09/04/2021 Product News Back to all News & Views
Uneven US recovery allows bond yields to fall and technology to lead

The US Institute of Supply Management released their latest survey for the services sector this week, coming in above expectations at 63.7 (with any number above 50 indicating expansion) and at an all-time high, propelling equity markets higher.  However, this was combined with an unexpected rise in new US jobless claims, pointing towards an uneven economic recovery, and allowing bond yields to fall (yields move inversely to price). 

As of 12pm London time on Friday, technology stocks, which have suffered selling pressure this year in anticipation of the reopening of economies, have led the way, with the global technology sector rising by 3.5% over the week. The US equity market increased by 1.9%, European equities 1.2% and UK stocks 2.8%.  Japanese equities declined by 0.6%, not helped by an increase in coronavirus cases, against a background of a slow vaccine rollout programme.  Australian equities were up 2.4%, supported by the metals and mining sector which rose by 3.5%.  Emerging markets increased by 0.4%, whilst Chinese equities fell by 1.0% despite the latest Caixin Purchasing managers Index for services, considered a good lead indicator for the health of the services sector, exceeding expectations, coming in at 54.3.  Chinese equities have suffered weakness this year as monetary support is expected to tighten as the economy is one of the few to have grown last year, and investors see greater opportunities in recovery elsewhere.

US Treasury 10-year yields fell further this week, touching 1.62%, having been as high as 1.77% at the end of March. Currently they are trading at 1.66%.  The Federal Reserve continued to emphasise its accommodative approach to monetary policy and cited the risks of stronger inflation as equally balanced against the risks of weak inflation.  10-year German bunds are currently trading at -0.30% and equivalent UK gilts at 0.79%.

Precious and industrial metals both rose this week, helped by a weaker US dollar.  Gold was up by 1.1%, now trading at $1,748 an ounce, whilst copper increased by 2.2% and Iron ore 3.9%.  Crude oil fell, with Brent currently trading at $63.1 a barrel and US WTI (West Texas Intermediate) $59.6.

Issues under discussion

Next month, investors will be eagerly awaiting the release of inflation data for the month of April, which is expected to show a material pickup, given that it is a year-on-year number and last April many western economies were in lockdown.  This much is widely expected, however, what happens after offers up very polarised views. 

One very well-respected US investment house expects any rise in inflation to be a ‘head fake’ as the deflationary forces of demographics, globalisation, and technology re exert themselves thereafter. 

Whilst another believes the effect of the US government posting out significant sums of cash support, combined with a US consumer who has been oppressed for the last year, is likely to lead to a jump in US inflation that will then remain with us for at least the remainder of the year.

Either way, for as long as Covid vaccine rollout programmes are successful, we believe global growth will be strong, and much stronger than what we have become accustomed to, and consequently this should benefit economically sensitive stocks to a much greater extent. 

So far this year, value, or economically sensitive stocks, have only really benefitted when bond yields are rising, which is a signal that the bond markets are expecting stronger inflation as a result of stronger growth.  However, value historically did not need bond yields to rise to outperform, yet that has been the experience since the financial crisis of 2008/09.  We wonder whether value will once again be able to outperform based on improving company fundamentals and not just the direction of bond yields.