Equities in most major markets posted minor gains last week with global stocks up +0.3% in Sterling terms, as inflation concerns seem to have stemmed a previously strong investor sentiment. US stocks were up +0.2% as multi-year high inflation data offset positive news on employment data. EU stocks were up +0.2%, despite Covid-19 cases surging in most countries in the region. UK stocks were up +0.7% while EM equities rose by +2.2%, driven by China’s announcement that it would propose easing measures to aid indebted real estate firms. The US 10Y Treasury yield was up 11.0bps finishing the week at 1.561%, while the UK 10Y yield was up 6.9bps reaching 0.914%. In US Dollar terms gold posted solid gains for the second week in a row, up +3.1%, while oil was down -0.1% to $80.4 per barrel.
CIO Analysis
Inflation concerns dominate the discussion after last week’s surprise 6.2% yearly rise of goods in the United States. European numbers also picked up, with Germany, the manufacturing heartland of Europe and historically an inflation-phobe, registering the highest inflation numbers in more than two decades.
Numbers themselves are useless, of course, if they are not broken down. While year-on-year US inflation has hit 6.2%, since October 2019, prices in the US have risen 3.6% per annum. This of course is still close to twice the Fed’s target of 2%. Excluding food and energy, the bi-annual rate is closer to 3%. Around a tenth of the weight is due to sharp rises in the costs of new cars and trucks, which have risen more than 12% per annum. Deduct just this one category, plus energy and food, and average-two year inflation would be closer to a much more acceptable 1.9%-2%.
This 6.2% headline number is highly focused on energy and car prices. And while these are very real costs for consumers there is precious little central banks can do about them. With supply chains stretched to the point of breaking and possibly beyond, demand for manufacturing goods has been erratic and based on availability. Scarcity only drives up demand itself (“I may need one item X now, but if there are only a few available, I might as well order two to cover future needs”). Just-in-time inventories have given way to a good-old-fashioned stocking-restocking cycle and without the availability of warehouses, congested ports have taken their place, causing even more congestion. This has caused energy and transportation costs to soar. The supply chain problem is so sprawling that it would take a centralised global approach to address. Unfortunately, the Covid-19 crisis has only exacerbated geopolitical problems, placing a coordinated solution realistically beyond reach.
Adding to lockdown-related dysfunctions, China, the world’s top trading partner, is going through its own political and economic transition. Supply chains were already stretched and have become hyper-sensitive to even the smallest disruptions (see Suez Canal issues). China adding further pressure could well break the proverbial camel’s back.
The length of this inflationary bout will be very closely correlated to developments in China. What it will not be correlated to is the Fed’s interest rate cycle. The US central bank has signalled that it does not intend to fight this price spike. If it did, interest rates would already be above 5%. Whether transitional or not, the Fed doesn’t have the tools to deal with supply inflation in a globalised economy. Instead, it is tapering asset purchases to fight asset price inflation, which is taking place in the financial economy. Reports last week suggest that Joe Biden is thinking of replacing dove Jay Powell with uber-dove Lael Brainard.
As inflation grips economies, it has become apparent that to assess this particular incident, we must look beyond interest rates, money velocity and recent history. For markets to understand what will happen with the financial economy and risk assets, they still need to focus on central bankers. To understand what the future brings on inflation and growth, however, instead of economists, portfolio managers would be better served to turn their attention to operations management and Xi Jinping.
–David Baker, CIO
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China’s property sector woes
China’s Evergrande Group has rapidly become Beijing's biggest corporate threat as it wrestles with debts of more than $300 billion as a result of years of aggressive expansion. But that was just the tip of the iceberg.
Investing in a world without QE
Inflation rising may upend a 12-year investment paradigm. Is there life after Quantitative Easing?
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Weekly Market Update: Reducing to equal weight
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Weekly Market Update: China’s ‘LTCM moment’ may be the least of its problems, and ours.
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You can relax. The Fed has no intention to fight inflation (yet).
With inflation pressures coming mostly from the supply side, there is little the Fed can do to curb it. Interest rates are tools best used to cool down the economy during a mature, credit-driven economic boom. They are not designed for a recovering economy and much less for one still under the threat of a pandemic.
Inflation momentum will recede. But prices may remain elevated.
There’s a strong possibility we may see the end of the episode soon. But supply chains could take long to mend and overall price levels could remain elevated versus pre-pandemic numbers.
Quarterly Outlook: An investor’s inflation and growth playbook
Investing during the past twelve years has been underpinned by a basic principle: market participants have been encouraged to take risks, mainly to offset the trust shock that came with the 2008 financial crisis (GFC). Each time equity prices have fallen significantly, the Federal Reserve, the world’s de facto central bank, would suggest an increase in money printing, or actually go ahead with it if volatility persisted. Bond prices, meanwhile, kept going up, as central banks and pension funds were all too happy to relieve private investors of their bond holdings even at negative yields. Market risk was all but underwritten.
Is gold a good hedge against inflation?
The problem with gold is that experience does not necessarily support theory. A quick look at the numbers suggests that although gold is widely perceived as an inflation hedge, reality suggests otherwise.
Weekly Market Update: Markets Grapple With Eventual Tapering of Asset Purchases
In a relatively volatile week of equity market trading, ultimately most major equity markets ended nearly unchanged. Following on from US inflation last week, there was increased focus on the UK and EU readings this week, with investors looking for any evidence of a potential shift in monetary policy. US equities fell most of major equity markets for British investors, down -0.7% in Sterling terms, although more modestly in local currency terms. UK equities ended a mixed week down -0.2% as the effects of stronger than anticipated labour market data and inflation played out. Emerging markets and Japanese equities saw a role reversal last week as they moved from laggards to leading markets, with emerging market equities providing the best returns to Sterling investors up +1.4% on the week. European equities rose +0.6% in Sterling terms. The US 10Y yield fell -0.7bps to 1.6%, while the UK 10Y fell -2.7bps to 0.8%. In commodity markets, gold rose +1.7%, while oil fell -2.9% to $64.1 a barrell.
Weekly Market Update: Mixed Results in Equity Markets as Economies Reopen but US Jobs Disappoint
With many regions operating a shortened trading week, returns varied significantly across major equity markets. UK equities provided the best returns to Sterling investors, up +2.4%. The rise in UK equities was helped in part by rising commodity prices, with miners and energy firms benefiting from rising metal and oil prices. European equities provided the next best returns, up +1.7% in Sterling terms. US equities rose a modest +0.2% in Sterling terms, though up +1.3% in local currency terms, as the rotation from growth to value impacted returns. Emerging markets fell -1.0% in Sterling terms. Japanese equities rose +1.3% in Sterling terms, not quite enough to move the region into positive territory year-to-date. The US 10Y yield fell temporarily on bad jobs data, although recovered somewhat, ending down 4.9bps to 1.6%, while the UK 10Y fell 6.7bps to 0.8%. Gold rose +2.4% on the week, while oil rose a further +1.0% to $65.4.
Weekly Market Update: Consumer-Led Recovery at Close to Fastest Pace in Modern History
Once again many major equity markets finished the week not far from where they started. Market attention was squarely focused on the Federal Reserve, where chairman Jerome Powell promised not to raise rates in the near term; as a consequence, markets did not sharply react in either direction. US equities were flat in US Dollar terms, but up +0.2% in Sterling terms. UK equities were the best performing region, up +0.5% last week. European equities fell for the second consecutive week, down -0.8% in Sterling terms. Emerging markets fell -0.2% in Sterling terms. Japan was the clear laggard, where earnings failed to meet expectations and the Bank of Japan kept policy unchanged. Japanese equities fell -1.9% in Sterling terms. The US 10Y yield rose on improved economic data, up 6.8bps to 1.6%, while the UK 10Y rose 9.8bps to 0.8%. Gold fell -0.3% on the week. The better than expected economic data helped oil to rise +2.4% last week to $64.4.
Weekly Market Update: Indian Covid Crisis Captures Attention of Markets
Equity markets ended the week largely unchanged, with the largest movements seen in Japanese and UK stocks. UK equities fell -1.1%, driven in part by a falling oil price, as the global economic outlook increasingly uncertain, with clear inequality in the vaccination progress between regions, dampening expected demand for oil. US equities fell -0.3% in Sterling terms, with plans to raise capital gains tax only making a slight impact on US markets. European equities rose +0.2% in Sterling terms due to currency effects, having fallen -0.4% in local currency terms. Emerging markets were the only risers in local currency terms, and were up +0.1% in Sterling terms. Globally the best performing sector was healthcare, whilst energy was the worst performing. The US 10Y yield fell slightly by 2.2 bps to 1.6%, while the UK 10Y fell 2 bps to 0.7%. Gold fell -0.2% on the week. Oil fell as the economic outlook deteriorated, down -1.7% on the week to $62.1.
Weekly Market Update: Caveat Emptor
UK equities reached the highest level in over a year as part of a broad-based rally in equities globally. Equity markets continue to benefit from increasing risk appetite as investors become increasingly bullish on a 2021 recovery. UK equities rose +1.6%, although it remains one of just a few regions not back to all time highs.US equities rose +0.7% in Sterling terms, the stronger growth moderated by Sterling rising +0.9% against the US Dollar. Globally the best performing sector was materials, whilst telecoms lagged other sectors. The US 10Y yield fell 7.9 bps to 1.6%. The UK 10Y yield was more or less unchanged, down just 1.0 bps to 0.8%. Gold rose +1.1% on the week, although it remains -7.6% so far this year. Oil rose +5.7% last week to $63.1 a barrel. Oil is up +28.5% this year. The jump in oil prices comes in spite of global coronavirus cases beginning to rise in many regions, with several European and Asian economies looking likely to increase the stringency of lockdowns.
Weekly Market Update: Rational Exuberance
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.
Will the rotation into value continue?
While it remains to be seen how long value leadership will last, many of the drivers that led investors to flock to growth stocks have reversed and now favour value stocks.
Relative to the year so far, last week saw quite a heterogeneous response to news by markets. On one hand there is continued and growing positivity surrounding the opening of economies, but this has lead to some inflationary concerns. Meanwhile, the Suez Canal blockage raised concerns about supply chain disruptions. US equities rose +2.2% in Sterling terms, hitting record highs, helped by a more optimistic vaccine schedule from President Biden. UK equities rose a more modest +0.6%. Globally the best performing sectors were more defensive names such as consumer staples and utilities, whilst telecoms was once again the worst performing. Japanese equities fell -1.5%, moving back into contractionary territory this year. The US 10Y yield fell slightly, down 4.5bps to 1.7%, while the UK 10Y fell 8.1bps to 0.8%. Neither gold nor oil were much changed, both down -0.1% on the week, with oil trading just under $60 a barrel.
Weekly Market Update: Stocks ended the week near all time highs
A positive week for equities saw all major equity markets close the week positive in local currency terms. With Sterling continuing its bullish start to the year this pushed EM equities down to a flat week in Sterling terms. US equities rose +2.0% in Sterling terms, hitting record highs. US equities were helped by falling bond yields, from Tuesday, which helped boost equity investor sentiment. UK equities rose +2.1%. Globally the best performing sector was consumer discretionary, whilst telecoms was the worst performing. Japanese equities rose +1.5%, erasing their losses year-to-date. The US 10Y yield continued its rise, although more modestly, up 5.9 bps to 1.6%, while the UK 10Y rose 6.6bps to 0.8%, reversing last week’s fall. Gold rose +0.8% on the week. Oil fell, after last week’s strong rise, down -1.4% on the week to $65.8. Oil is up +32.6% on the year, highlighting the extent to which vaccination programmes are increasing forecasters’ outlooks for economic activity later this year.
Market Comment – Macro headwinds
Last year was very positive, both in terms of stock market and macroeconomic volatility (the volatility of macroeconomic releases). In recent weeks, however, we have noticed a deterioration in macroeconomic releases, especially in the US. Lower inventories and higher imports took a toll on GDP. More detailed data on capital expenditure also shows weakness in […]
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