Market insights

Weekly market commentary

Why we stay risk-on in the short term

­Market take

Weekly video_20240325

Wei Li

Opening frame: What’s driving markets? Market take

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Last week was a big week for central banks and the key events worked out in favor of risk assets and we are dialing up risk-taking.

Title slide: Why we stay risk-on in the short term

1: U.S. Federal Reserve

I’ll start from the Fed. They stopped [at] three cuts for this year in their dot plot, even as they revised up growth and inflations forecasts. And that very much green-lit risk assets and reinforced our view that the current positive sentiment while the bar is pretty high to disrupt that. We continue to like U.S. equities and lean into AI as a theme.

2: Bank of Japan
Now moving to the Bank of Japan, it’s really quite an example of how to do something big in the most boring way. They hiked rates for the first time in seventeen years and markets liked it. They, in fact, alleviated some of our concerns around [a] policy mishap because: number one, they really framed out a normalization path rather than a policy tightening path; and number two, they didn’t really drop yield curve control despite what they said. They also said that in case of [a] rapid rise in long-term rates they would make swift adjustments, so they merely just relaxed the yield curve control which is quite positive for risk sentiment.

And this on top of positive earnings momentum, we’re looking at 12% earnings growth for this year as opposed to consensus of 6-8%. But we bring all of this together while further upgrading Japanese equities now three times in a row now. We’ve been upgrading it to the biggest single country overweight and from a whole portfolio perspective we are using already underweight in Japanese government bonds, we bring that to even more underweight to fund this upgrade of Japanese equities.

Now [the] Bank of Japan will be still more accommodative and still buy Japanese government bonds but from a total return perspective they really compare less favorably to other asset classes in this environment.

Outro: Here’s our Market take

We stay risk on we continue to like the U.S. and Japanese equities. We think that there is still more room to go. But we are paying very close attention to inflation and earnings for any turn in momentum. But for now, we ride on.

Closing frame: Read details:

www.blackrock.com/weekly-commentary

In support of risk-taking

We see falling inflation, nearing interest rate cuts and solid corporate earnings supporting cheery risk sentiment. We tweak our tactical views and stay pro-risk.

Market backdrop

U.S. stocks hit record highs last week and 10-year yields fell as the Fed stuck with planned rate cuts. Japanese stocks gained on a cautious BOJ policy pivot.

Week ahead

U.S. PCE takes center stage this week. We see goods deflation pulling down overall U.S. inflation for now before inflation resurges in 2025.

Central bank activity last week gave markets the thumbs up to stay upbeat. That keeps us pro-risk in our six- to 12-month tactical views as Q2 starts. We see stock markets looking through recent sticky U.S. inflation and dwindling expectations of Fed rate cuts. Why? Inflation is volatile but falling, Fed rate cuts are on the way and corporate earnings are strong. We stay overweight U.S. stocks but prepare to pivot if resurgent inflation spoils sentiment. We up our overweight on Japanese stocks.

Download full commentary (PDF)

Market backdrop

U.S. stocks climbed to all-time highs last week and U.S. 10-year Treasury yields slipped after the Fed stuck to its plans to cut policy rates three times this year even after lifting both its growth and inflation forecasts for this year. We think markets are underappreciating another change: the Fed nudging up its long-run policy rate. Japan’s Nikkei stock index hit all-time highs after the BOJ ended negative rates and lifted its yield cap. Yields on Japanese 10-year government bonds dipped slightly.

This week, we focus on U.S. PCE data, the Fed’s preferred measure of inflation. We think U.S. inflation can fall further toward 2% this year due to falling goods prices. Yet we see inflation on a rollercoaster back up in 2025, with inflation eventually settling closer to 3%. The Fed appears to be slowly adjusting to this view given its higher projections for policy rates two years out.

Week ahead

The chart shows that U.S. equities are the best performing asset year-to-date among a selected group of assets, while the German 10-year Bund is the worst.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of March 21, 2024. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.

March 26

U.S. consumer confidence and durable goods; UK GDP; Japan services PPI

March 29

U.S. PCE

March 31

China manufacturing PMI

Read our past weekly market commentaries here.

 

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Meet the Authors
Wei Li
Global Chief Investment Strategist — BlackRock Investment Institute
Natalie Gill
Portfolio Strategist – BlackRock Investment Institute
Beata Harasim
Senior Investment Strategist — BlackRock Investment Institute
Yuichi Chiguchi
Head of Multi-Asset Strategies & Solutions and Chief Investment Strategist in Japan – BlackRock