CONTRIBUTORS
Michael Hasenstab, Ph.D.
Portfolio Manager, Chief Investment Officer, Templeton Global Macro®
Calvin Ho, Ph.D.
Portfolio Manager, Director of Research, Templeton Global Macro
This month’s Global Macro Insights offers a comprehensive update on regional developments, along with analysis of the key opportunities and challenges shaping the current macroeconomic landscape.
Key takeaways
March overview: The Middle East conflict began in late February when the United States and Israel struck Iran, and it has dominated much of the news flow and financial market sentiment throughout March. The market reaction has evolved. Initially there was a traditional risk-off move which then turned into a selloff in core developed bond markets as oil prices surged, triggering fears of stagflation—a scenario characterized by inflation combined with stagnant or slow growth and rising unemployment. The US dollar (USD) strengthened over the course of the month, largely attributed to safe-haven flows in the wake of the conflict. The sharp rise in oil prices (between 50% to more than 60% higher over the month depending on benchmark used) led to concerns about both inflation and growth. This in turn resulted in renewed uncertainty over the path of monetary policy, and a number of central banks that held policy meetings during March highlighted the potential impacts on policy. Actual policy moves were divergent, with benchmark rates flat among most developed markets but with differing undertones, while emerging market (EM) central banks were a mix of unchanged, easing and hiking. Inflation continues to diverge somewhat among economies, but the focus has shifted to potential upward pressure from higher oil prices. The latest data on economic activity showed prior growth in the United States, the euro area revised lower, but Japan revised sharply higher. The USD strengthened in March, lifted by a safe-haven bid against the background of the conflict. Sovereign bond yields were mostly higher globally, as the rise in oil prices ignited inflation fears.
Outlook: Uncertainty remains a pervasive issue globally. For much of last year, political developments in particular countries, including elections and changing US tariff and trade policy, dominated headlines and led to uncertainty. But the most recent global events have turned geopolitics into the main source of potential instability. The latest events have raised stagflationary risks, and we acknowledge that some countries are more vulnerable to higher oil prices than others, but for now our views on developed markets remain largely unchanged. Risks have risen among EMs, but our longer-term constructive view arising from the strides forward in better policy, economic management and fundamentals over past years remains intact. The latest developments seem to confirm that the global monetary policy easing cycle is likely close to an end, and interest rate have already risen in countries like Australia and Colombia where inflation is of concern. We highlight that our thesis of “global rewiring” remains intact, and despite the geopolitical uncertainty, different economic agreements continue to proceed; latest examples include the free trade agreement (FTA) between Mercosur and the European Union (EU), which will begin on May 1, and a FTA between Australia and the EU signed in March.
WHAT ARE THE RISKS?
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Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
Currency management strategies could result in losses if currencies do not perform as expected.
Active management does not ensure gains or protect against market declines.
Diversification does not guarantee a profit or protect against a loss.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
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