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Asset allocation highlights – A challenge to the reflation trade

Our medium-term scenario continues to favour risk and equities, given the fundamental factors and economic policy support.  This is an extract of our Asset allocation monthly – Dots matter Reading between the dots The latest ‘dot plot’ published…

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Our medium-term scenario continues to favour risk and equities, given the fundamental factors and economic policy support. 
This is an extract of our Asset allocation monthly – Dots matter
Reading between the dots The latest ‘dot plot’ published after the June meeting of the US Federal Open Market Committee (FOMC), showing the participants’ assessment of the appropriate future level for the federal funds rate, had 13 out of 18 FOMC members foreseeing a rate rise by the end of 2023. The median value indicated an increase by 50 basis points (bp). This was more than most market participants had expected: they had called for stable rates or only one rate rise by 2023. What was particularly interesting was that the 2023 rate dot moved, but the forecast for core inflation in 2023 did not. The message from the Fed seems clear: the central bank is more sensitive to, and more willing to lean against, the risk of too much inflation than investors are. That revelation posed a challenge to the reflation trade. In a sense, however, the market had anticipated the Fed would eventually conclude that policy rate increases were necessary, just perhaps not quite yet. Expectations for the level of fed funds in two years’ time had shown two 25bp increases since early March when the US Senate passed President Joe Biden’s USD 1.9 trillion stimulus package. Despite the Fed’s subsequent insistence that rate rises were more distant, the market’s expectations did not wane.

A relatively subdued reaction

The market reaction to the FOMC news was significant, but some of the initial moves have unwound. At the front end, the current level of the fed funds rate in two years is only 9bp above where it was in early April and is consistent with two rate rises. Further out, five-year real yields jumped and five-year break-evens fell, but both have more or less retraced those moves. However, not everything is back the way it was. Very long yields are down, and have continued to move lower, with the 30-year nominal yield below 2% at the time of writing, having been above 2.40% in mid-May.

US bond yields should rise

With the rally in yields that followed the Fed meeting, we saw an opportunity to implement a short position in US Treasury yields. We expect rising yields to be the primary driver of any nominal yield move and therefore we have also implemented a short in US real rates. Inflation expectations are not far from the post-Global Financial Crisis average, while real yields remain near historical lows despite the looming taper of the Fed’s quantitative easing (QE) programme and the message in the dots that the FOMC will respond to evidence of rising inflationary pressure.

Equity reflation trades

Even as rates rise, we anticipate ongoing gains for equities through the rest of the year, albeit at a slower pace than in the first half. It is worth keeping in mind that continued robust earnings growth, combined with more modest price gains, will inevitably reverse some of the expansion of the price/earnings (P/E) ratio that has occurred this year. How strong are the foundations of the reflation trades such as value versus growth given the new interest rate outlook? We are more confident that cyclical sectors, regions and countries (such as emerging markets and Japan) will continue to outperform given that the key driver is the global economic recovery as opposed to the level of interest rates. The relative performance of cyclicals has nonetheless been lacklustre over the last few months, though this is at least partly due to a lagging car sector, hindered by semiconductor shortages, while the traditionally more defensive healthcare sector has outperformed thanks to restored access to non-Covid related procedures. Value stocks have underperformed growth stocks recently by more than one would expect given that Treasury yields have in fact risen slightly. Since 11 June, the Russell 1000 value index has dropped by 1.7% while growth gained 4.2%. Value has been held back primarily by financials as the market anticipates higher funding costs for banks, but a more hawkish Fed and a rollover in leading indicators have also weighed on performance. The gain for growth shares, however, was very concentrated in technology in a way much more reminiscent of the performance of US equities before the pandemic when mega-cap tech accounted for the bulk of the broad index returns. While tech makes up about 50% of the growth index, it contributed more than two-thirds of the recent returns. We do not expect a return to the pre-pandemic equity return pattern quite yet. As longer maturity yields rise, value stocks should resume their outperformance. Valuations are still heavily in value’s favour; the z-score of the relative forward multiple of value versus growth is -1.1, which is not much higher than the peak discount level of -1.4 from last August. The earnings outlook remains supportive. Forward earnings-per-share (EPS) estimates for growth stocks are already 25% higher than pre-pandemic levels, while for value they are just 4% higher and momentum is good.

Our asset allocation

The market environment is now trying to reflect the timing of Fed tapering/tightening as well as the ‘peak data’ theme. Amid a debate on whether the focus should be on the level or marginal change in macroeconomic data, we have seen a rotation out of the reflation trade post-FOMC, through the outperformance of US equities through the growth part and a flatter US yield curve. The repricing of the Fed terminal rate to sub-2% levels is raising questions about the steady state for a US economic expansion, with lower potential GDP growth and longer-term inflation expectations implied by these levels. In our view, the loose stance of fiscal and monetary policy (notably in the US) should support risky assets and higher bond yields. Cyclically-sensitive assets have the potential to outperform in the second half of 2021. Growth in other major economies that have been hit by Covid (e.g., Europe and EM ex Asia) should accelerate as vaccinations lead to reopenings. Our medium-term scenario continues to favour risk and equities given the fundamental factors and the economic policy support. We have kept our allocation to risk broadly unchanged over the past month at the level of our long-term risk target. Our net equity exposure remains overweight versus our benchmarks via positions in US value, EM equities, Chinese equities and Japanese equities against an underweight position in EMU large caps. The regional equity exposure seeks to find a balance between the ‘growth/quality’ and ‘value/cyclical’ styles that helps insulate against interest rate volatility, while providing a diversified allocation. Elsewhere, we are overweight risky assets such as commodities and EM local debt, and we hold other positions to diversify portfolios such as long gold. For a full analysis of our latest asset allocation and the positioning in various asset classes, click here
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk. Writen by Christophe Moulin. The post Asset allocation highlights – A challenge to the reflation trade appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.

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Low Iron Levels In Blood Could Trigger Long COVID: Study

Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate…

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Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate iron levels in their blood due to a COVID-19 infection could be at greater risk of long COVID.

(Shutterstock)

A new study indicates that problems with iron levels in the bloodstream likely trigger chronic inflammation and other conditions associated with the post-COVID phenomenon. The findings, published on March 1 in Nature Immunology, could offer new ways to treat or prevent the condition.

Long COVID Patients Have Low Iron Levels

Researchers at the University of Cambridge pinpointed low iron as a potential link to long-COVID symptoms thanks to a study they initiated shortly after the start of the pandemic. They recruited people who tested positive for the virus to provide blood samples for analysis over a year, which allowed the researchers to look for post-infection changes in the blood. The researchers looked at 214 samples and found that 45 percent of patients reported symptoms of long COVID that lasted between three and 10 months.

In analyzing the blood samples, the research team noticed that people experiencing long COVID had low iron levels, contributing to anemia and low red blood cell production, just two weeks after they were diagnosed with COVID-19. This was true for patients regardless of age, sex, or the initial severity of their infection.

According to one of the study co-authors, the removal of iron from the bloodstream is a natural process and defense mechanism of the body.

But it can jeopardize a person’s recovery.

When the body has an infection, it responds by removing iron from the bloodstream. This protects us from potentially lethal bacteria that capture the iron in the bloodstream and grow rapidly. It’s an evolutionary response that redistributes iron in the body, and the blood plasma becomes an iron desert,” University of Oxford professor Hal Drakesmith said in a press release. “However, if this goes on for a long time, there is less iron for red blood cells, so oxygen is transported less efficiently affecting metabolism and energy production, and for white blood cells, which need iron to work properly. The protective mechanism ends up becoming a problem.”

The research team believes that consistently low iron levels could explain why individuals with long COVID continue to experience fatigue and difficulty exercising. As such, the researchers suggested iron supplementation to help regulate and prevent the often debilitating symptoms associated with long COVID.

It isn’t necessarily the case that individuals don’t have enough iron in their body, it’s just that it’s trapped in the wrong place,” Aimee Hanson, a postdoctoral researcher at the University of Cambridge who worked on the study, said in the press release. “What we need is a way to remobilize the iron and pull it back into the bloodstream, where it becomes more useful to the red blood cells.”

The research team pointed out that iron supplementation isn’t always straightforward. Achieving the right level of iron varies from person to person. Too much iron can cause stomach issues, ranging from constipation, nausea, and abdominal pain to gastritis and gastric lesions.

1 in 5 Still Affected by Long COVID

COVID-19 has affected nearly 40 percent of Americans, with one in five of those still suffering from symptoms of long COVID, according to the U.S. Centers for Disease Control and Prevention (CDC). Long COVID is marked by health issues that continue at least four weeks after an individual was initially diagnosed with COVID-19. Symptoms can last for days, weeks, months, or years and may include fatigue, cough or chest pain, headache, brain fog, depression or anxiety, digestive issues, and joint or muscle pain.

Tyler Durden Sat, 03/09/2024 - 12:50

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Walmart joins Costco in sharing key pricing news

The massive retailers have both shared information that some retailers keep very close to the vest.

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As we head toward a presidential election, the presumed candidates for both parties will look for issues that rally undecided voters. 

The economy will be a key issue, with Democrats pointing to job creation and lowering prices while Republicans will cite the layoffs at Big Tech companies, high housing prices, and of course, sticky inflation.

The covid pandemic created a perfect storm for inflation and higher prices. It became harder to get many items because people getting sick slowed down, or even stopped, production at some factories.

Related: Popular mall retailer shuts down abruptly after bankruptcy filing

It was also a period where demand increased while shipping, trucking and delivery systems were all strained or thrown out of whack. The combination led to product shortages and higher prices.

You might have gone to the grocery store and not been able to buy your favorite paper towel brand or find toilet paper at all. That happened partly because of the supply chain and partly due to increased demand, but at the end of the day, it led to higher prices, which some consumers blamed on President Joe Biden's administration.

Biden, of course, was blamed for the price increases, but as inflation has dropped and grocery prices have fallen, few companies have been up front about it. That's probably not a political choice in most cases. Instead, some companies have chosen to lower prices more slowly than they raised them.

However, two major retailers, Walmart (WMT) and Costco, have been very honest about inflation. Walmart Chief Executive Doug McMillon's most recent comments validate what Biden's administration has been saying about the state of the economy. And they contrast with the economic picture being painted by Republicans who support their presumptive nominee, Donald Trump.

Walmart has seen inflation drop in many key areas.

Image source: Joe Raedle/Getty Images

Walmart sees lower prices

McMillon does not talk about lower prices to make a political statement. He's communicating with customers and potential customers through the analysts who cover the company's quarterly-earnings calls.

During Walmart's fiscal-fourth-quarter-earnings call, McMillon was clear that prices are going down.

"I'm excited about the omnichannel net promoter score trends the team is driving. Across countries, we continue to see a customer that's resilient but looking for value. As always, we're working hard to deliver that for them, including through our rollbacks on food pricing in Walmart U.S. Those were up significantly in Q4 versus last year, following a big increase in Q3," he said.

He was specific about where the chain has seen prices go down.

"Our general merchandise prices are lower than a year ago and even two years ago in some categories, which means our customers are finding value in areas like apparel and hard lines," he said. "In food, prices are lower than a year ago in places like eggs, apples, and deli snacks, but higher in other places like asparagus and blackberries."

McMillon said that in other areas prices were still up but have been falling.

"Dry grocery and consumables categories like paper goods and cleaning supplies are up mid-single digits versus last year and high teens versus two years ago. Private-brand penetration is up in many of the countries where we operate, including the United States," he said.

Costco sees almost no inflation impact

McMillon avoided the word inflation in his comments. Costco  (COST)  Chief Financial Officer Richard Galanti, who steps down on March 15, has been very transparent on the topic.

The CFO commented on inflation during his company's fiscal-first-quarter-earnings call.

"Most recently, in the last fourth-quarter discussion, we had estimated that year-over-year inflation was in the 1% to 2% range. Our estimate for the quarter just ended, that inflation was in the 0% to 1% range," he said.

Galanti made clear that inflation (and even deflation) varied by category.

"A bigger deflation in some big and bulky items like furniture sets due to lower freight costs year over year, as well as on things like domestics, bulky lower-priced items, again, where the freight cost is significant. Some deflationary items were as much as 20% to 30% and, again, mostly freight-related," he added.

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Walmart has really good news for shoppers (and Joe Biden)

The giant retailer joins Costco in making a statement that has political overtones, even if that’s not the intent.

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As we head toward a presidential election, the presumed candidates for both parties will look for issues that rally undecided voters. 

The economy will be a key issue, with Democrats pointing to job creation and lowering prices while Republicans will cite the layoffs at Big Tech companies, high housing prices, and of course, sticky inflation.

The covid pandemic created a perfect storm for inflation and higher prices. It became harder to get many items because people getting sick slowed down, or even stopped, production at some factories.

Related: Popular mall retailer shuts down abruptly after bankruptcy filing

It was also a period where demand increased while shipping, trucking and delivery systems were all strained or thrown out of whack. The combination led to product shortages and higher prices.

You might have gone to the grocery store and not been able to buy your favorite paper towel brand or find toilet paper at all. That happened partly because of the supply chain and partly due to increased demand, but at the end of the day, it led to higher prices, which some consumers blamed on President Joe Biden's administration.

Biden, of course, was blamed for the price increases, but as inflation has dropped and grocery prices have fallen, few companies have been up front about it. That's probably not a political choice in most cases. Instead, some companies have chosen to lower prices more slowly than they raised them.

However, two major retailers, Walmart (WMT) and Costco, have been very honest about inflation. Walmart Chief Executive Doug McMillon's most recent comments validate what Biden's administration has been saying about the state of the economy. And they contrast with the economic picture being painted by Republicans who support their presumptive nominee, Donald Trump.

Walmart has seen inflation drop in many key areas.

Image source: Joe Raedle/Getty Images

Walmart sees lower prices

McMillon does not talk about lower prices to make a political statement. He's communicating with customers and potential customers through the analysts who cover the company's quarterly-earnings calls.

During Walmart's fiscal-fourth-quarter-earnings call, McMillon was clear that prices are going down.

"I'm excited about the omnichannel net promoter score trends the team is driving. Across countries, we continue to see a customer that's resilient but looking for value. As always, we're working hard to deliver that for them, including through our rollbacks on food pricing in Walmart U.S. Those were up significantly in Q4 versus last year, following a big increase in Q3," he said.

He was specific about where the chain has seen prices go down.

"Our general merchandise prices are lower than a year ago and even two years ago in some categories, which means our customers are finding value in areas like apparel and hard lines," he said. "In food, prices are lower than a year ago in places like eggs, apples, and deli snacks, but higher in other places like asparagus and blackberries."

McMillon said that in other areas prices were still up but have been falling.

"Dry grocery and consumables categories like paper goods and cleaning supplies are up mid-single digits versus last year and high teens versus two years ago. Private-brand penetration is up in many of the countries where we operate, including the United States," he said.

Costco sees almost no inflation impact

McMillon avoided the word inflation in his comments. Costco  (COST)  Chief Financial Officer Richard Galanti, who steps down on March 15, has been very transparent on the topic.

The CFO commented on inflation during his company's fiscal-first-quarter-earnings call.

"Most recently, in the last fourth-quarter discussion, we had estimated that year-over-year inflation was in the 1% to 2% range. Our estimate for the quarter just ended, that inflation was in the 0% to 1% range," he said.

Galanti made clear that inflation (and even deflation) varied by category.

"A bigger deflation in some big and bulky items like furniture sets due to lower freight costs year over year, as well as on things like domestics, bulky lower-priced items, again, where the freight cost is significant. Some deflationary items were as much as 20% to 30% and, again, mostly freight-related," he added.

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