This was ahead of expectations and the strongest quarter on record since 2003, driven by the opening of the US economy and made increasingly possible by the vaccine rollout, combined with the huge amount of monetary and fiscal stimulus. US Treasuries sold off, with the yield on the 10-year, which moves inversely to price, climbing back up to 1.69% on Thursday. Intra week copper hit $10,000 a tonne for the first time since 2011 and Brent crude oil rose to $68.9 a barrel, whilst gold fell. Global energy and bank stocks rose strongly, whilst technology fell back, as did the healthcare and utility sectors. Despite the Federal Reserve (Fed) acknowledging the improving economic outlook for the US economy, chairman Jay Powell reaffirmed the Fed’s accommodative approach to monetary policy, saying it is too early to start withdrawing the monthly $120 billion bond purchasing programme, with which the selloff in US Treasuries abated.
As of 12pm London time on Friday, US equities rose 0.8% over the week, whilst US technology stocks fell 0.5%. European equities fell 0.3%, with the latest quarterly GDP data showing economic contraction of 1.8% for the first quarter, as Covid induced lockdowns have led to falling household consumption once more. However, this was better than forecast and the Eurozone has increasingly stepped up their vaccination programme, with Germany vaccinating over 1 million people in one day last week, raising hopes that the month of May will see easing of restrictions. UK stocks rose 0.2%, although data due to be released next month is also likely to report economic contraction in the first quarter. Japanese equities lost 0.9% and the Australian market fell 0.5%. Whilst the emerging markets rose 0.9%, including India, which was up 1.9%. This was despite the appalling headlines regarding the escalating Covid crisis in India, as investors stayed focused on the rollout of India’s vaccination programme on the over fifty age group.
10-year US Treasuries by Friday were trading with yields back down at 1.64%, nonetheless, a material increase over the week. Similarly, German bunds were trading higher at -0.21% and UK gilts 0.83%.
Issues under discussion
Markets are keenly awaiting the release of the latest inflation data next month, which is expected to show a jump in US inflation to above target levels of 2% on average, with the PCE (Personal Consumption Expenditures) Index to be around 2.5%, versus 1.6% when last published. This much has been fully anticipated by the Fed, but what happens thereafter will be much more significant. The Fed expects this to tail off relatively quickly, and inflation not to be an issue by the year end, although it may remain elevated for several months. If, however, inflation remains persistent, then the market is increasingly likely to second guess monetary policy tapering earlier than what is being guided.
The potential for increased volatility in markets in the coming months is therefore much higher, especially as macro data is often lumpy. We would likely consider any significant selloff in equity markets to be a buying opportunity, all else being equal.