Market and Economic review for week ending 9 April 2021
Within the LF Prudential Risk Managed Active and LF Prudential Risk Managed Passive portfolios we maintain an overweight position across a range of equity markets including UK, Europe, US, Japan, China, and Asia. A small emerging market debt overweight position remains with an underweight in US investment grade as a result. This is based on our continued positive view on risk assets and our belief that we are in the midst of a synchronised cyclical recovery; a view emphasised by the latest round of macroeconomic data releases.
Market and Economic review
The Easter holidays coincided with the end of another interesting quarter for financial markets. Q1 was largely positive for risk assets, with equities, oil and high-yield credit mostly higher than the start of the year. In contrast, safe havens did not fare so well, with gold ending a run of 9 successive quarterly advances and sovereign bond yields rallying on the back of optimism over the economic recovery, with investors pushing back on statements from the Fed and bringing forward their expectations of rate hikes. The Easter period also brought a rebirth of investor optimism and egg-citement, as surprisingly strong macroeconomic data combined with further US fiscal stimulus announcements and dovish central bank sentiment, pushed markets upwards. The S&P500 is up +1.92% on the week, while the FTSE 100 (+2.59%), Eurostoxx (+0.72%), Hang Seng (+0.24%) all posted gains.
US consumer confidence raced 19.3 points higher in March, to its highest level (109.7) since the start of the pandemic. There was a similar picture in Europe, where the European Commission’s monthly survey showing the sentiment indicator jumping from 93.4 in February to 101 in March, supporting views that economic growth will accelerate in the coming months. Signs of growth were also seen in PMI figures; the UK seeing a revised composite of 56.4, well into expansionary territory (as signified by anything over 50), while the Euro Area composite (53.2) comfortably beat expectations (52.5). Additionally, the US ISM non-manufacturing activity index rebounded to a reading of 63.7 with the surveys measure of new orders for the services industry rebounding to an all-time high, from a nine-month low in February. Staying with the US, non-farm payrolls rose by 916,000 in March, the biggest increase since August – with the economy adding a total of 1.6m jobs in Q1. Labour market rhetoric was dampened by an increase in the number of Americans filing for unemployment benefits, which unexpectedly rose by 16,000 and highlights the bumpy path to recovery the economy continues to tread.
The IMF revised its forecasts for global growth this week, and highlighted the impact a successful vaccine rollout is likely to have on the UK economy, which is set to outpace the Eurozone this year after 2020’s slump, though it is unlikely to regain its pre-pandemic size until 2022. The forecasts predict the UK economy to grow by 5.3% in 2021 (up from a previous estimate of 4.5%), while the Eurozone is anticipated to see growth of 4.4% over the same period – though the IMF figures do not take into account the latest lockdown measures across Europe.
Minutes from the Fed’s policy meeting struck a dovish tone, with accommodative policy set to remain for the foreseeable future, even as economic growth gathers pace. The Fed suggested there was little concern of the economy overheating, with members noting it could be some time before asset purchases would be tapered. Even though the committee increased its economic and inflation forecasts last month, concerns from the pandemic, including new variants and vaccination issues, remain key risks. US 10yr Treasury yields have retraced -5.8bps this week to 1.66 as the dovish Fed minutes and a relaxed tone on inflation led investors to conclude that market pricing based on an earlier than expected policy tightening may have been too aggressive.
US President Joe Biden continued to outline his spending spree plans, as he seeks to ease a national affordable housing shortage by setting up a $5bn fund for local governments to compete for new infrastructure projects, if they agreed to loosening zone rules, which could push the White House into a debate pitting older homeowners against younger workers seeking to gain a foothold in the most expensive US cities, where many families spend a third or more of their income on housing. In order to pay for this infrastructure spending, the Biden administration is looking to increase corporate taxes from 20% to 28%. Interestingly, this has also coincided with discussions at the G20 summit this week to negotiate a global minimum tax; instigating a global reform of the corporate tax system, with US Treasury Secretary Janet Yellen noting that these changes could raise c.$2.5trn in new revenues over the next 15 years.
Mixed news on virus cases and vaccinations have continued to highlight the difficulties of a global effort to curb the pandemic. Rising cases across Europe saw new lockdowns announced for France and Italy; cases have started to fall already. This has also been the case in India, where the daily case count rose above 100,000 for the first time. The vaccination programme has been seen as the way to loosen restrictions placed on society and economies across the globe, though news from health regulators that very rare blood clots have a firmer link to the Oxford AstraZeneca vaccine have caused governments to restrict its usage. This may have knock-on implications for the vaccination roll-out.
Our positioning has remained largely unchanged in 2021 with an overweight to a diversified global equity basket. We remain focussed on the increased volatility in and level of US government bond yields. The potential for rates to grind higher in a high growth and accommodative central bank policy environment has been of particular focus this year and is a factor we continue to weigh up in our positioning.
With that in mind, we maintain our view that a continued gradual increase in rates driven by an improving macro picture could be digested without material issue by risk assets. Equity markets should react positively to the increased US fiscal spending, however, continued volatility and increased uncertainty about the stability of the discount rate may dent sentiment once again. We continue to watch our signals for a material change as it continues to be one of the key risks to markets in 2021.
Data releases of particular interest in the week ahead include UK GDP, Chinese Money Supply and Trade Balance, ZEW Economic Sentiment and US Jobless Claims, Retail Sales and Industrial Production, along with the Philly Fed’s Business Index for April.
T&IO Weekly Market Update Podcast
Dean Cook CFA, Portfolio Analyst in the Multi Asset Portfolio Management Team at T&IO talks through this week’s latest market developments and T&IO’s current outlook.