Markets Weekly podcast - 05 July 2021

Henk Potts (HP): Hello. It’s Monday, 5^th July and welcome to the Barclays Private Bank Markets Weekly podcast, the recording that will guide you through the turmoil of the global economy and financial markets.

My name is Henk Potts, Market Strategist for Barclays Private Bank. Each week I’ll be joined by guests to discuss both risks and opportunities for investors.

Firstly, I’ll analyse the events that moved the markets and grabbed the headlines over the past week. We’ll then discuss the outlook for the global economy and financial markets for the second half of this year. Finally, I’ll conclude by previewing the major events and data releases that are likely to shape the week ahead.

Investors set aside fears that a wave of virus variants would result in the reintroduction of travel restrictions and lockdown measures last week preferring to focus on steadily improving economic data that points to a positive pace for recovery but not one that will lead to a persistent surge in inflationary pressures.

US stocks closed at all time highs for the seventh consecutive day on Friday, an achievement that hasn’t occurred since 1997. Technology led the way while cyclicals underperformed. The S&P 500 was up 1.7% over the course of the trading week. In Europe the STOXX 600 was little changed.

In terms of bond markets, US Treasury yields fell across the board. Ten-year fell 10.1 basis points over the week down to 1.43% in fact hitting its lowest level since early March.

The one data release that moves the markets more than any other of course is the Non-Farm Payroll Report. The US labour market report was healthy but did provide some mixed signals. The rate of hiring accelerated compared to prior months. There’s been some easing of the labour shortage that held back employment gains in the early stages of the reopening.

In terms of big numbers, well, 850,000 jobs were created in June. The consensus was for around 700,000 with big gains in consumer facing industries. Average hourly earnings rose 3.6% year on year.

There were a couple of concerns on the Household Survey. The unemployment rate edged up to 5.9%. The participation rate still remains very low, down at 61.6% compared to 63.4% pre pandemic. Remember, this is the proportion of people in work or looking for work and highlights concerns that infection risk, childcare constraints and improved social benefits are continuing to hold back the return to work.

In terms of the impact of the report, well, the level of employment is still 6.7 million, below its pre pandemic level of February 2020. However, the US economy has delivered an impressive private employment growth of 550,000 per month since February. If sustained should be enough to convince the FOMC of the US central bank that substantial progress will be achieved in the coming months paving the way for a formal announcement of tapering to come at the September meeting.

We believe that the Committee will taper gradually by reducing treasury and mortgage backed security purchases by $10 billion and $5 billion respectively per meeting meaning it will take about a year for the tapering process to be completed.

Data last week also showed that consumer confidence is rising rapidly on both sides of the Atlantic. In the US the Conference Board Index surged in June to 127.3 from an upwardly revised 120 reading in May. That’s the highest reading since the start of the pandemic in February 2020 with gains in both the current conditions and short-term outlook as Americans become more upbeat about the economy and specifically the labour market.

37% of respondents plan to take a holiday over the course of the next six months. There were also significant rises in the proportion of plans to buy large ticket items including appliances, cars and even homes.

In Europe figures from the European Commission showed consumer sentiment rose to its highest level in more than two decades in June smashing all expectations as infection rates fall, vaccination rates rise and pandemic restrictions are lifted.

Services got a boost from the reopening of shops and restaurants. There were also gains in retail trade. I think the surveys add to the evidence that the reopening of economies, more than $5 trillion of excess savings built up during the course of the pandemic and the unleashing of pent up demand will indeed generate a powerful consumer led recovery.

A rise in services expenditure should help to rebalance recovery in the second half of the year thereby further propelling growth.

The OPEC meeting as we know was a fractious affair with the UAE pushing back on a proposed deal from Russia and Saudi Arabia adding round about 400,000 barrels per day each month to its production levels between August and December although the cartel also proposed extending the deadline for all OPEC cuts from April to December next year.

The UAE has demanded a reassessment of its baseline given its production capacity has substantially increased over the course of the past couple of years. Recovering demand, constrained supply and falling inventory levels have pushed crude prices up by round about 50% year to date with Brent trading around $76 a barrel, the highest level in more than two years.

When you look at the OPEC data it suggests that demand will be 5 million barrels per day higher in the second half of this year than in the first six months. Demand is projected to exceed supply by 1.7 million barrels per day in August and in fact the gap is expected to widen to 1.9 million barrels per day through the second half of this year although of course those forecasts are complicated by the resurgent virus and the possible easing of crude export sanctions on Iran as part of a nuclear deal.

The International Energy Agency had called upon the group to start tapping its spare capacity to bolster supply. A recent report from Goldman Sachs estimates OPEC+ were holding something around 5.8 million barrels per day from the market. So an OPEC+ announcement on increased output is still anticipated earlier this week and is expected to include concessions for the UAE.

What we do know is investors have been watching surging crude prices very carefully fearing rising energy prices with increased costs for businesses and consumers as well as stoking inflation forcing central bankers to tighten policy earlier, both of which could stifle both the recovery but also of course impact future demand.

We forecast that Brent will remain above $70 a barrel through the course of the fourth quarter and will average $71 in 2022.

So that was the global economy and financial markets last year. Let’s move on to the consider global growth prospects and how investors should be positioned for the rest of the year. I’m pleased to be joined by Julien Lafargue, Chief Market Strategist for Barclays Private Bank.

Julien, good to have you with us today. We know the speed and the magnitude of the economic recovery seems far better now than it looked at the start of the year. What’s been driving that improvement, and perhaps more importantly how sustainable is the elevated growth profile?

Julien Lafargue (JL): You’re right, Henk, economic growth has been very strong so far this year. Although we’ve seen economic surprises levelling off in part of the world, mostly in the US and China, the improving health situation, the relaxation of restrictions, the ongoing aggressive policies support and the strength of the consumer have really helped growth this year and will continue to help growth next year.

If we go through the numbers this means that we expect global GDP growth of 6.3% this year and a still very robust 4.6% in 2022.

Now with regards to the question as to how sustainable this is we believe growth is sustained by a very strong consumer. Pent-up demand has built up throughout this crisis and we believe that as we emerge from COVID-19 restrictions we will see continuous trends in consumer spending which should really help lift growth for the quarters to come and we could also see some company spending in the form of capex.

That combined with still very supportive fiscal stimulus makes us believe that growth is going to remain strong for the next couple of years.

HP: So taking into account the economic backdrop and current financial market conditions, how do you think investors should be positioned and where do you see the best opportunities?

JL: So we do remain pro risk, maintaining an overweight on equities over bonds yet we are far from all in. We want to be mindful of the unprecedented nature of this recovery and the risks that go with it. So while we want to be and stay invested we also want to focus on higher quality assets while maintaining a high degree of diversification.

All that means in fixed income we’re broadly neutral duration. We like the BBB segment in credit and we see very selective opportunities in high yield and emerging market there.

In equities we don’t think value is really the place to be. We prefer to focus on quality as a factor. This means earnings visibility and strong balance sheets in particular. And for this reason we maintain a preference for the US over Europe and we believe investors should be using the recent weakness we’ve seen in emerging markets as a long term entry point.

Sector wise we like consumer discretionary take in its broad sense, healthcare and also part of the industrial complex.

HP: Julien, when you look across the recent metrics there are clearly a number of areas of concern, you’ve alluded to some of them already, the resurgent variants of the coronavirus of course, the threat of rising inflation but also adding to that perhaps peaking growth that you see in the United States and China. How do you evaluate these risks and incorporate them into your investment strategy recommendations?

JL: Well, clearly these are the main risks that we can see, right?  These are the known unknown and there’s obviously always the unknown unknown but we can only factor in for those risks that we see on the horizon and all those that you’ve just mentioned are clearly risks to this rather positive outlook that we have. Probably the one that we’re the most concerned about over the medium term is peaking growth particularly in China because this could have wide repercussions for the global economy.

In terms of how we evaluate those risks and how we include them in our investment strategy recommendation what we do prefer is to have this balanced approach that I mentioned before, so not going all in into this idea of there is a very strong recovery that will last forever. We don’t believe this is the case and because of those risks we need to account for them and the best way to do that really is through appropriate diversification.

So we don’t want to own only equities and bonds, but we also want to broaden the scope of investment in portfolios trying to bring less correlated assets. Private markets, private equities are very interesting in our opinion. We also look at specific strategies like hedge funds to help us bring down the risk, the overall risks of portfolio and obviously we want to be diversifying in the commodity complex as well.

HP:  Well, Julien, thank you for your insights today.  For listeners who are interested in greater detail on the outlook they can read the views of the investment strategy team in our Market Perspectives midyear outlook document which is on the Barclays Private Bank website.

Let’s move on to consider to outlook for this week. The focus will be on European and UK PMI figures on Monday, the European Central Bank minutes on Thursday. Friday’s a really big day. You get the Chinese June inflation numbers. We expect CPI to come in at a relatively stewed 1.2% but the PPI number will be incredibly important. We know producer prices have been rising. We expect it to print at 8.6%.

Final figure to watch out for perhaps this will be UK GDP figures for May on Friday as well. We expect this to print at 1.4% month on month very much driven by the recovery in services.

With that I’d like to thank you once again for joining us. We will of course be back next week with our latest instalment, but for now may I wish you every success in the trading week ahead.