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Weekly investment update – Covid in China and US inflation spell trouble for equities

Over the week to 11 May, global equities lost 7.1% (MSCI AC World index in US dollar terms) in a market that continues to be dogged by erratic moves and…

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Over the week to 11 May, global equities lost 7.1% (MSCI AC World index in US dollar terms) in a market that continues to be dogged by erratic moves and a risk-off stance amid concerns over growth and expectations of sharply higher US interest rates. We believe asset allocation decisions should be reactive and fluid in such conditions as they could point to a market regime change.  

Some knowns, many unknowns

It is easy to have a pessimistic view given that US policy rates could rise rapidly and push the country into recession. Meanwhile, European economies struggle with the fallout of a geopolitical crisis – all this at a time when global manufacturing continues to experience supply difficulties arising from Covid restrictions in China.

Some economists have already made this their central scenario. It is not the case for our research teams, but we are obviously conscious of the risks and headwinds.

Fed – Never more behind the curve

At his press conference on 4 May, Jerome Powell, Chair of the US Federal Reserve, promised a ‘soft landing’ while reiterating that, “Without price stability the economy doesn’t work for anybody, really”.

Looking at domestic demand-related indicators, the US economy is still working rather well. On the employment side, net job creation was strong at 428,000 in April, slightly ahead of market expectations, and taking the total for the year to nearly 2.1 million.

However, there was also a significant drop in labour force participation from 62.4% to 62.2%. There appear to be ‘outflows’ from the total workforce that are still difficult to analyse, while participation rates have remained well below their pre pandemic level of 63.4% in February 2020. Still, the jobless rate held steady at 3.6%, while wage increases seem to be starting to plateau.

On the US inflation front, the latest numbers do not point to stability: The consumer price index, excluding the more volatile food and energy components,  jumped by 0.6% between March and April ahead of the 0.3% consensus forecast. Core inflation declined only modestly year-on-year from 6.5% to 6.2%. Part of the unexpected month-on-month acceleration was due to the surge in airfares, but the increase in the price of services as a whole was also strong.

Although we do see signs of inflexion in the coming months, US inflation is likely to remain high and weigh on household purchasing power.

We believe it is now clear that, contrary to initial interpretations, Powell did not intend to rule out 75bp rate rises on 4 May, but simply indicated that such an increase was not something policymakers were ‘actively considering’. The Cleveland Fed President made it even clearer: ‘If we don’t have inflation moving down [in the second half of the year], we may have to speed up [policy tightening].”

Fingers crossed then that the Fed can engineer a soft landing, or at least, that any speeding-up of its inflation-busting policy action does not do too much damage to the US economy.

The European Central Bank became more hawkish

It was only late February when observers thought the ECB would delay the normalisation of monetary policy in the face of the slowdown in Europe due to the energy price shock. Just two months later, multiple ECB statements have raised expectations of a rise in the deposit totalling 75bps between now and the end of 2022.

President Christine Lagarde, who had previously steered clear of any bidding-up of hawkish comments, said on 11 May that the Asset Purchase Programme (APP) would end in June and that the first rate rise would come just ‘a few weeks’ later. This confirmed market expectations that the ECB will raise rates at the 21 July policy meeting.

It appears the ECB assumes that the economic slowdown will not last long, so it is opting to fight inflation. An ECB council member, the governor of the Banque de France said: “The ECB will do what it takes to bring inflation back to around 2% in the next two years.”

Indeed, the latest economic data is pointing to an improvement after the eurozone economy’s soft patch in the first half of 2022, due, in particular, to the drop in private consumption during first quarter 2022 when Covid restrictions were still in place.

Germany’s ZEW indicator of economic sentiment, which worsened sharply in March after the invasion of Ukraine, stabilised in April and improved slightly in May. France’s INSEE statistics office noted, ‘Surveys reflect the growing uncertainty, but also a certain resilience in the business climate’ in France. It expects a modest rebound in French GDP in second quarter 2022 rather than a continued contraction.

We expect a tangible growth acceleration in the eurozone in the second half of 2022 as business investment plans are holding up and the labour market remains strong.

Absolutely determined  

In the US and Europe, the downside risks to growth should not be ignored. For central banks, however, they do not seem to divert them from their determination to normalise monetary policies.

Against this backdrop, bond markets are likely to remain volatile. Since the beginning of May, the yield on the US 10-year T-note has moved between 2.90% and almost 3.15%, while the yield on the 10-year Bund rose close to 1.15% before closing below 1.00% on 11 May.

We remain convinced that a short-duration exposure is warranted, but will adjust our positions when we judge price moves, in either direction, to have become excessive.

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 Nathalie Benatia. The post Weekly investment update – Covid in China and US inflation spell trouble for equities appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.

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Spread & Containment

Joined up thinking needed for joined up data plans

Joined up data could transform the pharmaceutical industry and help create a healthier Europe for decades to come
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Joined up data could transform the pharmaceutical industry and help create a healthier Europe for decades to come – but the route to change is far from smooth sailing.

Without careful consideration and full stakeholder input, the EU’s plans for a connected data system could end up being counterproductive.

That’s the view of the European Federation of Pharmaceutical Industries and Associations (EFPIA), which has published a list of recommendations aimed at helping the sector get the most of out of the data it holds.

“If the European Health Data Space (EHDS) and the rules surrounding access to the data are not carefully thought through, with the involvement of all stakeholders, there could be unintended consequences that limit the utility of the data for developing innovative medicines,” said the organisation.

Huge potential

The EFPIA Recommendations on a Connected Data System in Europe, published at the end of April, welcomes the proposals, which are part of the European Strategy for Data, to create common data spaces.

Said the authors: “A connected health data ecosystem has the potential to empower more effective and efficient research and development of new treatments and diagnostics. It would also ensure better planning and delivery of patient-centred care through personalised medicine.

“This, combined with value-based healthcare, can result in better allocation of resources and more sustainable healthcare systems.”

The value of this approach, which places real-world data in the hands of the right people at the right time, was demonstrated in abundance over the last few years, they went on.

It was, they explained, stakeholders from across the healthcare ecosystem coming together to share insights, whether from clinic, research, or genomics, that changed the course of the COVID-19 pandemic.

Applying the same ethos to healthcare in general, then, could give the drug development sector all the information it needs to contribute to a fitter, healthier Europe.

“For the research-based industry, access to data is critical at every step. From accelerating drug discovery to understanding patients’ behaviours and the outcome of treatment, the availability of data is essential to testing hypotheses, identifying trends and assessing proposed treatments,” they said, adding that improved access to, and transmission of, health data could “transform the pharmaceutical industry”.

“A connected health data ecosystem has the potential to empower more effective and efficient research and development of new treatments and diagnostics. It would also ensure better planning and delivery of patient-centred care through personalised medicine.”

 

Significant challenges

While EHDS is a lofty ambition, bringing it to fruition will not be without its challenges, both practical and regulatory.

As the EFPIA paper points out, health data is currently held in a wide range of repositories, from clinical notes and electronic health records to insurance claims, patient registries, patient-reported outcomes records, and continuous patient monitoring data from apps and wearables.

Unlocking their value, then, requires a high level of interoperability between different IT systems, providers, data sources, and software, all based in different countries with different levels of infrastructure maturity.

“Healthcare system information must be better connected. This will allow stakeholders to use this data for optimising and improving health outcomes,” said the paper, adding that interoperability was a “critical enabler of the digital transformation of healthcare in Europe”.

Conflicting national laws could be another important barrier to data access and use. Varying interpretations of the General Data Protection Regulation (GDPR), for example, present challenges for clinical development of innovative medicines, said the authors.

“Conflicting interpretations of Article 9 of the GDPR, and the additional limitations on processing of health and genomic data that member states have enacted under this article, cause significant delays in study start-up and patient enrolment.

“Some member states take the position that the only lawful basis for processing health data is when individuals have given their consent for its collection and use. Others… take the position that processing this health data, when necessary for scientific research, is lawful.”

EU Data Protection Supervisors, the paper recommends, must reach a common understanding of key GDPR terms if citizens are to enjoy the same rights across the EU.

Practical solutions

The EFPIA paper makes a number of recommendations on how the EU could embrace the full potential of the proposed EHDS.

First, it says that developing a shared understanding of the relevant requirements in digital health is essential, and calls for an EU-wide approach to how data is accessed, pooled, compared and used, while also protecting privacy.

In terms of possible solutions, it points to the use of Federated Data Networks (FDN), in which separate networks share mutual RWD resources.

“In an FDN, data is not moved from its host source, though hybrid models can exist with local and central data hosting. The research question or query moves to where the data is originally hosted, with results aggregated centrally or delivered to the researcher,” said the authors.

This, they went on, could unlock the power of data in primary or secondary care settings, in clinical care decision-making, and in research, whilst preserving the privacy of the RWD at a local level.

Common data models (CDM), which standardise the logical infrastructure of software systems to enable interoperability, are also required.

“CDM is essentially a construct, a means to an end to help organise RWD into a common structure, formats, and terminologies across diverse, heterogeneous, and multiple source datasets,” said the paper.

“It addresses a central need to be able to curate data for analysis on a contemporaneous and continuous basis (not on a per study basis) or for largescale, geographically diverse, network studies of multiple data sources.”

 Joined up approach to joined up data

Ultimately, building a usable EU-wide health data system requires input from all stakeholders, and decisions on FDNs and CDMs should be taken internationally, as a sector.

Because, as the EFPIA says, we all have one goal: using the power of data to improve the health of the citizens of Europe.

About the author

Amanda Barrell is a freelance health and medical education journalist, editor, and copywriter. She has worked on projects for pharma, charities and agencies, and has written extensively for patients, HCPs and the public.

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Government

Large UK study suggests vaccination helps treat long COVID

An observational study in the UK has found evidence that COVID-19 vaccination can help alleviate the lingering symptoms
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An observational study in the UK has found evidence that COVID-19 vaccination can help alleviate the lingering symptoms that afflict some people who contract the virus, often referred to as ‘long COVID’.

There have been persistent anecdotal reports that vaccines can help people with persistent symptoms get better, but the study published in the British Medical Journal is the first to explore the connection in large numbers of patients.

It is based on responses from more than 28,300 adults who are taking part in the UK’s COVID-19 Infection Survey, carried out by the Office for National Statistics, and focused on individuals who reported symptoms that lasted for 12 or more weeks after infection.

The likelihood of long COVID symptoms was found to decrease after COVID-19 vaccination, and evidence pointed to an even greater improvement after a second dose. However, the authors say more data is needed before vaccination can be considered a treatment for the condition.

The team, led by ONS’ Daniel Ayoubkhani, found that before vaccines were available, the chances of experiencing long COVID were fairly constant after infection, but fell around 13% after a first dose, and a further 9% after a second.

The trial completed before the third booster doses were rolled out, and researchers say there is no data yet on whether the improvements reported after vaccines will be sustained with further follow-up.

They speculate that vaccination may “reset” immunity in people with long COVID who are thought to develop dysregulation of the immune system, similar to an autoimmune condition.

“Although causality cannot be inferred from this observational evidence, vaccination may contribute to a reduction in the population health burden of long COVID,” says the paper.

Further research is needed to look at the long-term relationship between vaccines and long COVID, and to gauge the effect of boosters and reinfection with SAS-CoV-2, particularly with the now-dominant Omicron variant, which had not emerged when the data was collected, according to the researchers.

Commenting on the results, Prof Penny Ward, visiting professor in pharmaceutical medicine at King’s College London, said: “These data broadly support prescribers encouraging patients with ‘long COVID’ to be vaccinated, or to complete the course of vaccination if they have not already done so.”

Meanwhile, Dr Peter English, a retired consultant in communicable disease control, said it is likely that long COVID is, in fact, a collection of different conditions, only some of which may respond to vaccination.

“The large scale of this study means that we can be fairly confident about what has been observed; but it does not mean we can be sure what it means,” he cautioned.

Nevertheless, faced with the potentially very significant consequences the condition could have on the health of the population, “anything that can reduce the burden of disease from Long COVID at reasonable cost is…important and valuable”.

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Economics

JPY forecast amid the Bank of Japan keeping the monetary policy easy

The rapid depreciation of the Japanese yen (JPY) in the last couple of years led to one of the most impressive moves seen in the FX market in recent history….

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The rapid depreciation of the Japanese yen (JPY) in the last couple of years led to one of the most impressive moves seen in the FX market in recent history. The yen simply melted, losing value against all its peers – not only against the US dollar.
Speaking of the US dollar, the yen dropped to over 131 recently before gaining some ground in the last few days. How will the yen perform for the rest of the year, and is the Bank of Japan right in keeping the monetary policy easy?

Bank of Japan still sees inflation as transitory

The main reason for the JPY’s move lower is the Bank of Japan’s policy. The central bank sees inflation as transitory, and, for this reason, it keeps the monetary policy easy.

It keeps buying government bonds, despite PPI or Producers Price Index (i.e., inflation on the producers’ side) rising at a four-decade high.

But so did the Fed, before dropping the transitory word when talking about inflation. If the PPI transfers to consumers, as it should, then the Bank of Japan would have to reverse its policy.

Truth be said, inflation in Japan is below 2% for decades, hurting the Bank of Japan’s credibility. It might have dramatic implications on the FX dashboard if it rises considerably above the target.

Only that the FX market is a leading one. Traders speculate and position themselves well before a central bank acts.

So did we see the lowest point in the JPY or not?

AUD/JPY daily chart points to a possible reversal

All JPY pairs’ charts look more or less like the AUD/JPY daily chart below. It shows that following the COVID-19 pandemic dip in 2020, the market rallied relentlessly.

But the recent breakout in 2022 following the Bank of Japan’s yield curve control comments is only the last leg of an otherwise super long trend. In other words, the yen was sold well ahead of the Bank of Japan’s comments. It followed the US stock market higher.

Now that the US stock market is coming down (i.e., Nasdaq 100 dropped -28% YTD), the JPY pairs may follow. The AUD/JPY chart above shows a possible head and shoulders pattern at the top which might just signal the top of a bigger head and shoulders pattern.

In other words, should the recent highs hold, a move back to 80 should not be discounted, especially if the US stock markets keep falling.

The post JPY forecast amid the Bank of Japan keeping the monetary policy easy appeared first on Invezz.

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