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MITON’S ANTHONY RAYNER: KEEPING UP WITH THE JONESES

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MITON’S ANTHONY RAYNER: KEEPING UP WITH THE JONESES
  • Record highs mask tug of war in markets
  • Perceptions of slowing economic momentum are changing market dynamics
  • We remain broadly constructive on markets, with a bias to economically sensitive businesses

Anthony Rayner, manager of Miton’s multi-asset fund range comments:

“Headlines were ablaze this week with the glory of the Dow Jones achieving record highs for 12 consecutive days. This is the first time in 30 years this has happened, but then 1987 did see some serious volatility in markets, with the Dow Jones falling 34% in October, despite managing to finish up over the calendar year.

“There has been some serious momentum to equity markets. No doubt a combination of the following should take some of the credit: decent corporate earnings growth, strong global economic growth and still low interest rates. The “Trump trade” is also in the mix with expectations of tax reform, a reduction in regulation and an increase in infrastructure spend all buoying markets, but this also comes with a lot of noise around policy formulation and implementation risk.

“Looking beyond the headlines, the story is more nuanced. The behaviour of equity markets had indeed been consistent with risk-on positioning for some months. For example, cyclical sectors had been outperforming defensive, and emerging markets had been outperforming developed. Meanwhile, high yield credit had been outperforming investment grade credit. However, this reversed in February this year and was accompanied by a rally in safe haven markets. Cyclicals have been outperforming defensives since the middle of 2016. The trend became less clear cut around year end and, in February this year reversed, although it’s too early to call it a new trend.

“The outperformance of cyclicals has been closely linked with bond yields moving higher. Going back further, this relationship holds pretty well, with bond markets and defensives (aka equity bond proxies) tending to move in tandem. Since the beginning of February, core government bonds have rallied, especially German bunds and UK gilts, reflecting regional differences such as heightened political risk in France (benefiting German bunds) and, in the UK, reduced expectations of a rate rise, with some signs of economic momentum slowing. US Treasuries have rallied less so, perhaps countered by stronger economic fundamentals and growing expectations of US interest rate hikes.

“So, asset classes are behaving in a broadly consistent way (with the exception of gold, which has rallied from the end of December, but gold does tend to do its own thing). The question is, why has there been a switch in market dynamics? It might simply be that markets are digesting the sharp rise in risk assets, with a healthy bit of mean reversion. Or that economic momentum is perceived to be slowing. Or that Trump needs to deliver more than a Twitter promise now and then.

“We can’t know the answers yet. So far, the economic data remains consistent with reflation, but that doesn’t mean that economically sensitive equities aren’t stretched short term. If bond yields move materially lower, or stay close to these levels, then it will likely mean that cyclicals will struggle to lead markets higher, as they have done for most of the period since the middle of 2016.

“For our part, we retain our reflation base case, and are broadly constructive on markets, with a bias to economically sensitive businesses and a preference for short duration, good quality corporate bonds. We also continue to add to our themes, such as technology healthcare, which helps to diversify our funds.”

Investing

Not company earnings, not data but vaccines now steering investor sentiment

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Not company earnings, not data but vaccines now steering investor sentiment 1

By Marc Jones and Dhara Ranasinghe

LONDON (Reuters) – Forget economic data releases and corporate trading statements — vaccine rollout progress is what fund managers and analysts are watching to gauge which markets may recover quickest from the COVID-19 devastation and to guide their investment decisions.

Consensus is for world economic growth to rebound this year above 5%, while Refinitiv I/B/E/S forecasts that 2021 earnings will expand 38% and 21% in Europe and the United States respectively.

Yet those projections and investment themes hinge almost entirely on how quickly inoculation campaigns progress; new COVID-19 strains and fresh lockdown extensions make official data releases and company profit-loss statements hopelessly out of date for anyone who uses them to guide investment decisions.

“The vaccine race remains the major wild card here. It will shape the outlook and perceptions of global growth leadership in 2021,” said Mark McCormick, head of currency strategy at TD Securities.

“While vaccines could reinforce a more synchronized recovery in the second half (2021), the early numbers reinforce the shifting fundamental between the United States, euro zone and others.”

The question is which country will be first to vaccinate 60%-70% of its population — the threshold generally seen as conferring herd immunity, where factories, bars and hotels can safely reopen. Delays could necessitate more stimulus from governments and central banks.

Patchy vaccine progress has forced some to push back initial estimates of when herd immunity could be reached. Deutsche Bank says late autumn is now more realistic than summer, though it expects the northern hemisphere spring to be a turning point, with 20%-25% of people vaccinated and restrictions slowly being lifted.

But race winners are already becoming evident, above all Israel, where a speedy immunisation campaign has brought a torrent of investment into its markets and pushed the shekel to quarter-century highs.

(Graphic: Vaccinations per 100 people by country, https://fingfx.thomsonreuters.com/gfx/mkt/azgvolalapd/Pasted%20image%201611247476583.png)

SHOT IN THE ARM

Others such as South Africa and Brazil, slower to get off the ground, have been punished by markets.

Britain’s pound meanwhile is at eight-month highs versus the euro which analysts attribute partly to better vaccination prospects; about 5 million people have had their first shot with numbers doubling in the past week.

Shamik Dhar, chief economist at BNY Mellon Investment Management expects double-digit GDP bouncebacks in Britain and the United States but noted sluggish euro zone progress.

“It is harder in the euro zone, the outlook is a bit more cloudy there as it looks like it will take longer to get herd immunity (due to slower vaccine programmes),” he added.

The euro bloc currently lags the likes of Britain and Israel in terms of per capita coverage, leading Germany to extend a hard lockdown until Feb. 14, while France and Netherlands are moving to impose night-time curfews.

Jack Allen-Reynolds, senior European economist at Capital Economics, said the slow vaccine progress and lockdowns had led him to revise down his euro zone 2021 GDP forecasts by a whole percentage point to 4%.

“We assume GDP gets back to pre-pandemic levels around 2022…the general story is that we think the euro zone will recover more slowly than US and UK.”

The United States, which started vaccinating its population last month, is also ahead of most other major economies with its vaccination rollout running at a rate of about 5 per 100.

Deutsche said at current rates 70 million Americans would have been immunised around April, the threshold for protecting the most vulnerable.

Some such as Eric Baurmeister, head of emerging markets fixed income at Morgan Stanley Investment Management, highlight risks to the vaccine trade, noting that markets appear to have more or less priced normality being restored, leaving room for disappointment.

Broadly though the view is that eventually consumers will channel pent-up savings into travel, shopping and entertainment, against a backdrop of abundant stimulus. In the meantime, investors are just trying to capture market moves when lockdowns are eased, said Hans Peterson global head of asset allocation at SEB Investment Management.

“All (market) moves depend now on the lower pace of infections,” Peterson said. “If that reverts, we have to go back to investing in the FAANGS (U.S. tech stocks) for good or for bad.”

(GRAPHIC: Renewed surge in COVID-19 across Europe – https://fingfx.thomsonreuters.com/gfx/mkt/xegvbejqwpq/COVID2101.PNG)

(Reporting by Dhara Ranasinghe and Marc Jones; Additional reporting by Karin Strohecker; Writing by Sujata Rao; Editing by Hugh Lawson)

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BlackRock to add bitcoin as eligible investment to two funds

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BlackRock to add bitcoin as eligible investment to two funds 2

By David Randall

(Reuters) – BlackRock Inc, the world’s largest asset manager, is adding bitcoin futures as an eligible investment to two funds, a company filing showed.

The company said it could use bitcoin derivatives for its funds BlackRock Strategic Income Opportunities and BlackRock Global Allocation Fund Inc.

The funds will invest only in cash-settled bitcoin futures traded on commodity exchanges registered with the Commodity Futures Trading Commission, the company said in a filing to the Securities and Exchange Commission on Wednesday.

A BlackRock representative declined to comment beyond the filings when contacted by Reuters.

Earlier this month, Bitcoin, the world’s most popular cryptocurrency, hit a record high of $40,000, rallying more than 900% from a low in March and having only just breached $20,000 in mid-December.

Bitcoin tumbled 10.6% in midday U.S. trading Thursday.

Other U.S.-based asset managers will likely follow BlackRock’s lead and add exposure to bitcoin in some form to their go-anywhere or macro strategies as the cryptocurrency market becomes more liquid and developed, said Todd Rosenbluth, director of mutual fund research at CFRA.

“It’s easy to see how strong the performance has been of late and look at a historical asset allocation strategy that would have included a slice of crypto and how returns would have been enhanced as a result,” he said. “Large institutional investors are going to be able to tap into the futures market in a way that a retail investor could not do.”

There is currently no U.S.-based exchange-traded fund that owns bitcoin, limiting the ability of most fund managers to own the cryptocurrency in their portfolios.

BlackRock Chief Executive Officer Larry Fink had said at the Council of Foreign Relations in December that bitcoin is seeing giant moves every day and could possibly evolve into a global market. (https://bit.ly/2XXFHrB)

(Reporting by David Randall; Additional reporting by Radhika Anilkumar and Bhargav Acharya in Bengaluru; Editing by Arun Koyyur and Lisa Shumaker)

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Bitcoin slumps 10% as pullback from record continues

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Bitcoin slumps 10% as pullback from record continues 3

LONDON (Reuters) – Bitcoin slumped 10% on Thursday to a 10-day low of $31,977 as the world’s most popular cryptocurrency continued to retreat from the $42,000 record high hit on Jan. 8.

The pullback came amid growing concerns that bitcoin is one of a number of financial bubbles threatening the overall stability of global markets.

Fears that U.S. President Joe Biden’s administration could attempt to regulate cryptocurrencies have also weighed, traders said.

(Reporting by Julien Ponthus; editing by Tom Wilson)

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