Bonds Sell off as the economic outlook brightens.
World equities fell over the week as inflationary worries rose, which lead to a selloff in government bonds. 10-year US Treasury yields, which move inversely to price, hit 1.33% during the week, having started the year just above 0.90%. Confidence in the outlook for the world’s economy has been boosted by the myriad of vaccine rollout programmes, coupled with high expectations for a massive injection of fiscal stimulus in the US. Companies expected to benefit from some normalisation after COVID-19 lockdowns generated positive returns for those investors prepared to delve a little deeper.
Inflation on the increase
There were signs of inflationary pressures this week, even as costs on industrial products, as measured by the producer price index, rose higher than expected, together with final demand inflation increasing by 1.7% over the entire year versus predictions of 0.9%. Retail sales in the united states for January also came in considerably higher, increasing by 5.3% versus predictions of 1.1%.
UK Equities Look Strong
As of noon London time on Friday, global equities fell 0.5% over the week, with tech stocks dropping 1.9%. However, energy stocks advanced 1.9%, the metals and mining sector rose 2.7%, banks were up 2.4% and airlines 2.6%.
US equities fell 0.5%, Europe was down 0.1%, whilst the UK, a much more economically exposed cyclical stock market, rose 0.4% despite Sterling rallying to $1.40 and €1.15. Japanese equities fell 0.3%, and the Australian market lost 0.2%, whilst emerging markets were down 0.3%. Alongside US Treasuries, German bunds and UK gilts sold off, with the 10-year yield rising to -0.33% and 0.65%, respectively.
Industrial commodities continue to rise.
Gold sold off 2.9%, now trading at $1,770 an ounce, whilst industrial commodities continued their upward momentum, with copper and iron ore both gaining 5% over the week. Crude oil rallied strongly mid-week, with Brent hitting as high as $65 a barrel, before settling back down to $63, whilst US WTI (West Texas Intermediate) hit $62 before dropping down to $59.5.
Company survey data shows an improving outlook.
PMI (purchasing managers index) data released this week, which indicates how firms see the environment they are operating in, was stronger than forecast. All the Manufacturing PMI in Europe came in at 57.7, also 54.9 in the UK. Any number above 50 represents growth. The service sector survey was more mixed, with the PMI figures coming in at 49.7 for the UK, suggesting gentle contraction but substantially higher than forecasts of 42. Whilst for the Eurozone, it arrived in under expectations at 44.7. It was a similar film in Japan, together with fabricating coming in at 50.6 and providers 45.8. The survey data is expected to be released for the US later today.
China displaced America since the European Union’s biggest trading partner this past year, with both exports and imports rising. America remains the EU’s biggest export market (followed by Britain), but total trade between the two slumped after their respective markets contracted sharply during the pandemic.
Facebook blocked news content on its Websites in Australia and stopped people outside of the country from seeing Australian news publications on its platforms. The social-media giant took action following the Australian parliament passed a bill that would force it to pay for news content shared with its customers; the company says the law is uncertain about what constitutes “news”.
The price of Bitcoin crossed another. At one stage on Friday, the digital currency rose to a high of $54,880 per cent, a gain of over 350% in the previous six months.
UK home prices climbed 8.5% in 2020 – Reaching a listing of 252,000 in December. A property tax vacation due to finish in March contributed to the increase. Separately, Sterling reached $1.40 for the First time since April 2018 on favourable news regarding the vaccination Rollout in the united kingdom.
Topics for discussion
Whilst Markets have sold off this week as bond yields have risen, we remain constructive since the direction of travel for bond yields is expected to expectations of substantial economic expansion rather than an impending downturn. As long as bond yields do not rise too high and too quickly, this should be positive for equities, even if parts of the market are vulnerable. In cases like this, companies whose earnings have enhanced under COVID-19 may return some of their expansion as nations exit lockdown or those trading on large valuations but whose earnings are not likely to gain much from economic reflation might be exposed by faster international expansion.
Investors should be aware that a replica of the 2013 taper tantrum selloff if the US Federal Reserve asserted that it was preparing to tighten monetary policy for the first time post the financial crisis of 2008/09 is a real chance which, is possibly exacerbated by increasing expectations for President Biden’s impending fiscal injection to stoke inflationary pressures when they’re on the rise anyway.
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