van een afdeling daarvan en de juistheid ervan kan niet worden verzekerd.
Uitgegeven in de EER door BlackRock (Netherlands) B.V.: Amstelplein 1, 1096 HA, Amsterdam, Tel.: 020 - 549 5200, Handelsregister nr. 17068311. Raadpleeg de website voor meer informatie: www.blackrock.com. Voor uw bescherming worden telefoongesprekken gewoonlijk opgenomen. BlackRock is een handelsnaam van BlackRock (Netherlands) B.V.
