8th March 2021
Stock markets are finding they cannot have it both ways
Another week of bond market price falls has pushed ten-year government bond yields upwards everywhere except Japan. The US ten-year yield experienced the biggest rise of the developed world, up almost 20 basis points (0.2%) since the previous Friday to a yield of 1.6%. As was the case over the previous week, that fed through to US equity markets, with the S&P 500 down about 2% and the NASDAQ 100 down 4%, with a knock-on to global equity markets. UK equity and bond markets are flat in sterling terms, partly because the GBP is about 2% weaker against the USD, which is rising against most currencies.
Global financial conditions are relatively easy but, at the moment, they are not getting easier. We have reached one of those fascinating, if unfortunate, points where capital markets are, in themselves, quite a big determinant of how economic growth turns out later this year. And that is when market moves become a real focal point for central banks.
February was a positive month for global equity markets which rose 0.5% in sterling terms. The best performing equity market was the UK large cap index up 1.6%, a beneficiary of the vaccine rollout as well as the announcement of a reopening plan for the economy. Cyclical industries continued to benefit from expectations of increased global consumption throughout the rest of 2021.
Whilst the US main market rose 0.9% in February, the growth focused technology sector was impacted by rising inflation expectations and increased scrutiny from competition authorities leading to it falling -0.8%. Fiscal policy was the other key theme discussed with the US Treasury Secretary Janet Yellen indicating an upcoming rise in the corporate taxes to 28% and Rishi Sunak expected to increase corporation tax in the UK budget during March.
Gauging the new Fed policy rule
One of the more worrying trends of late has been the uptick in US government bond yields. Throughout the pandemic, the ‘risk-free’ rate of US Treasury yields has been virtually non-existent. The effect on capital markets, and the wider economy, cannot be overstated. Not only has it allowed governments fiscal free rein in combating the worst of the economic fallout, but it also pushes return-seeking investors into riskier assets, thereby supporting equity values. Rising yields are therefore worth keeping a close eye on. Thankfully, this trend has stabilised lately, with bonds levelling out, and most importantly real yields (yields adjusted for inflation) still in the negative. Nevertheless, tensions persist under the surface.