This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

Taking Advantage of Volatility

BlackRock

Contributor:
BlackRock
Visit: BlackRock

Key points

  • Risk opportunities: We could see more temporary risk-off episodes in light summer trading, and would view them as opportunities to re-adjust portfolios to a pro-risk stance.
  • Dovish ECB: The European Central Bank delivered a dovish tilt in its guidance on interest rates, likely to be followed by an increase in its asset purchases.
  • Fed watch: All eyes will be on the Federal Reserve’s policy meeting this week, with the central bank unlikely to flag an imminent tapering of asset purchases.

Market volatility is on the rise, as worries about new virus strains have been exacerbated by stretched positioning and light summer trading. Recent swings in market sentiment reflect the unusually wide range of potential outcomes beyond the current economic restart, in our view. Market overreactions may create opportunities to readjust portfolios to a pro-risk stance as we maintain high conviction in our new nominal investment theme that implies low real yields.

Negative real yields underpin equities

Sources: BlackRock Investment Institute, with data from Refinitiv DataStream, July 2021. Notes: The purple line represents the nominal 10-year U.S. Treasury yield. The yellow line is the real, or inflation-adjusted, yield. The red line is the 10-year breakeven inflation rate, or the average inflation rate over the next decade implied by the pricing of Treasury Inflation-Protected Securities. Indexes are unmanaged. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest in an index.

Market sentiment has been swinging between extremes: One week the concern is runaway inflation; the next it’s the prospect of a deflationary spiral. Most recently, bond markets appear to have ignored the latest strong U.S. employment and inflation data, and are focusing more on virus fears. Real, or inflation-adjusted, yields have dropped back toward historic lows, as the chart shows. The drop in nominal yields was likely exacerbated by foreign buying and short covering – or investors forced to close out bets that yields would head higher. Shifting sentiment drove equity market volatility too – with large sectoral moves that quickly reversed.

The big picture: We believe these swings are to be expected, given the wide range of potential outcomes beyond the current restart of economic activity. In a noisy and unprecedented economic restart, having an anchor is all the more important. We stick to our new nominal investment theme: Major central banks are slower to respond to rising inflation than in the past, keeping nominal bond yields lower and real rates negative – a positive for risk assets.

We believe the powerful restart of economic activity remains the key story for markets, and it’s too early to make the determination that new virus strains will derail this. The evidence on vaccines is still consistent with their expected effectiveness, in our view, as reflected in hospitalizations significantly lagging the recent rise in cases due to the delta variant. Rising cases in the U.S. are to be expected – given the swift reopening and the emergence of the delta variant. The increase in cases in Europe has come quicker than many foresaw, yet pressure on hospitals is limited so far. The UK remains a test case to monitor — and we are watching for a decline in the rate of growth of new cases after a recent spike. Asian and emerging market economies struggling with vaccination rollouts are suffering most in terms of health outcomes and mobility restrictions. Yet vaccines remain the way out, barring vaccine-resistant variants or new evidence on vaccine effectiveness, in our view. Stay up-to-date with our Covid tracker.

While virus dynamics are uncertain, we remain confident that the policy paradigm has changed: many central banks are now attempting in different ways to overshoot inflation targets to make up for past misses. Our analysis suggests the drop in yields since May was primarily due to a decline in the term premium – the additional compensation that investors demand for moving further out the yield curve in duration. This represents a partial unwinding of a spike in the term premium seen since mid last year. We have also seen a reversal in market expectations of the U.S. “terminal” rate – or the neutral rate consistent with the Fed’s objectives. Markets are pricing in around four quarter percentage point rate hikes by 2025, roughly half what they priced in April – moving back toward our new nominal theme.

The bottom line? We believe the economic restart is real – but it is a restart, and will eventually taper back to the pre-covid trend. We see nominal yields rising far less in response to inflation than during similar episodes in the past. Yet still believe the direction of travel should be higher for nominal yields – and this is why we remain underweight Treasuries and government bonds overall, both on a tactical and strategic basis. Negative real interest rates provide a positive backdrop for equities, in our view. Markets may overreact to economic data and other news flow with thin liquidity in the summer, amid an unusually wide range of macro outcomes, in our view. Yet for now we see the restart intact and the new nominal holding – and would consider any temporary sell-offs as opportunities to readjust portfolios into a pro-risk stance.

Download the full commentary

Click here to read the full article

Originally Posted on July 19, 2021 – Taking Advantage of Volatility

© 2021 BlackRock, Inc. All rights reserved.

General disclosure:  This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of July 26, 2021 and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks.

In the U.S. and Canada, this material is intended for public distribution. In EMEA  Until 31 December 2020, issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 2020394, has issued this document for access by Professional Clients only and no other person should rely upon the information contained within it. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorized activities conducted by BlackRock. From 1 January 2021, in the event the United Kingdom and the European Union do not enter into an arrangement which permits United Kingdom firms to offer and provide financial services into the European Union, the issuer of this material is:(i) BlackRock Investment Management (UK) Limited for all outside of the European Union; and(ii) BlackRock (Netherlands) B.V. for in the European Union, BlackRock (Netherlands) B.V. is authorized and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. In Switzerland, for qualified investors in Switzerland: This document is marketing material. Until 31 December 2021, this document shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”), as amended. From 1 January 2022, this document shall be exclusively made available to, and directed at, qualified investors as defined in Article 10 (3) of the CISA of 23 June 2006, as amended, at the exclusion of qualified investors with an opting-out pursuant to Art. 5 (1) of the Swiss Federal Act on Financial Services (“FinSA”). For information on art. 8 / 9 Financial Services Act (FinSA) and on your client segmentation under art. 4 FinSA, please see the following website: www.blackrock.com/finsa. For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the “Advice Law”), nor does it carry insurance thereunder. In South Africa, please be advised that BlackRock Investment Management (UK) Limited is an authorized financial services provider with the South African Financial Services Board, FSP No. 43288. In the DIFC this material can be distributed in and from the Dubai International Financial Centre (DIFC) by BlackRock Advisors (UK) Limited — Dubai Branch which is regulated by the Dubai Financial Services Authority (DFSA). This material is only directed at ‘Professional Clients’ and no other person should rely upon the information contained within it.  Blackrock Advisors (UK) Limited – Dubai Branch is a DIFC Foreign Recognised Company registered with the DIFC Registrar of Companies (DIFC Registered Number 546), with its office at Unit 06/07, Level 1, Al Fattan Currency House, DIFC, PO Box 506661, Dubai, UAE, and is regulated by the DFSA to engage in the regulated activities of ‘Advising on Financial Products’ and ‘Arranging Deals in Investments’ in or from the DIFC, both of which are limited to units in a collective investment fund (DFSA Reference Number F000738).   In the Kingdom of Saudi Arabia, issued in the Kingdom of Saudi Arabia (KSA) by BlackRock Saudi Arabia (BSA), authorized and regulated by the Capital Market Authority (CMA), License No. 18-192-30. Registered under the laws of KSA. Registered office: 29th floor, Olaya Towers – Tower B, 3074 Prince Mohammed bin Abdulaziz St., Olaya District, Riyadh 12213 – 8022, KSA, Tel: +966 11 838 3600. The information contained within is intended strictly for Sophisticated Investors as defined in the CMA Implementing Regulations. Neither the CMA or any other authority or regulator located in KSA has approved this information. The information contained within, does not constitute and should not be construed as an offer of, invitation or proposal to make an offer for, recommendation to apply for or an opinion or guidance on a financial product, service and/or strategy. Any distribution, by whatever means, of the information within and related material to persons other than those referred to above is strictly prohibited. In the United Arab Emirates this material is only intended for -natural Qualified Investor as defined by the Securities and Commodities Authority (SCA) Chairman Decision No. 3/R.M. of 2017 concerning Promoting and Introducing Regulations. Neither the DFSA or any other authority or regulator located in the GCC or MENA region has approved this information. In the State of Kuwait, those who meet the description of a Professional Client as defined under the Kuwait Capital Markets Law and its Executive Bylaws.  In the Sultanate of Oman, to sophisticated institutions who have experience in investing in local and international securities, are financially solvent and have knowledge of the risks associated with investing in securities.  In Qatar, for distribution with pre-selected institutional investors or high net worth investors.  In the Kingdom of Bahrain, to Central Bank of Bahrain (CBB) Category 1 or Category 2 licensed investment firms, CBB licensed banks or those who would meet the description of an Expert Investor or Accredited Investors as defined in the CBB Rulebook. The information contained in this document, does not constitute and should not be construed as an offer of, invitation, inducement or proposal to make an offer for, recommendation to apply for or an opinion or guidance on a financial product, service and/or strategy.  In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.  In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. In South Korea, this material is for distribution to the Qualified Professional Investors (as defined in the Financial Investment Services and Capital Market Act and its sub-regulations). In Taiwan, independently operated by BlackRock Investment Management (Taiwan) Limited. Address: 28F., No. 100, Songren Rd., Xinyi Dist., Taipei City 110, Taiwan. Tel: (02)23261600. In Japan, this is issued by BlackRock Japan. Co., Ltd. (Financial Instruments Business Operator: The Kanto Regional Financial Bureau. License No375, Association Memberships: Japan Investment Advisers Association, the Investment Trusts Association, Japan, Japan Securities Dealers Association, Type II Financial Instruments Firms Association.) For Professional Investors only (Professional Investor is defined in Financial Instruments and Exchange Act). In Australia, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975 AFSL 230 523 (BIMAL). The material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. In China, this material may not be distributed to individuals resident in the People’s Republic of China (“PRC”, for such purposes, excluding Hong Kong, Macau and Taiwan) or entities registered in the PRC unless such parties have received all the required PRC government approvals to participate in any investment or receive any investment advisory or investment management services. For Other APAC Countries, this material is issued for Institutional Investors only (or professional/sophisticated /qualified investors, as such term may apply in local jurisdictions). In Latin America, for institutional investors and financial intermediaries only (not for public distribution). No securities regulator within Latin America has confirmed the accuracy of any information contained herein. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx

Not FDIC Insured | May Lose Value | No Bank Guarantee

© 2021 BlackRock, Inc. All Rights Reserved. BLACKROCKiSHARES and ALADDIN are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

BIIM0721U/M-1736077

Disclosure: BlackRock

©2021 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from BlackRock and is being posted with permission from BlackRock. The views expressed in this material are solely those of the author and/or BlackRock and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Disclosure: Margin Trading

Trading on margin is only for sophisticated investors with high risk tolerance. You may lose more than your initial investment.

For additional information regarding margin loan rates, see ibkr.com/interest

trading top