Weekly Market Update: Rational Exuberance
Mon 12 Apr 2021
Markets opened positively this week thanks to the impact of stronger than anticipated US payrolls data released over the bank holiday. Meanwhile, the EU vaccination campaign is finally beginning to pick up pace. US equities rose +3.4% in Sterling terms, reaching further record highs. UK equities rose +2.7% in the final week before the second phase of lockdown easing. European equities rose +3.2% in Sterling terms, supported by the increased likelihood of fiscal stimulus in the region. Emerging market equities fell in local currency terms, but gained +0.1% in Sterling terms. Globally, the best performing sector was information technology, whilst energy was the worst performing. The US 10Y treasury yield fell slightly down 6.3 bps to 1.7%, while the UK 10Y gilt yield fell 2.1 bps to 0.8%. Gold rose +1.6% last week. Oil fell for the second week, down -2.8% to $59. Oil has fallen almost -20% from its earlier surge, driven partly by a more challenging route out of the pandemic than originally forecast.
The second quarter of 2021 is projected to be the polar opposite of the same quarter in 2020, when the global economy experienced its worst performance in modern times.
Global output is improving markedly. The UK is reaching critical herd immunity levels while the US and Europe are now ramping up Covid-19 vaccinations, allowing G7 economies to confidently begin reopening in the next few weeks. Employment data is consistently good, especially in the US, suggesting that post-stimulus unemployment rates may well be manageable. Weaker than average confidence amongst consumers and businesses leaves room for further improvement. Meanwhile, the US Federal Reserve remains skeptical of the nature of the recovery, as it feels the global economy will remain out of sync for some time, leaving a lot of slack for the economy and thus long inflation pressures muted.
It is no surprise then that last week saw global equity prices soar to new highs, while the bond yield rally seems to have stopped for now, with the US 10-year treasury unable to break the 1.75% mark for almost a month. Both equities and bonds rising is not just due to the help of the Federal Reserve but also because of the different time horizons of their investors. This stage of the recovery, the initial rebound, is good for equities which rally on the good economic news as analysts can place more faith in companies generating the income to justify their current valuations. Longer term economic weakness affects the bond market more, as fixed income traders really care about the willingness of the central banks to keep their fingers on the scale, against a backdrop of an uneven and unbalanced recovery throughout the year.
David Baker, CIO