The week in review

What’s happened in markets?

Figures in the respective local currencies as at the end of trading on 5/3/2021.

All the attention during the week of 1 March remained focused on the continued selloff in government bond yields and the impact of this on equity prices, particularly for technology growth stocks.

Central bank speakers tried to talk down yields, but with little success, including Federal Reserve (Fed) chair, Jay Powell, who pushed back on recent bond market moves by stating that there was unlikely to be any moves in interest rates until inflation reaches over 2.5%. However, Powell disappointed markets as many expected him to give more hints of potential intervention by the Fed – something which he was not prepared to do, especially in the case of the monetary committee wanting to pull down long-dated rates.

European Central Bank (ECB) officials also continued to make comments aimed at stemming the rise in yields. For example, the French central bank governor said that “in so much as this tightening (in financial conditions) is unwarranted, we can and must react against it, starting with … our (bond) purchases”. However, there was no evidence of an increase in ECB bond purchases during the week of 1 March, highlighting that central bankers’ words are not yet being backed up by central bank action.

The economic data highlight was the US jobs release for February on Friday 5 March, as the US economy created 379,000 jobs in February. This increase in employment far exceeded consensus expectations and was more than double the number of jobs added in January. This also took the headline unemployment rate down to 6.2%. All this points to a sharp rebound in the US labour market, supported by a decline in coronavirus cases nationwide and a loosening of lockdown restrictions. The strong jobs data also accelerated the sell-off in US government debt on Friday 5 March, with the yield on the 10-year Treasury bond climbing to its highest level since February 2020.

The other big story last week, was the sharp move higher in oil prices after OPEC+ agreed to postpone increasing its supply until later in 2021. In fact, on Monday 8 March, Brent crude traded above US$70 per barrel, its highest level since October 2018, after Saudi Arabia reported an attack on the world’s largest crude terminal. It’s important to monitor oil prices at the moment as higher oil prices are also fuelling higher inflation expectations, which in turn are impacting bond yields.

In markets, all markets were positive, apart from Europe ex UK (-0.50%), with the UK leading the way (+2.33%). Style-wise, value (+2.89%) continued to claw back performance versus growth (-0.97%), with energy (+7.89%) and financials +(3.76%) the best sectors, while information technology (-1.39%), an important part of the growth index, continued to lose support. Small capitalisation stocks (+0.63%) outperformed their large peers (+1.12%).

What’s happened in portfolios?

While equity markets were up during the week of 1 March, this was due to the rally on Friday 5 March, with US markets increasing by 3%. Throughout the remainder of the week, however, equity markets were volatile and generally nervous as bond yields rose throughout the week and were actually well down until the ‘dip buyers’ stepped up to the plate just before the close of play at the end of the week.

Investment grade bonds were slightly soft, led by the US, with investors continuing to worry about inflation and how the recently agreed US$1.9 trillion fiscal package will be funded. While a short bout of inflation is coming down the chute due to the large US fiscal support, on top of what the Fed is already doing through its programmes, this comes on top of a year of constraints meaning there’s lots of pent-up demand waiting to be unleashed when restrictions ease.

News flow on the investment trusts was quiet apart from another capital raise announcement in the renewable space – this time from The Renewable Infrastructure Group. This will come at 123p, presenting a 7p discount to the price it was trading before the announcement.

What’s happening this week?

10 Mar • US Consumer Price Index | 11 Mar • ECB Interest Rate Decision | 12 Mar • UK January GDP