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No Rest for the Weary

Overview: Risk appetites are improving on the margin. Asia Pacific stocks still fell after the sharp losses on Wall Street on Monday. Still, China, Taiwan…

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Overview: Risk appetites are improving on the margin. Asia Pacific stocks still fell after the sharp losses on Wall Street on Monday. Still, China, Taiwan and Indian equities traded higher. Europe's Stoxx 600 is snapping a four-day 6.5%+ slide and is up around 1.2% in late European morning turnover. US equity futures are up over 1%. The 10-year Treasury yield that pushed to 3.20% yesterday is a little above 3% now. European benchmark yields are 5-7 bp lower and the peripheral premium has narrowed slightly. The US dollar is trading is mixed. The Australian dollar, yen, and Canadian dollar are steady, while the Norwegian krone and the Swiss franc are laggards. Most emerging market currencies are firmer, including the Indian rupee, which fell to record lows yesterday. The central reportedly intervened in the spot, forward and NDF markets. Today, the South Korean won, and Turkish lira are underperforming. Gold is holding above $1850 support. June WTI initially extended yesterday's pullback from the $110 area to test $100 before steadying. US natgas tumbled 12.6% yesterday after the pre-weekend drop of 8.4%. Today, it is off another 1.3%, and is below $7 for the first time in nearly two weeks. Europe's benchmark is off nearly 4% today after falling about 15% in the past two sessions. It is near last month's low. Iron ore fell 2.2% in Singapore. It is the sixth drop in the past seven sessions and has returned to levels last seen in mid-January. The June copper futures fell to the year's low yesterday and has steadied today. July wheat fell for the first time in four sessions yesterday but has come back bid today.

Asia Pacific

As Covid restrictions were eased, pent-up demand helped boost household spending in Japan even though wages increases are not keeping pace with inflation. Spending surged 4.1% in March over February, which was more than expected. The quarter ended on a firm note but not enough to offset the earlier weakness and spending fell around 1.8% on the quarter. Japan reports Q1 GDP next week and economists (median, Bloomberg survey) anticipate a 0.5% contraction.

Japan's Foreign Minister Hayashi became the latest international official to visit the Solomon Islands after a secret pact was signed with China. Clearly, many countries in the region, are concerned about an extended China presence. Prime Minister Sogavare claims that the Solomon Islands are being treated like children. The government insisted that the treaty does not allow for a permanent Chinese presence. The US had downgraded its own presence in the islands in 1993 when it closed its embassy, which had been open for five years. The US said it would re-open the embassy earlier this year but also warned Sogavare that it would "respond accordingly" if China builds a base or secure capability. The apt comparison may not be the Cuban Missile Crisis, but Ukraine. Kyiv has the right to choose its allies even if it is disruptive to some of its neighbors. Solomon Islands could be punished if it chooses wrong. 

As US 10-year yields pulled back and briefly dipped below 3.0% after reaching 3.20% yesterday, the dollar slipped to a three-day low near JPY129.80. US yields stabilized and so did the greenback. It has settled in a JPY130.20-JPY130.60 range. Last week's low was seen aroundJPY128.65 and this needs to be taken out to signal a corrective rather than just the consolidative phase. The Australian dollar was sold to almost $0.6900, its lowest level since mid-2020, before rebounding to about $0.6985. Buying emerging in early Europe on a pullback toward $0.6940. A move above $0.7000 is needed to stabilize the technical tone. The greenback traded on both sides of yesterday's range against the Chinese yuan. It briefly traded above CNY6.74 for the first time since November 2020 before being sold off to almost CNY6.69 where it found a new bid. The PBOC set the dollar's reference rate lower than expected (CNY6.7134 vs. CNY6.7139). After three days of gains, the greenback is trading softer.

Europe

It may not be particularly clear in the PMI data, which has been holding up fairly well for the euro area. The April Composite PMI rose to 55.8 from 54.9 in March and 555.5 in February before the Russian invasion of Ukraine. But the economy is weakening. Last week, we learned that retail sales fell 0.4% in March, which was more than expected. At the end of this week, we will learn that industrial output slumped. Consider that last week German reported March industrial output plummeted by 3.5% (the median in Bloomberg's survey expected a 0.4% decline). French industrial production fell by 0.5%, more than twice what had been expected. It followed a revised 1.2% decline in February (from -0.9%). It was the fourth decline in five months. Spain's industrial output contracted by 1.8% in March. The median forecast in Bloomberg's survey called for a 0.5% decline. Earlier today, Italy offered a pleasant surprise:  Its industrial output was flat in March. Economists had forecast a 1.5% decline on the month. The aggregate figure for the eurozone is due at the end of the week. A 2% fall is expected, which would be the most since the pandemic first struck.

Sentiment is also falling. Last week, the EC confidence indicators for April were all weaker than expected. Yesterday, the May Sentix investor confidence measure fell to -22.6, worse than expected and the lowest since June 2020. Today was the ZEW survey. The eurozone expectations component approached the March 2020 low (-43.6) but recovered to -29.5 in May. In Germany, the assessment of the current situation deteriorated (-36.5 vs. -30.8), but expectations stopped a two-month dramatic slide. It had fallen from 54.3 before the Russian invasion of Ukraine to -41.0 in April. The "rebound” lifted it to -34.3 in May. The latest survey on Bloomberg put the risk of a recession in the eurozone at 35% of the next 12 month. The odds of a recession in the UK and Japan are put at 30%. The US is at 25% and Canada is 17.5%.

The euro has been bouncing along its trough around $1.0480 for the better part of two weeks. The upside blocked last week in the $1.0630-$1.0640 area. So far, today, it is holding above $1.0550, which, if sustained, would be the highest low since April 26. The intraday momentum indicators suggest there is scope for range-extension today to the upside and a close above $1.06 could lift the tone. However, the $1.0650 area needs to be overcome to signal a correction rather than consolidation. Sterling traded on both sides the of the pre-weekend range yesterday but the close was a little lower. This is consistent with some sideways movement. Previous support at $1.2400 offers resistance. It is also the (38.2%) retracement of last week's BOE-induced slide. The intraday momentum indicators suggest a test on it is likely in North America today. Initial support is now seen near $1.2320.

America

The Financial Times citing the work of one bank suggests that we are in "reverse currency wars."  Is that a helpful or accurate framing of the issue or is "war" an inflammatory image that is the material equivalent of click-bait?  First, we would counter by saying that it is possible that the foreign exchange market becomes an arena of competition and beggar-thy-neighbor strategies. However, there is an arms control agreement, and even if the edges fray a little, it is holding. Second, most central banks from high-income countries view the exchange rate in terms of financial conditions. When the monetary officials are reducing accommodation, they prefer to see currency appreciation. Depreciation, on the other hand, would blunt or offset the tightening of financial conditions that is sought. What seemed like a race-to-the-bottom was that there was a common shock and central banks were easing policy.

Central banks from high-income countries are mostly tightening financial conditions. There are three notable exceptions. The Swiss National Bank and the Bank of Japan are clearly feeling no sense of urgency. For the European Central Bank, it appears a rate hike is a question of time. The debate seems to be between July and September. The signals from policy makers suggest an "expeditious" campaign to above zero before the end of the year. Depending on several other variables, including openness of an economy, exchange rates can influence inflation. Given elevated prices in most many high-income countries, yes, it is given that exchange rates are being monitored. Yet, given the increase in volatility and the trend moves, foreign exchange rates do not seem to be particularly urgent. And what is the policy implication that the "reverse currency war" is supposed to do?  The FT says that the bank estimates it to be worth 10 bp extra of tightening that will be required. This is a rounding error and speaks the exaggerated precision economists often use, not the kind of damage fitting of war imagery.

There are three key developments since last week's FOMC meeting. First, US rates are mixed. Since the night before the May 4th decision, the US 10-year yield has risen by about five basis points but was up closer to 23 bp at its peak yesterday. The two-year note yield has fallen 18 bp, and at yesterday's low point, had fallen 21 bp from the day before the FOMC hiked. Second, follows from the first point and is that the US 2-10 yield curve steepened. Both of those are consistent with the Fed not being as aggressive as the market expected. However, what challenges this narrative is that the 10-year breakeven (the difference between the conventional yield and the 10-year inflation protected security) has fallen. And it settled yesterday at its lowest level in two months (slightly below 2.75%). 

Mexico's inflation accelerated last month, and the market expects the central bank to lift the overnight target rate by 50 bp on Thursday to 7.0%. The headline rate rose to 7.68% from 7.45%, which was slightly less than expected. However, the core rate rose slightly more than expected (7.22%, vs. 7.18%, the median forecast in Bloomberg's survey and 6.78% in March). The swaps market is pricing in about 115 bp of tightening over the next three months. This suggests two 50 bp moves with the risk of a 75 bp move.

The dollar traded above CAD1.30 yesterday for the first time since November 2020 as US equities cratered. Its gains were initially extended in the Asian turnover today (a little above CAD1.3035), but as equities stabilized, the greenback has pushed back below CAD1.30. Note that the CAD1.3025 corresponds to the (38.2%) retracement of the US dollar's decline from the pandemic high (~CAD1.4670). Hedging the large ($3.35 bln) option that expires today at CAD1.2935 may have contributed to the upward pressure on the exchange rate. Tomorrow, there is a $1.2 bln option at CAD1.30 that expires and $1.9 bln in options at CAD1.2950. We continue to see the key drag on the Canadian dollar coming the dramatic slide in equities rather than Canada's fundamentals. The greenback initially extended its gains against the Mexican peso. It rose to a five-day high near MXN20.44 to test the 200-day moving average before pulling back to around MXN20.3160 in the European morning. Nearby support is the MXN20.25-MXN20.30 band.

 


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Economics

Demand for commercial properties soars nationwide amidst economic expansion and stock market volatility, according to RE/MAX® Canada Brokers

Demand for commercial properties soars nationwide amidst economic expansion and stock market volatility, according to RE/MAX® Canada Brokers
Canada NewsWire
TORONTO, May 26, 2022

Investors flock to ‘bricks and mortar’ as hedge against inflation in …

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Demand for commercial properties soars nationwide amidst economic expansion and stock market volatility, according to RE/MAX® Canada Brokers

Canada NewsWire

Investors flock to 'bricks and mortar' as hedge against inflation in Q1 2022

TORONTO, May 26, 2022 /CNW/ -- With North American stock markets dangerously close to correction, bricks and mortar properties continue to resonate with institutional and private investors, particularly those who are personally vested, across almost every commercial asset class in major Canadian centres, according to RE/MAX brokers.

The RE/MAX Canada 2022 Commercial Real Estate Report found demand for industrial, multi-unit residential – particularly purpose-built rentals – and farmland was unprecedented in the first quarter of 2022, with values hitting record levels, while retail and office are starting to show signs of growth in multiple markets. Highlights from the report, which examined 12 major Canadian centres from Metro Vancouver to St. John's, include the following:

  • 92 per cent of markets surveyed (11/12) reported extremely tight market conditions for industrial product in the first quarter of 2022. Newfoundland-Labrador was the only outlier.
  • 67 per cent of markets surveyed (8/12) found challenges leasing industrial space. Included in the mix were Vancouver, Edmonton, Calgary, Winnipeg, Ottawa, the Greater Toronto Area, Hamilton-Burlington-Niagara and London. Some realtors are recommending tenants start their search for new premises at least 18 months before their current leases come up for renegotiation.
  • While demand for overall office space in the core remains relatively soft in 92 per cent of markets (11/12) across the country, Metro Vancouver continues to buck the trend.
  • Suburban office space continues to prove exceptionally resilient in 67 per cent of markets surveyed (8/12). Those markets include Vancouver, Calgary, Saskatoon, Winnipeg, Hamilton-Burlington-Niagara, Ottawa, Halifax-Dartmouth and Newfoundland-Labrador.
  • Development land remained sought after (industrial/residential) in 67 per cent of markets surveyed (8/12) including Vancouver, Calgary, Regina, Saskatoon, Winnipeg, Ottawa, the Greater Toronto Area and Halifax-Dartmouth.
  • End users are encountering challenges in terms of expanding their businesses due to land constraints/shortages, with specific mentions of this noted in Vancouver, the Greater Toronto Area and Regina.
  • Retail is on the rebound in 75 per cent of major Canadian markets (9/12), with strong emphasis on prime locations in neighbourhood microcosms. The trend has been identified in Vancouver, Edmonton, Calgary, Saskatoon, Regina, Winnipeg, Hamilton-Burlington-Niagara, Toronto and Ottawa.

Download the full report with detailed regional market insights HERE.

"The overall strength of the Canadian economy continues to propel massive expansion in commercial markets across the country in 2022," says Christopher Alexander, President, RE/MAX Canada. "What began as heightened demand for industrial space to accommodate a growing ecommerce platform during the pandemic has blossomed into a full-blown distribution and logistics network that encompasses millions of square feet in markets across the country. Recent volatility in the stock markets has also prompted a shift to greater investment in the commercial segment as investors look to real estate as a hedge against inflation."

Given the current shortage of land/space, developers and end users looking to build, have become increasingly creative in 58 per cent of markets surveyed (7/12), including Metro Vancouver, Edmonton, Regina, Saskatoon, Winnipeg, London, and the Greater Toronto Area. The supply/demand crunch has proven the adage, 'necessity is the mother of ingenuity', as new solutions emerge in the marketplace. In Metro Vancouver, Oxford Properties introduced the first industrial multi-storey industrial/commercial space in 2019 and a second stratified multi-storey facility—Framework by Alliance Partners—is planned for False Creek Flats. The first building is nearing completion and leased to Amazon while the first and second phase of the False Creek development is sold out and a third phase is currently selling at $725 per square foot.

In the future, municipalities may also consider industrial land reserves, registered areas dedicated to industrial in municipalities that are experiencing land constraints, given overwhelming demand.

"Land development is pushing city boundaries in major centres and municipalities are scrambling to accommodate residential and industrial intensification," says Alexander. "At present the process is painfully slow in most centres, even where land is already serviced. Given the on-going likelihood of demand, policy that helps availability or fast-tracking of approvals would certainly be a boon to the market." 

The RE/MAX Canada 2022 Commercial Real Estate Report also identified a growing trend in infill land assembly that targets retail storefront/strip retail malls in mature areas for mixed-use developments by institutional and private investors. These new developments almost always have a residential housing component on top, often purpose-built rentals or condominiums, given the shortage and need for greater densification. Smaller investors and end users are largely shut out of this market and tenants are having difficulties securing long-term leases in these key areas. Canada Mortgage and Housing Corporation (CMHC) is offering an exceptionally attractive financing package for multi-unit, purpose-built residential construction, with a 50-year-amortization rate, low loan-to-value ratios, and favourable interest rates.

Institutional and private investors remain exceptionally active in the commercial market across the country, spurring demand for industrial/office/retail product on a large-scale basis. Extensive portfolios are a primary target, especially those containing 10 or more properties. Spillover from activity in major centres is also serving to bolster smaller, secondary markets, where affordable price points, in relative terms, prove attractive, especially as savvy investors anticipate future needs and potential, given urban sprawl, density, population growth, pricing and inventory trends. 

While retail is making a comeback in prime neighbourhoods, the return of foot traffic should have a positive impact on the market moving forward. Revitalization of older retail spaces and malls is underway to enhance the shopper experience and influence the return to in-person shopping. This, in turn, is attracting tenants. The sector is expected to continue to strengthen as markets move past former pandemic constraints and more favourable conditions emerge to support retail growth.

RE/MAX Canada has found that cannabis outlets are largely over-represented in most major Canadian centres. As the industry amalgamates, there could be an influx of retail inventory returned to the market over the next 12 to 18 months.

Other trends noted in the commercial market by RE/MAX Brokers include novel ways to expand exposure and streamline the selling process. As inventory of farmland dwindles and price per acre has risen, realtors have turned to auctions with great success in Saskatchewan. Saskatoon, for example, which typically has about 300 listings for grain farms for sale at this time of the year, has seen available properties drop to under 90. Realtors have turned to auctions as a more effective way to increase exposure to a wider audience, generating offers from across the country, as well as the US. The trend is another sign of a heated marketplace where buyers are willing to compete for the right product in the right location in a transparent process.

"The soaring price of commodities has bolstered Western Canadian markets, with resource-rich provinces such as Saskatchewan, Alberta, and Manitoba experiencing unprecedented growth as industries emerge from their slumber," says Elton Ash, Executive Vice President, RE/MAX Canada. "Saskatchewan, in particular, is reinvigorated, with the economic engine just heating up in agriculture, mining, forestry, and potash."

Continued strength is forecast in commercial markets, supported by population growth and further economic expansion. According to the RBC Economics, Provincial Outlook published in March, GDP growth is expected to climb to 4.3 per cent in Canada, led by BC, Saskatchewan, and Alberta in 2022. An unquenchable demand for product in the industrial, multi-unit residential and farmland sectors will persist as intentions remain strong, despite a serious scarcity of inventory. Buyers, large and small, will continue to seek opportunity as investors increasingly favour tangible assets. Dollar volume is up across the country in almost every market as the principals of supply and demand impact values. Lease rates are also edging upward. With the pandemic fading quickly from memory, the return to the workplace – either full-time or in a blended/hybrid format – is expected to spark the next wave of growth, revitalizing downtown office buildings, and breathing new life into the core.

About the RE/MAX Network
As one of the leading global real estate franchisors, RE/MAX, LLC is a subsidiary of RE/MAX Holdings (NYSE: RMAX) with more than 140,000 agents in almost 9,000 offices with a presence in more than 110 countries and territories. RE/MAX Canada refers to RE/MAX of Western Canada (1998), LLC and RE/MAX Ontario-Atlantic Canada, Inc., and RE/MAX Promotions, Inc., each of which are affiliates of RE/MAX, LLC. Nobody in the world sells more real estate than RE/MAX, as measured by residential transaction sides.

RE/MAX was founded in 1973 by Dave and Gail Liniger, with an innovative, entrepreneurial culture affording its agents and franchisees the flexibility to operate their businesses with great independence. RE/MAX agents have lived, worked and served in their local communities for decades, raising millions of dollars every year for Children's Miracle Network Hospitals® and other charities. To learn more about RE/MAX, to search home listings or find an agent in your community, please visit remax.ca. For the latest news from RE/MAX Canada, please visit blog.remax.ca.

Contributing RE/MAX Brokers and Agents:

Metro Vancouver

Saskatoon

Greater Toronto Area

Steve Da Cruz

Brent Haas

Michael Davidson

RE/MAX Commercial Advantage

RE/MAX Bridge City Realty

RE/MAX Realtron

604.889.9293

306.641.6929

Realty Inc.



416.831.7108




Edmonton

Winnipeg


Scott Hughes

Mark Theissen

Ottawa

RE/MAX Commercial Capital

RE/MAX Professionals

James Palmer

780.915.7895

204.794.5700

RE/MAX Hallmark



613.698.5356

Calgary

London


Darryl Terrio

Eavan Travers & Gary Robinson

Halifax-Dartmouth

RE/MAX Complete Realty

RE/MAX Advantage

Craig Snow

403.930.8555

519.649.6000

RE/MAX Nova



902-499-7886




Regina

Hamilton-Burlington-Niagara


Mack Macdonald

Conrad Zurini

Newfoundland & Labrador

RE/MAX Crown Real Estate

RE/MAX Escarpment

Jim Burton

306.539.6806

905.573.1188

RE/MAX Infinity



709.682.8663

Forward looking statements
This report includes "forward-looking statements" within the meaning of the "safe harbour" provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as "believe," "intend," "expect," "estimate," "plan," "outlook," "project," and other similar words and expressions that predict or indicate future events or trends that are not statements of historical matters. These forward-looking statements include statements regarding housing market conditions and the Company's results of operations, performance and growth. Forward-looking statements should not be read as guarantees of future performance or results. Forward-looking statements are based on information available at the time those statements are made and/or management's good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. These risks and uncertainties include (1) the global COVID-19 pandemic, which has impacted the Company and continues to pose significant and widespread risks to the Company's business, the Company's ability to successfully close the anticipated reacquisition and to integrate the reacquired regions into its business, (3) changes in the real estate market or interest rates and availability of financing, (4) changes in business and economic activity in general, (5) the Company's ability to attract and retain quality franchisees, (6) the Company's franchisees' ability to recruit and retain real estate agents and mortgage loan originators, (7) changes in laws and regulations, (8) the Company's ability to enhance, market, and protect the RE/MAX and Motto Mortgage brands, (9) the Company's ability to implement its technology initiatives, and (10) fluctuations in foreign currency exchange rates, and those risks and uncertainties described in the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission ("SEC") and similar disclosures in subsequent periodic and current reports filed with the SEC, which are available on the investor relations page of the Company's website at www.remax.com and on the SEC website at www.sec.gov. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made. Except as required by law, the Company does not intend, and undertakes no duty, to update this information to reflect future events or circumstances.

SOURCE RE/MAX Canada

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Economics

EUR/GBP price prediction: is the bears’ pain over?

Ever since Brexit happened, the British pound gained against the common currency, the euro. Despite many analysts calling for the pound’s decline, it…

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Ever since Brexit happened, the British pound gained against the common currency, the euro. Despite many analysts calling for the pound’s decline, it gained ground in a relentless bearish trend.

The downtrend was so strong that even in 2022, some analysts believe that the EUR/GBP exchange rate will still hover around 0.84 in March 2023 – about 10 months from now.

Currently, EUR/GBP trades at 0.85, bouncing from its lows and looking constructive from fundamental and technical perspectives. So, where will the exchange rate go next?

Here is a price prediction considering both the technical and fundamental aspects.

The two central banks’ policies are set to diverge

Let’s start with the fundamental perspective. A currency pair moves based on the monetary policy differences between the two central banks.

In this case, the Bank of England was one of the first major central banks in the world that decided to increase the interest rate in the aftermath of the COVID-19 induced recession. Moreover, it did so not once but multiple times.

At the same time, the European Central Bank did nothing. It couldn’t do so, as a war started in Eastern Europe (Russia invaded Ukraine) in February.

In order to shelter European economies from the war’s economic impact, the European Central Bank preferred a wait-and-see stance. However, inflation is running way higher than the central bank’s target, and one of the causes is just the war.

As such, the central bank recently announced that it plans to end negative rates by September. Considering that the deposit facility rate is at negative 50bp, it means that a couple of rate hikes are on the table during the summer.

Yet, the Bank of England is now in a wait-and-see mode. Therefore, the fundamentals favor a move higher in the EUR/GBP exchange rate over the summer.

An inverse head and shoulders shows EUR/GBP struggling to overcome resistance

From a technical perspective, the market may have bottomed with the move to 0.82. It was quickly retraced, suggesting the presence of an inverse head and shoulders pattern.

A close above 0.86 should put the 0.90 area in focus. That is where the pattern’s measured move points to, and the move also implies that the lower highs series would be broken, thus ending the bearish bias.

All in all, EUR/GBP looks bullish here. Both technical and fundamental aspects favor more strength in the months ahead.

The post EUR/GBP price prediction: is the bears’ pain over? appeared first on Invezz.

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Economics

Weekly investment update – Weaker economic outlook weighs on markets

Global equities have continued their sell-off over the last week. What is new is that markets are now reacting to risks of weaker economic data weighing…

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Global equities have continued their sell-off over the last week. What is new is that markets are now reacting to risks of weaker economic data weighing on earnings. Real bond yields, whose rise triggered the recent drop in equity markets, have fallen as investors price a higher probability of a recession.   

Yields of US Treasury bonds have slipped since reaching around 3.12% in early May (see Exhibit 1). The rally has been driven by fears of a global recession due to poor economic data, strong inflation numbers, aggressive talk from central bankers and concerns over the consequences of Covid in China.

Recent data that contributed to the bond market’s unease about the prospects for the US economy includes: 

  • The Richmond Federal Reserve Manufacturing survey, which fell to its lowest since 2020 at -9.
  • The monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York fell to -11.6, with the shipment measure falling at its fastest pace since the start of the pandemic two years ago.
  • The Federal Reserve Bank of Philadelphia’s May business index dropped 15 points to 2.6, with the six-month outlook falling to its lowest since December 2008 (though the underlying details were better than the headline number).
  • Existing and new home sales dropped for a third month, to its lowest since 2020, held back by lean inventory, rising prices and higher mortgage rates. 

Taken together, the various regional Federal Reserve surveys suggest that the ISM Report for Business may come in at around 53, above 50 so still clearly in expansion territory for the US economy, but down noticeably from the upper 50s/lows 60s readings to which markets have become accustomed.

US equities still weak

US equities have remained weak as the down move continues for its seventh week.

It has been apparent that, in contrast to the start of the year when rising real bond yields were undermining equity markets, it is now fears of falling earnings due to a weaker economy that are weighing on stocks.

The last week has seen, in accordance with the risk-off regime, more buying-the-dip and selling-the-rally. There has also been a rotation out of growth and cyclicals into value and defensives (healthcare, real estate, utilities and staples).

European markets under the cosh

Bearish sentiment is prevalent in Europe, too, with investors cutting exposures to European equities.

There was another outflow in the week to 18 May, taking the total to 14 weeks of outflows in a row. Cyclicals, in particular, saw strong outflows, led by the materials, financials and energy sectors.

Our multi-asset team are inclined to reduce exposure to equity markets given the deterioration in the outlook.

European economy resists

Economic activity indicators have fallen so far in May, but remain above 50. Activity edged up in the manufacturing sector despite the fallout from the Ukraine war and supply chain disruptions that have intensified with China’s coronavirus lockdowns.

Although factories continue to report widespread supply constraints and diminished demand for goods amid elevated price pressures, the eurozone economy is being boosted by pent-up demand for services as pandemic-related restrictions are wound down.

While purchasing manager indices are still pointing to growth, it may be that these surveys understate the shock to activity, while sentiment surveys likely overstate the shock. Markets are increasingly tilting towards anticipation of a contraction in the coming quarters.

Higher food prices

Restrictions on the export of Ukrainian cereals continue and risks increasing food insecurity as the UN World Food Programme has highlighted.

As much of Russian and Ukrainian wheat goes to poorer nations, hunger could be a critical risk, driving up political instability.

The risk of further rises in food prices will be a key driver of inflation, particularly in emerging markets, the worst-case scenario being that the situation worsens significantly.

Moreover, lower fertiliser supply will have a greater impact on the next few months’ harvests, while the pass-through of costlier logistics and input prices is likely to drive food prices even higher.

Coming up…

Minutes of the meeting of the US Federal Open Markets Committee on 3-4 May will be published later on Wednesday.

However, market conditions have soured appreciably since the Fed’s first 50bp rate rise, so some of the language in the minutes pertaining to financial risks and market conditions will be outdated.

Instead, the three major focus points for market participants will likely be: 

  • Policymakers’ views on the conditions which could lead to a shift down, back to a pace of raising rates by 25bp at each FOMC meeting;
  • Any hints as to how far and for how long policymakers intend to push policy rates into restrictive territory;
  • Guidance shaping expectations for the next Summary of Economic Projections — aka the dot plot — due to be released at the June meeting. 

Forthcoming economic data  

US personal income and spending data for April should give investors an insight into the US consumer’s behaviour: Are they tightening the purse strings? The report may also show the Fed’s preferred inflation gauge (core PCE deflator) starting to decelerate.

Perhaps equally important, the report should shed light on how consumers are responding to the current high inflation environment, indicating how wages are performing relative to inflation and how aggressively consumers are tapping into the USD 2.5 trillion of accumulated savings from the pandemic period.

Disclaimer

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. The views expressed in this podcast do not in any way 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 Andrew Craig. The post Weekly investment update – Weaker economic outlook weighs on markets appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.

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