A selection of articles looking back through the markets last month.
Global Market Review
Concerns grow over inflation
Although most major equity indices ended February in positive territory, the month finished on a question-mark. A sharp sell-off across bond markets pushed up bond yields and drove down demand for growth stocks as investors assessed the probability of rising inflationary pressures that could lead to higher interest rates and the withdrawal of support from governments and central banks.
“The greater risk at present is of central bank complacency” (BoE chief economist Andy Haldane)
Bank of England (BoE) chief economist Andy Haldane warned: “People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely. But, for me, the greater risk at present is of central bank complacency”. Elsewhere, as the UK’s vaccination programme continued to expand and infection rates eased, UK Prime Minister Boris Johnson set out the “roadmap” for the reopening of the economy in England, beginning on 8 March with a return to school. Over February, the FTSE 100 Index rose by 1.2%.
Investors’ concerns were alleviated to some degree by reassurance from Federal Reserve (Fed) Chair Jerome Powell, who maintained that the US economic recovery remained “far from complete” and would need central bank support for “some time”. Nevertheless, the yield on the benchmark US Treasury bond rose to its highest level in more than a year. Meanwhile, President Joe Biden’s US$1.9 trillion “American Rescue Plan” was approved by the House of Representatives, and former President Donald Trump was acquitted in his second impeachment trial. The Dow Jones Industrial Average Index increased by 3.2% over February.
Sentiment in Europe was dampened during February by a slower-than-hoped rollout of the Covid-19 vaccine. Despite this, economic confidence in the eurozone improved slightly over the month, underpinned by signs of optimism in the industry and services sectors, and amongst consumers. The eurozone’s economy shrank by 0.6% during the fourth quarter of 2020 and contracted by 6.8% over the year as a whole. The Dax Index rose by 2.6% in February.
Having grown by 5.3% during the third quarter of 2020, Japan’s economy expanded at an annualised rate of 3% during the final three months of the year, boosted by stronger consumption and export activity. Over 2020, the country’s economy shrank by 4.8%, posting its first calendar contraction since 2009. During February, the Nikkei 225 Index rose by 4.7% and closed above 30,000 points for the first time in more than 30 years.
Asia & Japan Market Review
Nikkei reaches 30-year closing high
Japan’s economy expanded by 3% year on year during the final quarter of 2020, having grown by 5.3% in the previous quarter. Private consumption posted growth of 2.2% in the fourth quarter following a 5.1% increase in the third quarter, while exports were buoyed by rallying overseas demand. Over 2020 as a whole, the country’s economy contracted by 4.8%, representing its first calendar-year contraction since 2009.
“The Nikkei 225 Index closed above 30,000 points for the first time in more than 30 years”
Exports continued to strengthen, rising at an annualised rate of 6.4% in January after a 2% increase in December. Activity was boosted by a 37.5% annualised surge in shipments to China, although this rise is likely to have been flattered by disruption caused by the Lunar New Year. Meanwhile, imports fell at an annualised rate of 9.5%. Core machinery orders picked up during December, rising by 5.2% month on month. However, a survey undertaken by the Cabinet Office found that manufacturers expect core machinery orders to decline by 8.5% over the first three months of 2021.
During February, the Nikkei 225 Index rose by 4.7% and closed above 30,000 points for the first time in more than 30 years. The broader-based Topix Index increased by 3.1%, and the TSE Second Section Index climbed by 4.4%.
Credit ratings agency Fitch affirmed Australia’s credit rating at its highest “AAA”, citing the country’s strong institutions and effective policy framework. Fitch believes that Australia’s economy has withstood the effects of the coronavirus pandemic well compared with its peers, enacting an effective fiscal and monetary strategy. Fitch also maintained its “negative” outlook, however, highlighting “uncertainty” surrounding Australia’s medium-term debt trajectory following a significant increase in public debt in response to the pandemic.
Governor of the Reserve Bank of Australia (RBA) Philip Lowe said that the recovery was “well under way” and had proved stronger than previously expected. Nevertheless, the central bank intends to purchase an additional A$100 billion-worth of Australian Government bonds as part of its extended programme of quantitative easing. Policymakers do not expect to raise interest rates until wage growth is “materially higher”; this will require a tighter labour market and is unlikely to be achievable until at least 2024. Although the rate of unemployment has eased to 6.6%, this still represents a 20-year high. The ASX All Ordinaries Index rose by 1% over the month.
Europe Market Review
Economic confidence improves in Europe
Former President of the European Central Bank (ECB) Mario Draghi took the helm of Italy’s government during February. The move provided a welcome boost for sentiment, which was buoyed by the prospect of stability after months of political turmoil, a faltering economy, and high Covid-19 infection rates. Business and consumer confidence improved, and the FTSE MIB Index rose by 5.9% over the month.
“German business sentiment staged a marked improvement”
Economic sentiment in the eurozone improved during February, according to a monthly survey undertaken by the European Commission. Sentiment – which has been generally dampened by a slower-than-hoped rollout of the Covid-19 vaccine – was supported by signs of strengthening confidence in industry, services and among consumers, but optimism in the retail sector deteriorated.
The eurozone’s economy performed slightly better than initially calculated during the final quarter of 2020, shrinking by 0.6%. Both Spain and Germany managed to register positive growth of 0.4% and 0.1% respectively, while France contracted by 1.3%. Over 2020 as a whole, the euro area posted an economic contraction of 6.8%. The eurozone’s annualised rate of inflation strengthened to 0.9% in January from -0.3% in December, compared with a rate of 1.4% a year ago. The Dax Index rose by 2.6% during February, while the CAC 40 Index posted an increase of 5.6%.
Germany’s economy expanded by 0.3% during the final quarter of 2020. Over the final three months of the year, exports rose by 4.5%, while consumer spending dropped by 3.3% following a third-quarter increase of 10.8%. Over 2020, the country’s economy shrank by 5.3%. Export activity continued to rise during December, lifted by an 11.6% increase in shipments to China and an 8.4% rise in exports to the US. Overall, having risen by 2.3% in November, exports posted a 0.1% increase in December, while imports fell by 0.1%.
German business sentiment staged a marked improvement during February, according to the Ifo Institute. Confidence amongst manufacturers climbed to its highest level since November 2018; meanwhile, sentiment in the services sector improved and the tourism sector demonstrated “cautious optimism” ahead of the approaching holiday season. Elsewhere, investor sentiment strengthened at a faster-than-expected pace during February, according to the ZEW-Leibniz Centre, whose President Achim Wabach commented: “The financial market experts … are confident that the German economy will be back on the growth track within the next six months”.
Global Bond Market Review
Global bond sell-off in February
Global bond yields surged during February as hopes over economic recovery and speculation over rising inflationary pressures prompted investors to sell off global bonds. Expectations were fuelled the prospect of economic stimulus in the US, as President Joe Biden’s US$1.9 trillion “American Rescue Plan” was approved by the House of Representatives at the end of the month. The Federal Reserve (Fed) made it clear that the US is not yet close to policymakers’ goals for inflation or employment, and the Fed is widely expected to continue its support for the country’s economy.
“The Fed is widely expected to continue its support”
The yield on the ten-year US Treasury bond ended the month at 1.42% compared with 1.07% at the end of January and 0.93% at the start of the year. During February, however, it climbed to 1.54%, reaching its highest level for over a year. Elsewhere, in the opening plenary session of the European Parliamentary Week 2021, President of the European Central Bank (ECB) Christine Lagarde said that the ECB was “closely monitoring the evolution of longer-dated nominal bond yields”.
Following record issuance levels in 2020, global bond issuance is set to decline by 3% to US8 trillion this year, according to S&P Global Ratings. Annual issuance totals reached new highs across almost every sector last year, reducing the likelihood of similar growth this year as the global economy and financial markets return to more normal conditions. Meanwhile, low yields, rising expectations for US inflation, and “record-high cash balances” on company balance sheets are likely to reduce the need to raise additional funds and their attractions for investors. Nevertheless, these factors are likely to be offset to some degree by a rising proportion of sovereign debt with negative yields, and a resurgence of corporate activity.
Bond funds were the best-selling asset class during January, according to the Investment Association (IA), posting net retail sales of £2.2 billion. With net retail sales of £596 million, Global Bonds was the second best-selling IA sector over the month, superseded only by the Global sector with sales of £826 billion. Elsewhere, £1.2 billion was invested in responsible investment funds during January, with £180 million invested in bond funds. By the end of January, responsible investment funds under management totalled more than £56 billion, and 20% of this was invested in bond funds.
UK Bond Market Review
Letting the inflationary cat out of the bag?
Gilt prices fell and yields rose following the announcement of a gradual lifting of Covid-19 restrictions as investors considered the likelihood that inflationary pressures will start to build and the possibility that higher interest rates could undermine economic recovery. The benchmark UK gilt yield breached 0.80% for the first time since December 2019 and ended February at 0.84%, having begun 2020 at 0.20%. Bank of England (BoE) chief economist Andy Haldane warned: “Inflation is the tiger whose tail central banks control … People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely. But, for me, the greater risk at present is of central bank complacency allowing the inflationary (big) cat out of the bag”.
“Policymakers believe inflationary pressures are likely to intensify”
The BoE believes that the successful vaccination programme is likely to support a “material recovery in household spending”, underpinned by pent-up savings. UK households had amassed excess savings of £125 billion between March and November 2020, and these are likely to have risen further. Policymakers believe inflationary pressures are likely to intensify from their January level of 0.7% to around 1.6% in the second quarter of 2021. The BoE has also started to assess whether to begin unwinding quantitative easing measures before tightening interest rates. This move is in contrast to their previous strategy, which stated that rates should increase to 1.5% before reducing the stock of purchased assets
The rate of unemployment rose by four percentage points to 5.1% during the three months to December, reaching its highest level since early 2016. The number of payroll employees has fallen by 726,000 since February 2020, and the number of those out of work climbed to 1.74 million during the period. The UK economy shrank at a record rate of 9.9% during 2020 and contracted to its 2013 size. Nevertheless, the final quarter of 2020 saw overall expansion of 1% and, with positive growth expected in the first quarter of 2021, the UK looks set to swerve the prospect of a double-dip recession.
Following an operational review of the UK banking sector, the Prudential Regulation Authority (PRA) indicated early in February that negative interest rates were operationally viable. However, it is likely to take around six months for lenders to prepare properly, prompting speculation that, against a backdrop of building inflationary pressures, negative rates are less likely to materialise.
UK Equity Market Review
The end of lockdown beckons
UK investor sentiment was boosted in February by evidence that the UK’s Covid-19 vaccination programme is progressing well: more than 20 million people had received their first jab by the end of the month. As infection rates continued to ease, Prime Minister Boris Johnson outlined the “roadmap” for the reopening of the economy in England. Non-essential shops, hairdressers, indoor leisure, and outdoor hospitality outlets are set to reopen on 12 April; further relaxations on social interaction will take place from 17 May; and the remaining restrictions are scheduled to be lifted on 21 June, although the progression to each stage will hinge on various criteria.
“The UK economy is ‘poised like a coiled spring’” (BoE chief economist Andy Haldane)
In response to the announcement, investors turned their attention to companies in the sectors that are likely to benefit from the end of lockdown, including leisure and travel. At the same time, the news sparked concerns that the reopening could trigger a sharp rise in inflationary pressures and the subsequent withdrawal of government and central bank support. In turn, this led to a steep increase in bond yields and a sudden dip in sentiment towards long-term growth stocks. Over February, the FTSE 100 Index rose by 1.2%, while the FTSE 250 Index climbed by 3.4%.
The British Retail Consortium (BRC) reported that UK retail sales fell during January to their lowest level since May 2020 as lockdown measures hit non-essential retailers and traditional January sales failed to materialise. The BRC hopes that pent-up savings and continued progress in the vaccine rollout programme will aid recovery amongst retailers later this year. The UK economy is “poised like a coiled spring”, according to BoE chief economist Andy Haldane, who expects recovering consumer confidence to drive a strong rebound in activity.
2020 proved to be a year of two halves for profit warnings in the UK, according to EY. While the first half saw record levels of profit warnings, they fell to below-average levels during the second half. 35% of UK quoted companies issued a warning in 2020, and 10% of companies across the FTSE 350 Index issued three or more warnings in 2020. There were 74 warnings in the travel & leisure sector, 53 in the retailing sector, and 53 in the industrial support services sector. Looking ahead, EY has warned that, despite the nascent recovery, many more businesses are expected to fail in 2021.
UK Equity Income Market Review
Banks resume dividend payouts
During February, investment sentiment was buoyed by significant progress in the UK’s vaccination programme, followed by confirmation that lockdown measures are set to be eased from March onwards. Over the month, the FTSE 100 Index rose by 1.2%, while the FTSE 250 Index climbed by 3.4%. The pound strengthened against the US dollar, rising as high as US$1.42 to reach its highest rate since April 2018; however, sterling’s appreciation dampened sentiment towards companies in the FTSE 100 Index, which tend to generate a significant proportion of profits overseas.
“UK equity income funds remained firmly out of favour”
The yield on the FTSE 100 Index dropped from 3.69% to 3.37% during February, while the FTSE 250 Index’s yield declined from 2.30% to 1.99%. In comparison, the yield on the benchmark UK gilt rose from 0.33% to 0.84% over the month. According to the Investment Association (IA), UK equity income funds remained firmly out of favour, with net retail outflows of almost £400 million during January. The sector has not experienced positive inflows since May 2020, and it remained one of the worst-selling IA sectors over the month.
Despite some relatively weak earnings releases, the UK banking sector announced during February that it would be resuming dividend payments. The Prudential Regulation Authority (PRA) had vetoed dividend payouts from banks in March 2020, but subsequently removed the ban in December, although it urged institutions to ensure that “any distributions should be prudent”. During January, Link Asset Services commented: “(The banks) will only partially restore their dividends, but it matters more how quickly they do so, rather than exactly how much they pay”.
US Market Review
Rising speculation over inflation
Having reached a fresh all-time high in the middle of February, the technology-rich Nasdaq Index fell towards the end of the month. As demand for growth stocks was dampened by rising speculation over inflationary pressures and higher interest rates, the yield on the benchmark US Treasury bond rose to its highest level for over a year. Nevertheless, concerns were alleviated to some degree by reassurance from the Federal Reserve (Fed) that it intends to continue to support the economy. Testifying to the Senate Banking Committee, Fed Chair Jerome Powell commented: “The economic recovery remains uneven and far from complete … The economy is a long way from our employment and inflation goals and it is likely to take some time for substantial further progress to be achieved”.
“The economic recovery remains uneven and far from complete” (Fed Chair Jerome Powell
Over February as a whole, the Nasdaq Index increased by 0.9%, while the benchmark Dow Jones Industrial Average Index climbed by 3.2%. The S&P 500 Index closed above 3,900 points for the first time during the month and ended February 2.6% higher.
During February, energy was the best-performing S&P industry sector by a substantial margin. Oil prices climbed above US$65 per barrel for the first time in over a year as unusually severe winter storms in Texas disrupted US oil production and resulted in the declaration of a major disaster in the state. Other sectors that performed particularly well included financials, industrials, and communication services. In comparison, utilities, health care, and consumer staples ended the month in negative territory.
President Joe Biden’s “American Rescue Plan” was approved by the House of Representatives at the end of February. The relief package – worth US$1.9 trillion – will progress to the Senate in March. During February, recorded deaths relating to Covid-19 in the US surpassed 500,000. Elsewhere, at his second impeachment trial, former President Donald Trump was acquitted of inciting the violence that hit the Capitol in January.
Only 49,000 jobs were added to the US economy during January, following a decline of 140,000 in December and an increase of 245,000 in November. The US has around 9.9 million jobs fewer than in February 2020. Although the unemployment rate fell from 6.7% to 6.3%, this may be attributable to a drop in the labour force as people abandoned their search for work, and the Fed believes that the true rate of unemployment is nearer to 10%.