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BlackRock Checks-In on European Risk & The Week in Review

Posted by WrapManager's Investment Policy Committee

September 27, 2018

A Check-in on European Risk

Fears of a fiscal showdown between Italy’s new government and the European Union (EU) have roiled Italian assets this year – and renewed concerns about EU cohesion. How worried are we? We see a limited risk of near-term flare-ups but are skeptical about the Italian government’s commitment to fiscal discipline and Europe’s ability to cope with the next downturn. We see better risk-return tradeoffs in non-EU assets.

Italian assets have taken a hit this year. The selloff was sparked by fears that Italy’s populist government would breach the EU’s key budget deficit limit of 3% of gross domestic product (GDP), as the two major parties in the new governing coalition had vowed to cut taxes and boost welfare spending in their campaign. Italian 10-year government bond yields spiked after the March election, while local stocks fell. See the chart above. Italian assets have recouped some losses recently, only after Rome repeatedly assured it would respect EU rules in its soon-to-be released budget. We see scope for a further recovery in Italian asset prices, but do not see them returning to pre-election levels anytime soon. Why? A number of structural factors are weighing down both Italian and European assets. This helps explain why European stocks have underperformed other global developed markets in 2018.

BlackRock's Budget Base Case

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Blackrock Inc market perspective Money Manager Commentary

BlackRock Reports on China's Currency, Domestic GDP Data, and the Fed's View of the Economy

July 26, 2018
Should China's Currency Worry Markets? A slide in the Chinese yuan is sparking fears of a sharper devaluation that could rattle global markets. Are the worries justified? We see the yuan depreciating moderately in response to slower growth, financial deleveraging and escalating trade tensions. We expect China to rely mostly on fiscal and monetary tools, rather than the currency, to manage any growth slowdown in the second half. The Chinese currency posted its biggest monthly fall against the U.S. dollar on record in June - just as the trade tussle between China and the U.S. heated up. The yuan has slid 4% so far this year, with the fall accelerating since mid-June when U.S. President Donald Trump announced a 25% tariff on $50 billion of Chinese imports. See the blue line in the chart above. We do not see China resorting to a 2015-style devaluation to cushion the blow. Back then, a lack of market confidence in China’s policy framework contributed to capital flight (see the green bars), spooking global markets. Today, China has stricter capital controls in place – and improved coordination between policymakers. We believe this should give the government confidence to allow the yuan to gradually slide lower. [+] Read More

BlackRock Says Investors Should Prepare for Trade Wars, Not Panic

June 28, 2018
Trade Wars: Don't Panic, Prepare Trade tensions are here to stay. Even without a full-blown trade war, escalating frictions could weigh on business confidence – and growth. Economic fundamentals are still running strong and underpinning our risk-on view in the short term, but we advocate building increased resilience into portfolios as macro uncertainty rises. Economic tensions between China and the U.S. have shot up, confirmed by our BlackRock Geopolitical Risk Indicator. This has coincided with an out performance of quality stocks, as the chart shows. Investors appear to be heeding risks, trade included. Trade risks are not limited to China. The prospects of a North American Free Trade Agreement (NAFTA) deal have deteriorated. The European Union (EU) and others have retaliated against U.S. steel and aluminum tariffs, while the U.S. has threatened to impose tariffs on cars imported from the EU. [+] Read More

BlackRock Weekly Commentary Asks Is This As Good As It Gets?

May 17, 2018
An Unusual Earnings Season With many developed market firms having reported first-quarter results, we can say without doubt it’s been an unusual earnings season. Strong beats were met with little investor cheer. The worry: Earnings are close to a peak. Yet we see more room for earnings to climb this year and next, and reaffirm our overweight to U.S. equities. [+] Read More

A Comparison of Perspectives: Nuveen & BlackRock Share Weekly Investing Outlooks

April 26, 2018
As market volatility continues to be a focus point for investors, money managers are keeping a close eye on key market indicators. This week we share the market commentaries presented by Robert C. Doll, CFA, the Senior Portfolio Manager and Chief Equity Strategist at Nuveen Asset Management, and Richard Turnill, the Global Chief Investment Strategist at BlackRock. While their analyses highlight many of the same economic and market factors, their interpretations have distinct flavors. Doll feels that while the “equity markets have been buffeted by a number of credible threats so far in 2018,” it “shouldn’t be enough to actually cause a bear market,” yet, “these risks will need to ease before stocks can regain their footing.” Interestingly, Turnill feels that “the market environment in 2018 has returned to a more ‘normal’ mix of lower returns and higher volatility,” which “reflects rising economic uncertainty and less room for growth to exceed expectations,” but should not “spell the end of the equity bull market, now in its ninth year.” Continue reading for a more detailed analysis of the current market from both Nuveen Asset Management and BlackRock Investment Institute. [+] Read More

BlackRock Evaluates Short-Term Treasuries

March 8, 2018
Long on Short Bonds... The steady increase in shorter-maturity bond yields provides a thicker cushion against concerns around further rises in interest rates. Interest rates would need to jump more than one percentage point to wipe out a year of income in the two-year Treasury note. This is nearly double the cushion on offer two years ago – and far larger than the thin insulation provided by longer-term bonds today. We believe the short end offers relatively compelling income along with a healthy buffer against the prospects of further increases in yields. Read an excerpt of BlackRock's commentary below, or download the complete commentary now. [+] Read More

BlackRock Commentary: An Upside U.S. Growth Surprise

January 31, 2018
A tax overhaul in the U.S. could spill over to benefit the global economy. The U.S. tax overhaul and higher expected federal spending points to faster growth just as the expansion enters its ninth year. This represents a of sea change from U.S. fiscal policy’s long drag on growth and bodes well for the synchronized, global expansion. Read an excerpt of BlackRock's evaluation below, or download the complete commentary now. [+] Read More

BlackRock Evaluates Tax Overhaul Winners and Losers

January 18, 2018
Investors need to look beneath the surface to identify the longer-term winners... The Tax Cuts and Jobs Act is poised to boost a U.S. economy already running at full capacity. A windfall from lower taxes and incentives for capital expenditure could spur more consumer and business spending and corporate deal-making. A likely convergence in tax rates could create winners and losers, rippling across sectors and companies. Read an excerpt of BlackRock's evaluation below, or download the complete commentary. [+] Read More

BlackRock Shares Its Outlook on Global Investing in 2018

December 14, 2017
We see stable global growth with room to run... Setting the scene: the eurozone is enjoying its fastest economic expansion since 2011. EM (Emerging Markets) growth looks self-sustaining, even if powerhouse China slows more than markets currently expect. The breadth of the global recovery has expanded: Manufacturing figures are up in about 80% of countries, a share that has steadily increased over the past year. And U.S. tax cuts could provide a decent dose of fiscal stimulus. The caveat? Consensus expectations have mostly caught up with our GPS for G7 economies over the past year. See the "More growth, less upside" chart on page 3. This suggests less investor drive to play catch-up and embrace the positive growth outlook. Overall, we see very steady growth, coupled with still subdued inflation and low interest rates, as positive for risk assets — but with returns more muted. We expect global economic growth to chug along in 2018, but see less room for upside surprises to lift markets. Read an excerpt of BlackRock's key views below, or view the entire Global Investing Outlook for 2018. [+] Read More

BlackRock Asks: Where Is the US Dollar Headed?

November 9, 2017
We see a mildly stronger U.S. dollar (USD) ahead... A key U.S. dollar index has depreciated roughly 7% this year. Some are betting on further declines; speculative short positioning is at three-and-a-half year highs in the futures market. We believe this positioning buildup led to an April break in the usual positive correlation between the USD and the U.S. yield premium over other developed markets. Yet we see the USD’s broad uptrend since mid-2014 slowly resuming as monetary policy divergence re-emerges. The Fed is normalizing rates while the European Central Bank and Bank of Japan maintain easier policies, and the positive correlation between the USD and yield premium has returned. Read an excerpt of Richard Turnill's weekly commentary below, or view the entire BlackRock weekly investment commentary here. [+] Read More