Investors Pull Cash From ESG Funds As Performance Lags

Economic

Summary:

Sustainably focused equity funds suffer net $40bn of outflows in 2024, the first sustained exodus.

Global investors are turning their backs on sustainably focused stock funds, as poor performance, scandals and attacks from US Republicans hit enthusiasm for a much-hyped sector that has pulled in trillions of dollars of assets.

Clients have withdrawn a net $40bn from environmental, social and governance (ESG) equity funds this year, according to research from Barclays, the first year that flows have trended negative. Redemptions, which include a record monthly net outflow of about $14bn in April, have been widespread across all main regions.

The outflows mark a significant reversal for a sector that investors have flocked to in recent years, attracted by the claim that such funds could help change the world for the better while also making as much — or even more — money as traditional stock portfolios.

Pierre-Yves Gauthier, head of strategy and co-founder at AlphaValue, a Paris-based independent research company, compared the sector to the tech bubble that burst in 2000. “ESG was a dotcom sort of hype 20 years later and now it has passed,” he said.

Many funds have been hit by the poor performance of sectors such as clean energy, while they have also missed out on strong returns from fossil fuel companies that they actively avoided.

Scandals such as one at German asset manager DWS — which agreed to pay $19mn to the US securities regulator in a greenwashing probe after being accused of making “materially misleading statements” — have also hit appetite for the sector.

Congressional Republicans have attacked ESG investing as “radical partisan activism masquerading as responsible corporate governance”. The Republican-controlled House of Representatives has subpoenaed

BlackRock and rival State Street as part of an investigation into the sector, which they say may violate antitrust laws. BlackRock’s Larry Fink last year said he did not use the term ESG anymore “because it’s been entirely weaponised”.

Amid the backlash, US investors pulled $4.4bn from ESG equity funds in April, according to the Barclays research, which is based on data from fund tracker EPFR.

Assets in BlackRock’s largest US ESG fund have halved from $25bn at the peak in late 2021 to $12.8bn in May. Last year, the company dropped the ESG fund from its popular “60/40” model portfolio of stocks and bonds.

The largest US sustainable fund, Parnassus Core Equity, which has $28.4bn of assets, “has been one of the 10 biggest losers in terms of flows for two years straight”, Morningstar said in a report in May.

“US ESG flows are negative, and it is probably a testimony to what is happening in the context of the US with a very polarised and politicised debate around it which has frozen the behaviour on that front,” said Elodie Laugel, chief responsible investment officer at Amundi, which is the second-largest sustainable fund manager globally after BlackRock.

But the most recent data highlights that the pullback from ESG has reached Europe, the strategy’s traditional stronghold. ESG equity fund outflows in the region were $1.9bn in April.

Global investors’ appetite for ESG peaked at the end of 2021, just before Russia invaded Ukraine, leading to a surge in gas prices and fossil fuel stocks. Sharp interest rate rises by central banks in 2022 to combat inflation, meanwhile, punished high-growth technology companies, which are typically favoured by ESG funds over oil and gas businesses.

Over the past 12 months, global sustainable equity funds made an 11 per cent return, compared with 21 per cent for conventional stock funds, according to a May report from JPMorgan.

“Clearly, the fact that performance has not been good for these funds over the past two years . . . has discouraged some investors,” said Hortense Bioy, global director of sustainability research at Morningstar.

Suggesting that some ESG products might have failed to live up to their promise, Jamie Franco, global head of sustainable investments at asset manager TCW, said some funds launched in 2020-21 “probably went out a little too quickly [and] probably took advantage of some ESG marketing sentiment”.

But she added some investors continued to pursue ESG goals in separately managed accounts that were not necessarily captured by fund flow figures.

While withdrawals have hammered ESG equity funds, ESG bond funds have had 13 straight months of inflows through to April, according to Barclays. ESG bond funds have raked in $22bn this year.

Todd Cort, a professor at the Yale School of Management who specialises in sustainable investing, said that although the ESG label might increasingly fall out of use, underlying social and environmental challenges would remain.

“Behind the curtain, there will be substantially more effort by investors to understand environmental and social risks,” he said. “That will continue to grow, and I actually don’t care too much if we continue to call it ESG.”

Source:Financial Times

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Daily News

[Quick Facts]

1. U.S. ADP shows labor market slowing.

2. The U.S. services sector expanded in May.

3. The Bank of Canada cuts interest rates by 25bp.

4. The ECB may start cutting rates, but what about after that?

[News Details]

U.S. ADP shows labor market slowing

The U.S. ADP employment increased by 152,000 in May, lower than the increase in April. It was below market expectations and hit a three-month low. In addition, the April data was revised downward.

Employment in the goods manufacturing sector increased by only 3,000, a significant reduction from the previous month's 47,000. The services sector saw an increase of 149,000 jobs, of which 55,000 came from trade, logistics and utilities industries, but the number of jobs in the information industry continued to decline by 7,000.

The May data indicates that the U.S. labor market, although still solid, has softened in some districts and industries. Both U.S. job growth and wage gains have slowed since entering May.

After the data was released, swap contract pricing showed that investors still expect the Federal Reserve to cut interest rates at least once this year, in November rather than the previously forecast December. The probability of a 25 basis point rate cut in September is close to 70%, according to the CME FedWatch Tool.

The U.S. services sector expanded in May

The U.S. ISM non-manufacturing PMI rose from 49.4 in April to 53.8 in May, the highest level since last August. The business activity index surged by 10.3 points to 61.2, the biggest gain since March 2021 and the highest level since November 2022. New orders growth accelerated again after slowing in the previous two months, rising to 54.1, while a measure of services input costs eased. The employment index came in at 47.1, still in contractionary territory.

This data contrasts with the ISM manufacturing report, which showed factory activity contracted for a second straight month in May. The strong performance of the ISM non-manufacturing PMI could make policymakers more cautious about cutting interest rates.

The Bank of Canada cuts interest rates by 25bp

The Bank of Canada (BOC) cut its key policy rate by 25 basis points to 4.75% on June 5, marking the central bank's first rate cut in four years. It is also the first central bank among G7 countries to do so. BOC officials agreed that monetary policy no longer needs to be that restrictive as evidence continues to show that underlying inflation is slowing, and recent data have increased the central bank's confidence that inflation will continue to move towards its 2% target, according to the monetary policy statement.

The easing path depends on sustained progress on inflation, which is "likely to be uneven". Global tensions, faster-than-expected house price rises, and high wage growth relative to productivity are all potential risks to the economic outlook.

BOC Governor Tiff Macklem said that further rate cuts are possible as long as inflation continues to ease and officials gain more confidence that inflation is moving closer to 2%. Nonetheless, we will make rate decisions on a meeting-by-meeting basis.

Various data suggest that the Bank of Canada will not only cut interest rates faster than the Federal Reserve but may even make several rate cuts before the U.S. starts cutting rates. Currently, the market generally expects the Bank of Canada to have several more rate cuts during the year. Other major central banks cutting rates before the Fed highlights the divergence between the U.S. and other countries in terms of inflation progress and economic growth.

The ECB may start cutting rates, but what about after that?

After the Bank of Canada became the first central bank in the G7 countries to cut rates, the European Central Bank (ECB) will probably follow suit. The ECB believes inflation has been curbed, which is enough to ease the burden on the economy. ECB officials recently have shown more confidence that they can lower rates in June. This has led the market to bet that the ECB will cut rates at the June meeting.

However, what will happen after the June rate cut remains uncertain, which is what the market is focusing on. ECB officials are divided on this issue. Many officials have become more cautious after data showed stronger-than-expected economic growth and wage gains as well as high inflation.

[Focus of the Day]

UTC+8 13:45 Switzerland Unemployment Rate (May)

UTC+8 20:15 ECB June Interest Rate Decision

UTC+8 20:45 ECB President Christine Lagarde Holds Monetary Policy Press Conference

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Owen Li

Economic

Central Bank

After being held at a peak of 4% for nine months, analysts polled by Bloomberg almost unanimously predict that the deposit rate will be reduced by a quarter-point to 3.75% on Thursday — a step ECB officials have widely telegraphed in recent weeks.

Despite a bumpier retreat in price growth toward the 2% goal, President Christine Lagarde declared in May that inflation in the 20-nation euro zone is “under control” following its historic spike. That's put the ECB on course to loosen monetary policy before either the Federal Reserve or the Bank of England, where the problem is proving more stubborn.

Where the ECB goes from here is unclear, with views becoming more cautious in the wake of data showing stronger-than-anticipated economic growth, inflation and wage increases. While most economists reckon there'll be three rate cuts this year, investors have pared back their expectations and are only fully pricing two.

Lagarde will discuss the situation at a 2:45 p.m. briefing in Frankfurt — 30 minutes after the ECB's policy announcement.

Interest Rates

Officials have fueled long-standing expectations of this week's 25 basis-point cut. Even hawkish Governing Council members like Bundesbank President Joachim Nagel and Executive Board member Isabel Schnabel have maintained that there are sufficient grounds for such a move.

That level of commitment has raised some eyebrows following the recent batch of economic reports.

“If they were consistent with their reaction function, they should actually be holding this week,” said Soeren Radde, an economist at Point72. “Which tells you that it's a political compromise they came up with.”

Anatoli Annenkov, an economist at Societe Generale, called the latest data “not unambiguously supportive of policy easing, leaving a question mark as to why policymakers have been so focused on June, already since early this year.”

What Bloomberg Economics Says...

“The ECB will almost certainly lower rates by 25 basis points on June 6. The focus at the press conference is likely to be on what will happen in the months ahead. President Lagarde is unlikely to explicitly signal another move in July, but she may give a gentle nod to more action in September.”

Some have spoken out against a second straight cut in July, though Bank of France Governor Francois Villeroy de Galhau wants that option to remain available and Italy's Fabio Panetta argues that policy will remain tight even after several cuts.

The focus is increasingly on the quarterly meetings for which fresh economic projections are produced — June, September and December — because that's also when more of the relevant data on wages, corporate profits and productivity is available, as Dutch central-bank chief Klaas Knot has stated.

New Forecasts

Economists don't expect material shifts in this round of ECB forecasts, which they reckon will again show inflation returning to target in 2025. There may be an upward revision for growth this year, however, after first-quarter gross domestic product topped estimates.

One figure to watch is core inflation for 2026, which is currently seen at 2%. An increase may be taken as a signal that the bar for further monetary easing is high.

Another wrinkle is that these projections are put together by national central banks, alongside ECB staff. In the past, “there has been a sense” that this setup can lead to more hawkish outcomes, according to JPMorgan economist Greg Fuzesi.

Global Backdrop

While the ECB looked set to diverge from the Fed until recently, the stickiness of some inflation categories in Europe is prompting comparisons to the challenge faced by officials on the other side of the Atlantic.

US policymakers have to had to rethink monetary loosening after price gains surpassed expectations, even if traders are still hopeful of a rate cut this year. The Bank of England is also unlikely to cut this month, while the Bank of Canada did so on Wednesday.

Within Europe but outside of the euro zone, Sweden's Riksbank and the Swiss National Bank are among those to have already begun to ease policy.

Source: Bloomberg

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Alex

Economic

Commodity

For years, market participants have been lamenting the lack of detailed communication from OPEC+ on the group's intended production beyond the following three months. This weekend, the alliance gave them a full timetable of planned production levels until September 2025. The oil bulls were disappointed.

The key disappointment was the plan to start unwinding some of the extra voluntary production cuts as early as October this year.

While OPEC+ extended most output reductions into 2025, it said it could begin unwinding some voluntary cuts after the end of the third quarter of 2024—subject to market conditions.

Most analysts see the OPEC+ alliance's announcement this weekend as bearish for oil prices toward the end of the year because of the plan to begin unwinding the cuts. But most analysts don't think there would be market conditions for the group to begin gradually adding supply in the fourth quarter of 2024.

OPEC+'s announcement of a detailed plan for its production well into 2025 coincided with a bearish sentiment that had already taken hold of the market, stemming from fears of weaker-than-expected oil demand in the near term.

The prospect of sluggish demand growth below OPEC's estimates of 2.25 million bpd growth in 2024, coupled with the plan to potentially start tapering the cuts as early as this year and a 300,000-bpd boost to the UAE's quota next year, sent oil prices tumbling this week.

Oil hit a four-month low, and Brent Crude prices slipped below $80 per barrel for the first time since early February.

Goldman Sachs said that the OPEC+ plan to start bringing back some production is negative for oil prices as it shows producers' desire to pump more crude as soon as the market conditions allow.

"The communication of a surprisingly detailed default plan to unwind extra cuts makes it harder to maintain low production if the market turns out softer than bullish OPEC expectations," analysts at Goldman Sachs wrote in a note carried by Reuters.

"As a result of the bearish meeting, and given recent upside surprises to inventories relative to our expectations, we now see the risks to our $75-90 range for Brent as skewed to the downside," Daan Struyven, head of oil research at Goldman Sachs, said.

TD Securities commodity strategist Ryan McKay wrote in note cited by Bloomberg, "The easing of supply risk premia has already been weighing on prices and spreads, and the OPEC agreement has done little to turn that tide."

Mukesh Sahdev, Senior Vice President and Head of Oil Trading/Downstream Solution at Rystad Energy, commented that, "The bottom line is that the OPEC+ math does appear to be an OPAQUE math."

"It is fair to acknowledge that OPEC+ effort is commendable in keeping oil prices in a stable range despite geopolitical rifts in a super election year," Sahdev added.

However, OPEC+ is likely to consider fundamentals beyond the third quarter, and it is "unlikely to find support to unwind cuts in near term."

Third-quarter demand and market balances could be tempting for a reversal of the cuts from October, but OPEC+ is likely to consider balances for Q4 and beyond, Sahdev says. These balances, according to Rystad Energy, are expected to be flat demand growth in the last quarter of the year, a decline in crude demand at refineries, and nearly 1 million bpd growth in non-OPEC+ supply.

"2025 fundamentals do not provide a strong signal for an OPEC+ strategy reversal," Sahdev noted.

Helima Croft, head of global commodity strategy at RBC Capital Markets, said the market shouldn't get too bearish on the OPEC+ announcement as the cut reversal is subject to market conditions and may not begin this year at all.

"While any signal to add back barrels will be seized on by market bears, we think it is important that the taper timeline execution will be data dependent and subject to review at summer's end," Croft wrote in a note carried by MarketWatch.

RBC Capital Markets sees the OPEC timeline "as something of an aspirational taper schedule, not a binding course of action," the strategist added.

The sell-off in oil this week is overdone, ING's commodities strategists Warren Patterson and Ewa Manthey wrote in a Wednesday note.

"The decision from OPEC+ warrants relatively more weakness further along the forward curve (we currently see a small surplus in 2025 with the gradual return of OPEC+ supply), but speculative money will be largely positioned in the nearby prompts," they said.

Technical signals also suggest that the oil market is now entering oversold territory, but weakness in refinery margins remains a concern for the market, ING reckons.

Source:Oilprice

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Kevin Du

Economic

Forex

The euro gained 0.07% to $1.0876, as traders looked ahead to the ECB meeting later in the global day for guidance on the bank's rate outlook.

While policymakers have telegraphed an intention to lower borrowing costs this month, they have remained reticent on how soon subsequent cuts could come.

"The Governing Council's rationale will likely be driven by a stronger-than-expected recovery in (business) activity and increased confidence that inflation will return to the targeted level," said market strategist Henk Potts at Barclays Private Bank.

"Beyond the June meeting, we forecast that we could see quarter-point cuts in September and December."

In the broader market, the U.S. dollar was on the back foot, weighed in part by easing labour market conditions in the United States which added to the case for Fed rate cuts this year.

Markets have priced in nearly 50 basis points of Fed rate cuts this year, with the first expected to come in September.

Data on Wednesday showed the U.S. services sector switched back into growth mode in May after a short-lived contraction the month before, though details of the survey pointed to employment remaining in contraction territory.

"While new orders suggest continued demand, the selected industry comments and continued employment contraction reveal a touch of caution among service-providers," said economists at Wells Fargo.

Against the U.S. dollar, the kiwi touched a three-month top of $0.6201, while sterling rose 0.09% to $1.2800 and the Aussie edged 0.25% higher to $0.6664.

The dollar index eased 0.14% to 104.10.

YEN RISES

The yen nursed some of its losses from the previous session and rose 0.4% to 155.50 per dollar.

The Japanese currency had a brief rally earlier in the week following turbulence in emerging markets owing to political worries, which sent investors unwinding positions in yen-funded carry trades.

In a carry trade, an investor borrows in a currency of a country with low interest rates and invests the proceeds in a higher-yielding currency.

A strong election victory for Mexico's ruling party sparked concern about disputed constitutional reform, resulting in a squeeze on long peso/short yen positions, which has been a favourite among carry trades.

The peso was last little changed against the yen, following a 2.6% gain in the previous session. It had fallen roughly 6% against the Japanese currency at the start of the week, in the wake of Mexico's election results.

Adding to yen gains were expectations of the Bank of Japan (BOJ) scaling back its massive bond purchases as early as this month, as it works to normalise monetary policy.

The BOJ will hold its two-day monetary policy meeting next week.

"A greater influence was headlines that the BOJ might look to cut back on bond purchases in the June BOJ meeting," said Chris Weston, head of research at Pepperstone.

BOJ Governor Kazuo Ueda kept a near-term tapering of the bank's huge bond buying on the table as he said this week the BOJ's basic stance is to allow market forces to set long-term interest rates.

"This was almost a momentum play from the Japanese central bank - that is, add in JPY positive news flow when funding currencies - JPY and CHF - were already being covered and bought back, and the result was the JPY rally gaining additional legs," said Weston.

Source: Reuters

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Glendon

Economic

Silver, the precious metal with a rich history and diverse applications, has long been a sought-after investment asset. As investors navigate the ever-changing financial landscape, keeping a close eye on the silver price today is crucial for making informed decisions. In this article, we'll explore the current trends, factors influencing silver prices, and potential investment opportunities.

Current Silver Price and Market Trends

According to real-time data from Tako Search, as of May 1, 2024, the silver spot price per troy ounce stands at $29.36. This figure represents the current market value of unrefined silver, excluding any premiums or manufacturing costs.

Over the past month, the silver price has exhibited a notable upward trend, rising by 9.34%. However, it's essential to note that silver prices can be volatile, and short-term fluctuations are common. Investors should consider both historical trends and current market conditions when evaluating silver as an investment opportunity.

Factors Influencing Silver Prices

Several factors contribute to the fluctuations in silver prices, including:

Industrial Demand: Silver has numerous industrial applications, ranging from electronics and solar panels to medical devices and water purification systems. Increased demand from these sectors can drive up silver prices, while a slowdown in industrial activity can have the opposite effect.

Investment Demand: Silver is often viewed as a safe-haven asset and a hedge against inflation and economic uncertainty. During times of market volatility or geopolitical tensions, investors may flock to precious metals like silver, driving up demand and prices.

Supply and Mining: The supply of silver is influenced by mining activities and recycling efforts. Disruptions in mining operations, changes in production levels, or discoveries of new silver deposits can impact the overall supply and, consequently, the price.

Currency Fluctuations: As a globally traded commodity, silver prices are influenced by currency exchange rates. A stronger U.S. dollar can make silver more expensive for international buyers, potentially dampening demand and lowering prices.

Government Policies and Regulations: Government policies, trade agreements, and regulations related to mining, taxation, and environmental concerns can affect the silver market and influence prices.

Investing in Silver

Investors can gain exposure to silver through various investment vehicles, each with its own advantages and considerations:

Physical Silver: Purchasing physical silver in the form of coins, bars, or rounds is a popular investment option. It offers direct ownership and the ability to hold a tangible asset. However, storage and insurance costs should be factored in.

Silver ETFs and Funds: Exchange-traded funds (ETFs) and mutual funds that track the price of silver provide a convenient way to invest in the metal without the need for physical storage. These products offer liquidity and diversification but may involve management fees.

Silver Mining Stocks: Investing in shares of silver mining companies can provide exposure to the silver market, but the performance of these stocks may not always correlate directly with silver prices.

Silver Futures and Options: Futures contracts and options on silver allow investors to speculate on price movements or hedge their positions. However, these instruments involve higher risk and require a thorough understanding of derivatives trading.

Silver as an Inflation Hedge

One of the key reasons investors consider silver is its potential to act as an inflation hedge. Historically, silver prices have tended to rise during periods of high inflation, as the metal's value retains its purchasing power better than fiat currencies.

However, it's important to note that silver's performance as an inflation hedge can vary depending on the time frame. Over longer periods, measured in decades or centuries, silver has proven to be an effective hedge against inflation. In shorter time frames, however, its effectiveness may be less consistent.

Conclusion

The silver price today reflects a complex interplay of various factors, including industrial demand, investment sentiment, supply dynamics, and global economic conditions. While silver can be a valuable addition to a diversified investment portfolio, it's crucial for investors to conduct thorough research, understand the risks involved, and align their investment strategies with their financial goals and risk tolerance.

By staying informed about current silver prices, market trends, and the factors influencing the precious metal's value, investors can make more informed decisions and potentially capitalize on opportunities in the silver market.

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Thomas

Economic

Forex

Bank of Japan in the Spotlight

On Thursday (June 6), Bank of Japan Board member Toyoaki Nakamura could influence buyer appetite for the USD/JPY.

Recent economic indicators support more meaningful Bank of Japan discussions about interest rate hikes. In April, average cash earnings increased 2.1% year-on-year after an increase of 1.0% in March. The April numbers reflected the outcome of the spring wage negotiations, also known as Shunto.

Higher wages may increase disposable income, fueling consumer spending and demand-driven inflation. The BoJ could hike interest rates to deliver price stability.

Additionally, the Jibun Bank Services PMI fell modestly from 54.3 to 53.8 in May, up from a preliminary PMI of 53.6. The rate of job creation was among the most marked since 2007, while input price inflation softened from an eight-month high in April.

Reactions to the latest economic data will need consideration, with support for a nearer-term rate hike likely to drive buyer demand for the Yen,

Beyond the stats, views on the effects of a weak Yen on the Japanese economy will also attract investor attention. On Tuesday (June 4), BoJ Deputy Governor Ryozo Himino reportedly highlighted the effects of Yen trends on the Japanese economy, saying,

“Exchange-rate fluctuations affect economic activity in various ways. It also affects inflation in a broad-based and sustained way, beyond the direct impact on import prices.”

His comments suggested that sustained weakness in the Yen could influence the BoJ interest rate trajectory.

There are no stats from Japan to consider on Thursday, as investors await household spending numbers for April (Fri).

US Economic Calendar: US Labor Market in the Spotlight

Later in the session on Thursday, US labor market data will warrant investor attention.

Economists forecast initial jobless claims to increase from 219k to 220k in the week ending June 1. According to preliminary numbers, unit labor costs and nonfarm productivity rose by 4.9% and 0.1% in Q1 2024.

An unexpected spike in jobless claims could raise investor bets on a September Fed rate cut. Weaker labor market conditions could affect wage growth and reduce disposable income. Downward trends in disposable income could impact consumer spending, dampening demand-driven inflation. The net effect could be a less hawkish Fed interest rate trajectory.

Unless there are marked revisions to the preliminary unit labor cost and nonfarm productivity figures, the jobless claims will likely impact the USD/JPY more.

On Wednesday (June 5), the US ISM Services PMI beat forecasts, surging from 49.4 to 53.8 in May. However, the ISM Services Employment Index rose from 45.9 to 47.1, signaling a continued contraction, albeit at a less marked rate. Additionally, the ADP reported a softer-than-expected increase in private payrolls. The reports suggested a weakening US labor market environment.

Short-term Forecast

Near-term trends for the USD/JPY will hinge on household spending numbers from Japan and the US Jobs Report. A jump in household spending and weaker-than-expected US wage growth figures would likely impact buyer demand for the USD/JPY. Nevertheless, interest rate differentials firmly favor the US dollar.

USD/JPY Price Action

Daily Chart

The USD/JPY sat comfortably above the 50-day and 200-day EMAs, affirming the bullish price signals.

A USD/JPY break above the 156.500 level could give the bulls a run at the 158 level. Furthermore, a USD/JPY return to the 158 level would support a move toward the April 29 high of 160.209.

Investors should consider Bank of Japan commentary and US labor market data.

Conversely, a USD/JPY fall through the 155 handle would bring the 50-day EMA into play. A drop below the 50-day EMA could signal a fall toward the 151.685 support level.

The 14-day RSI at 50.67 suggests a USD/JPY return to 160 before entering overbought territory.