The US Institute of Supply Management announced their latest results for the services sector last week which came in above expectations at 63.7 (with any number above 50 indicating expansion) and at an all-time high, pushing equity markets higher. On the flip side, this was combined with an unexpected rise in new US jobless claims, pointing towards an uneven economic recovery, and allowing bond yields to fall (yields move inversely to price).
The IMF said that it now thinks the world economy shrank by 3.3% last year, less than it had feared, mainly because of the huge stimulus packages that propped up many developed economies. It raised its forecast for growth this year to 6%, as rich countries emerge from the pandemic with “smaller scars” than from the financial crisis of 2008.
As of noon London time on Friday, tech stocks, which have suffered selling pressure this year in anticipation of the reopening of economies, have led the way, with the global technology sector rising by 3.5% over the week. The US equity market increased by 1.9%, European equities 1.2% and UK stocks 2.8%. Japanese equities declined by 0.6%, not helped by a rise in coronavirus cases because of their slow vaccine rollout programme. Australian equities were up 2.4%, supported by the metals and mining sector which rose by 3.5%.
Emerging markets increased by 0.4%, whilst Chinese equities fell by 1.0% despite the latest Caixin Purchasing managers Index for services, considered a good lead indicator for the health of the services sector, exceeding expectations, coming in at 54.3. Investors also took note of a report in the Financial Times that the People’s Bank of China has asked banks to limit lending in a bid to cool the country’s bubbling property market. Chinese equities have suffered this year as monetary support is expected to tighten as the economy is one of the few to have grown last year, and investors see more opportunities elsewhere.
TechnologyFirmsOnThese
The swift containment of Covid-19 and the rise of technology firms in China plus saw Beijing replace New York as the city with the most billionaires; according to the annual Forbes rich list, the Chinese capital added 33 billionaires last year and now hosts 100 compared to the 99 living in New York City. A record 493 newbies joined the list globally last year, roughly one new billionaire every 17 hours.
US Treasury 10-year yields fell further this week, touching 1.62%, having been as high as 1.77% at the end of March. They are currently trading at 1.66%. The Federal Reserve continued to emphasise its accommodative approach to monetary policy and pointed out the risks of stronger inflation as equally balanced against the risks of weak inflation. 10-year German bunds are currently trading at -0.30% and equivalent UK gilts at 0.79%.
Precious and industrial metals both rose this week, thanks to a weaker US dollar. Gold was up by 1.1%, now trading at $1,748 an ounce, copper increased by 2.2% and Iron ore 3.9%. Crude oil fell, with Brent currently trading at $63.1 a barrel and US WTI (West Texas Intermediate) $59.6. OPEC and Russia agreed to gradually increase oil production from May for three months. Saudi Arabia had resisted the move, arguing that prices are still volatile.
Bitcoin Mining Becomes To Costly
According to new research Bitcoin mining in China is so carbon-intensive that it could threaten the country’s emissions reduction targets. China wants its emissions to peak in 2030 and has plans to be carbon neutral by 2060. Currently, China accounts for more than 75% of bitcoin mining around the world with rural areas a popular destination among bitcoin miners, due to cheaper electricity prices and the availability of land to house the servers. By 2024, it’s estimated that China’s bitcoin operations will exceed the total energy consumption of Italy and Saudi Arabia and would rank 12th among nations.
Next month, investors will be eagerly awaiting the release of inflation data for April, which is expected to show a material pickup, given that it is a year-on-year number and last April many western economies were in lockdown. This much is widely expected, however, what happens after offers up some very mixed opinion.
One very well-respected US investment house expects any rise in inflation to be short-lived as the deflationary forces of demographics, globalisation, and technology re-exert themselves thereafter. Another believes the effect of the US government posting out significant sums of cash support, combined with a US consumer who has been oppressed for the last year, is likely to lead to a jump in US inflation that will then remain with us for at least the remainder of the year.
Either way, for as long as Covid vaccine rollout programmes continue to be a success, we believe global growth will be strong, and much stronger than what we have become accustomed to, and consequently, this should benefit economically sensitive stocks to a much greater extent.
Value, or economically sensitive stocks, so far this year, have only really benefitted when bond yields are rising, which is a signal that the bond markets are expecting stronger inflation as a result of stronger growth. However, value historically did not need bond yields to rise to outperform, yet that has been the experience since the financial crisis of 2008/09. We wonder whether the value will once again be able to outperform based on improving company fundamentals and not just the direction of bond yields.
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