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Weekly investment update – Twists and turns

Last Friday, after the latest inflation US data, everything seemed clear already: Higher-than-expected inflation in May would lead the Federal Reserve…

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Last Friday, after the latest inflation US data, everything seemed clear already: Higher-than-expected inflation in May would lead the Federal Reserve to continue raising policy rates quickly. Signals from the ECB that it, too, was ready to act and bond and equity markets swooned.  

The Fed and inflation  

The US headline consumer price index in May rose by 1.0% versus the prior month and 8.6% from a year go, surprising to the upside and challenging the assumption that the inflation peak was behind us. That view now looks like wishful thinking.

While the core index (ex food and energy) continued to slow from 6.5% in March to 6.2% in April and 6.0% in May, other measures of underlying inflation rose, suggesting that inflationary pressures are broad-based, particularly in the services sector (airfares, hotel rooms).

In addition, the cost of shelter, as measured by rents and owner-equivalent rents, rose sharply. Goods inflation accelerated mainly due to car prices (new and used).

As a result, and as was widely expected after media reporting on Monday, the Fed raised rates by 75bp at its latest policy meeting, marking its largest move in 28 years.

The main new piece of information from chair Jerome Powell’s news conference was that the decision at the next meeting would be between either a 50bp or 75bp rate rise. Powell described the Fed’s larger hike in response to the inflation data as unusual. That should help damp down (at least for now) market speculation about the possibility of a 100bp increase at the July policy meeting.

Higher, faster?

The Fed also published new economic forecasts. These continue to show a benign outlook. The latest interest rate ‘dot plot’ shows rates hitting almost 3.5% at the end of this year, moving up another 50bp in 2023 before modest easing begins in 2024.

Market expectations ahead of the latest Fed action had already sent the 10 year T-note yield to 3.47% at the close on June 14, marking a level not seen for a decade and causing a flattening of the yield curve, with the 2-year yield closing at 3.43%.

The assumption of a sharp tightening of US monetary policy has weighed heavily on equity markets. The S&P 500 recorded falls for five days in a row, losing 10% between 7 and 14 June.

The ECB and fragmentation  

On the other side of the Atlantic, equities also fell sharply, although by slightly less (-8.2% for the EuroSTOXX index between 7 and 14 June). 

In fixed income markets, the outlook is no brighter than in the US. Since the ECB meeting on 9 June, the 10-year Bund yield has risen by more than 40bp to close at 1.76% on 14 June, marking its highest point since early 2014.

Moreover, spreads within the eurozone widened abruptly, resurrecting the spectre of a sovereign debt crisis. The end of net asset purchases by the ECB raised concerns (arguably somewhat premature) that more indebted countries would have difficulty financing their debt in the face of rising borrowing costs.

Eurozone ‘peripheral’ bond markets have suffered. At the close of 14 June, the spread between Italian and German yields exceeded 240bp on 10-year maturities compared to 200 bp at the end of May. The crossing of the 200bp threshold, later 225bp and finally 250bp intraday, aroused nervousness among market participants who thought the ECB would not tolerate such a surge in Italian yields and would react accordingly.

‘No limit’

Indeed, it did. The reaction was a two-act play: Isabel Schnabel, member of the Executive Board, indicated that the ECB would not tolerate fragmentation that would impair monetary policy. Despite her strong words: ‘Our commitment to the euro is our anti-fragmentation tool. This commitment has no limits’, the speech did not appear to fully convince investors.

This was followed by an ad-hoc meeting of the Governing Council to ‘discuss current market conditions’. The ECB announced that it ‘will apply flexibility in reinvesting redemptions coming due in the Pandemic Emergency Purchase Programme (PEPP) portfolio, with a view to preserving the functioning of the monetary policy transmission mechanism’. In addition, work on the design of a new anti-fragmentation instrument would be accelerated.

The ad-hoc meeting had the merit of making it clear that the ECB was concerned about the sharp swings of spreads in the eurozone and wanted to put its flexibility and anti-fragmentation view on record, signalling that it could act during erratic market movements.

If the effect is not (yet?) as impressive as former President Mario Draghi’s July 2012 comment (‘the ECB is ready to do whatever it takes to preserve the euro’), spreads have now tightened and it is likely that many investors have to unwind their short positions (a crowded trade) not only in ‘peripheral markets’, but also in ‘core’ markets such as Germany.

Our fixed income management teams have decided to move their exposure to Italy back to neutral from underweight while keeping their short duration in multi-asset portfolios.

As central banks exit, more or less gradually, from the exceptional monetary policies put in place during the pandemic, they are showing that they remain attentive to the market’s reaction. The fight against inflation has become the key variable in their reaction function, but they have no desire to provoke a new crisis.

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 – Twists and turns 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

Preventing the next pandemic: Learning the lessons

In the first of a three part series, Ben Hargreaves looks at what the odds are of another
The post Preventing the next pandemic: Learning the lessons appeared…

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In the first of a three part series, Ben Hargreaves looks at what the odds are of another pandemic arising in our lifetimes and what can be done to lower the risk of this happening again.

The current pandemic is still very much underway. The question is, as one study was recently entitled, whether the current phase brings the world closer to the end of the pandemic or just to the end of the first phase? What is clear is that due to vaccines and therapeutics, the critical early phase of the pandemic is over. As the article suggests, what could lie ahead is a process of learning how to live with a persistent circulation of the virus and, with this, consistent spikes of cases, likely occurring periodically and more often in the winter months.

With the current pandemic refusing to dissipate, the discussions around future pandemics become more difficult to countenance. As identified very early into the current pandemic by the WHO, there is the risk of fatigue arising over long-term global health crisis response, which becomes an issue when acknowledging that the current times we’re living through could happen again. Research has suggested that in any given year there is a 2.5 to 3.3% chance of a pandemic on the scale of COVID-19 occurring. Not only this, the expectation is that such events are becoming more likely, with estimations that the probability of outbreaks such as the current pandemic will likely grow three-fold in the next few decades.

Pharma invested

The acceptance that there will potentially be another pandemic within many people’s lifetimes underlines the importance of using the emergence of COVID-19 to better protect ourselves against the next threat. Although it’s come at a high cost, the world is now in a strong position to prepare itself, with the lessons from the current pandemic still fresh in mind.

One clear benefit is that the pharmaceutical industry has proven that it is able to develop and safely deliver vaccines in a much shorter timeframe than usual. A typical vaccine development timeline takes between five and 10 years; the vaccines approved for COVID-19 emerged much more quickly.

Though the next pandemic could prove to be a more complicated target to vaccinate against, the success of the vaccines and the financial gains that were achieved would see companies eager to engage in development. Already, the industry is seeing greater research and funding being diverted back into vaccine development, with mRNA vaccines holding particular interest. This should see a pipeline of vaccine candidates better stocked than on the emergence of COVID-19, if this can be sustained into the future.

Global governance

However, the work required to prevent the next pandemic is far broader than vaccines and therapeutics, which are essentially the last defence. In the future, the entire global health system will need to change to become more resilient, which requires many individual changes but can be broken down it smaller, logical actions that have outsized outcomes. One such action is simply coordination at the highest levels.

There were warning signs prior to COVID-19 that a pandemic could be possible, with the outbreaks of Zika and Ebola viruses, both of which have occurred intermittently for years but had attained wider notoriety after bigger outbreaks in the last decade. Despite this, coordinated efforts on the response to the current pandemic lacked cohesion – many countries adopted different methods of combatting the spread of the virus and containment. Once vaccines were on the market, countries competed against one another for access, thereby denying them to the countries without the economic firepower to match.

A recent report for the G20 group of nations, on preventing the next pandemic, concluded: “It requires establishing a global governance and financing mechanism, fitted to the scale and complexity of the challenge, besides bolstering the existing individual institutions, including the

WHO as the lead organisation. A primary one is training and hiring adequate levels of health workers.”

The report broke down four major gaps that need to be addressed, on a global and national level, to be able to respond more quickly, equitably and effectively when further pandemics occur:

  • Globally networked surveillance and research: To prevent and detect emerging infectious diseases
  • Resilient national systems: To strengthen a critical foundation for global pandemic preparedness and response
  • Supply of medical countermeasures and tools: To radically shorten the response time to a pandemic and deliver equitable global access
  • Global governance: To ensure the system is tightly coordinated, properly funded and with clear accountability for outcomes

Spending money to save money

The hiring of additional healthcare workers, the build-out of surveillance systems, support provided for R&D into infectious diseases, and the creation of a stockpile of medical countermeasures all require funds. This is a major question of the report for world leaders: Whether there is the appetite for further funding into pandemic preparation? The global economy has taken and continues to feel the financial blow of COVID-19.

However, the report calls for more public funding to be put into health in the coming years, with the authors stating that approximately 1% of GDP must be committed by low- and middle-income countries. In terms of funding for international efforts for preventing the next pandemic, the figure is estimated at $15 billion per year, sustained for the coming years. Compared to the sums spent on vaccines and therapeutics during the current pandemic, the investment is far lower and will help boost what the report calls, “a dangerously underfunded system.”

Beyond all action is a tactic for mitigating pandemics that is known as primary prevention. Fundamentally, this means going before all of the previously discussed methods to tackle the virus at the root cause.

Research has called for greater emphasis to be put on elements that prevent virus spillover, where a virus jumps species. The authors identify three areas where a difference can be made: reduced deforestation, better management of the wildlife trade and hunting, and better surveillance of zoonotic pathogens before any human is infected. The authors suggest that even a 1% reduction in risk of viral zoonotic disease emergence would make any efforts in this direction cost-effective. They end their study, stating, “Monothetic ‘magic bullets,’ including diagnostic tests, treatments, and vaccines, failed to control COVID-19 as it spread around the globe and exacted the largest health and economic toll of any pathogen in recent history. This makes plain that we cannot solely rely upon post-spillover strategies to prevent a similar fate in the future.”

The post Preventing the next pandemic: Learning the lessons appeared first on .

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FTSE 100 gains as commodity-linked stocks bounce back

The commodity-heavy FTSE 100 gained 0.4%, while mid-cap FTSE 250 index inched up 0.3% UK’s FTSE 100 gained on Monday, as an easing of COVID-19 restrictions…

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The commodity-heavy FTSE 100 gained 0.4%, while mid-cap FTSE 250 index inched up 0.3%

UK’s FTSE 100 gained on Monday, as an easing of COVID-19 restrictions in China brought relief to commodity prices, lifting shares of major oil and mining companies.

As of 0704 GMT, the commodity-heavy FTSE 100 gained 0.4%, while mid-cap FTSE 250 index inched up 0.3%.

The risk sentiment improved after a Wall Street rally late last week and a rebound in copper and iron ore prices on Monday, boosted by an easing COVID-19 restrictions in Shanghai and relaxed testing mandates in several Chinese cities.

The burst of global enthusiasm for equities has put a spring in the step of the FTSE 100 at the start of the week, Hargreaves Lansdown analyst Susannah Streeter said.

Mining stocks led gains on the FTSE 100 index, with Anglo American, Rio Tinto and Glencore rising more than 3%, after Group of Seven leaders pledged to raise $600 billion private and public funds in five years to finance needed infrastructure in developing countries.

It is hoped this scheme, seen as a counter to China’s Belt and Road Initiative, will set off a spurt of spending and demand for commodities around the world, Streeter added.

Among individual stocks, CareTech surged 20.8% after the UK-based provider of care and residential services agreed to be acquired by a consortium led by Sheikh Hoidings in an 870.3 million pounds ($1.07 billion) deal.

Carnival Corp jumped 5.6%, extending its Friday gains after the leisure travel company forecast a positive core profit for the current quarter despite surging costs.

London-listed shares of Rio Tinto added 2% after a U.S appeals court ruled that the federal government may give the UK copper miner a right to lands in Arizona.

BAE Systems inched up 0.4% after the defence company received a $12 billion contract from the U.S Department of Defence.

The post FTSE 100 gains as commodity-linked stocks bounce back first appeared on Trading and Investment News.

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Structural racism drives higher COVID-19 death rates in Louisiana, study finds

COLLEGE PARK, MARYLAND–Disproportionately high COVID-19 mortality rates among Black populations in Louisiana parishes are the result of longstanding…

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COLLEGE PARK, MARYLAND–Disproportionately high COVID-19 mortality rates among Black populations in Louisiana parishes are the result of longstanding health vulnerabilities associated with institutional and societal discrimination, according to research conducted by an interdisciplinary team under the mentorship of University of Maryland (UMD) Clark Distinguished Chair Deb Niemeier and UMD Associate Professor of Kinesiology Jennifer D. Roberts in the School of Public Health. 

Credit: Guangxiao Hu, Nora Hamovit, Kristen Croft, Jennifer D. Roberts, and Deb Niemeier, University of Maryland.

COLLEGE PARK, MARYLAND–Disproportionately high COVID-19 mortality rates among Black populations in Louisiana parishes are the result of longstanding health vulnerabilities associated with institutional and societal discrimination, according to research conducted by an interdisciplinary team under the mentorship of University of Maryland (UMD) Clark Distinguished Chair Deb Niemeier and UMD Associate Professor of Kinesiology Jennifer D. Roberts in the School of Public Health. 

The team included doctoral students from three different programs at UMD, working together as part of an interdisciplinary fellowship program known as UMD Global STEWARDS, directed by Professor Amy R. Sapkota of the School of Public Health.

“Our results suggest that structural racism and inequities led to severe disparities in initial COVID-19 effects among highly populated Black Louisiana communities, and that as the virus moved into less densely populated Black communities, similar trends emerged,” the researchers concluded in a study published in the Proceedings of the National Academy of Sciences on Monday, June 27. 

Over the course of generations, discrimination in employment, education, housing, and access to medical care has led to higher risks of chronic illnesss (including asthma, diabetes, and obesity) among Black communities, as well as a higher likelihood of suffering a stroke, the authors noted. The Centers for Disease Control and Prevention (CDC) have linked these factors to the likelihood of becoming severely ill from COVID-19.

Both nationally and in Louisiana, Black communities encounter inadequate housing and lower rates of home ownership, reduced access to health care, and lower rates of employment. As exemplified by Cancer Alley, Black families are more likely to live in so-called “fence-line” neighborhoods, located near industrial facilities that expose them to pollutants, and typically encounter reduced air and water quality compared to white Americans. Black families are also more likely to be uninsured and face higher rates of unemployment. These and multiple other factors, all reflecting decades of institutional and societal bias, add up to a combination of stressors that undermine health and, in the case of COVID-19, have made Black communities particularly vulnerable.

To obtain their findings, the team members identified the spatial distribution of social and environmental stressors across Louisiana parishes, and used hotspot analyses to develop aggregate stressors. They then tracked the correlations among stressors, cumulative health risks, COVID-19 mortality rates, and the size of Black populations across Louisiana. The results suggest that COVID-19 mortality rates initially spiked in Black communities with high population densities and moderate levels of aggregate stress. Over time, the rates also increased in less densely populated Black communities with higher levels of aggregate stress.

“We find that Black communities in Louisiana parishes with both higher and lower population densities experience higher levels of stressors leading to greater COVID-19 mortality rates,” the researchers wrote. “Our work using the COVID-19 pandemic, particularly as observed in Louisiana, makes clear that communities with high levels of social, economic, and environmental racism are significantly more vulnerable to a public health crisis.”

The study lead authors include UMD graduate students Kristen Croft (Department of Civil and Environmental Engineering). Nora Hamovit (Department of Biology), and Guangxiao Hu (Department of Geographical Sciences), who worked together on the study as part of the UMD Global STEWARDS (STEM Training at the Nexus of Energy, WAter Reuse and FooD Systems) training fellowship program, which is funded by the National Science Foundation (NSF).

Allen P. Davis, Professor of Civil and Environmental Engineering, is a co-PI for the UMD STEWARDS program, which aims to bring together graduate students from a wide variety of backgrounds to work on collaborative projects. “Each student brings their own area of expertise to the table, resulting in synergy,” Davis said. “That kind of synergy is something you might not get in other disciplinary studies.”

The value of such an approach was evident in the collaboration among the three students.  “As a human geographer, my main focus was on the spatial disparities of structural racism and inequities and their effects on COVID-19 mortalities,” Hu said. “Using hotspot analysis, we identified two groups of parishes with high or low population densities located at different regions of Louisiana. Our research provides policy makers with very useful insights about the disproportionate burden of Black communities and the nonstationary distribution of this disproportion across Louisiana.”

Hamovit performed the initial data analysis that yielded stressor index calculations, which Hu then utilized for hotspot analysis. “Because my PhD research involves large and complex data sets I brought a strength of data organization and analysis to our team,” Hamovit said. Croft played a key role in defining the research topic and utilized her background in stormwater research to pinpoint specific variables that could have a bearing on health. 

Faculty mentors included Niemeier and Roberts. Niemeier, who joined the UMD civil and environmental engineering faculty in 2019 as the inaugural Clark Distinguished Chair, is an internationally-recognized expert on the equity impacts of infrastructure and engineering decisions. She is a member of the National Academy of Engineering and, in 2021, was elected to the American Philosophical Society. Her work, which details how marginalized communities are affected by vehicle emissions, development patterns, climate change, and approaches to disaster preparation and recovery, has helped spur policy and regulatory reforms.

Roberts is founder and director of the  Public Health Outcomes and Effects of the Built Environment Laboratory at UMD. She is also co-founder and co-director of NatureRx@UMD. Her scholarship focuses on the impact of built, social and natural environments, including the institutional and structural inequities of these environments, on physical activity and public health outcomes of marginalized communities. Roberts was recently named to the National Academy of Science’s Response and Resilient Recovery Strategic Science Initiative Strategy Group on COVID-19 and Ecosystem Service in the Built Environment.

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