Market Update 26/2/21

Focus was on interest rates last week, as the increase in government bond yields sped up, unsettling both equity and fixed-income markets. Bond volatility has risen to the highest level since April last year and spread to other asset classes.

The major benchmarks pulled back sharply in response to the steep rise in longer-term Treasury interest rates. The S & P 500 index recorded its largest weekly decline in a month, while the Nasdaq Composite Index suffered its worst decline since October. Consumer discretionary shares were specifically weak, driven in part by a steep decline in the automaker Tesla, while a decline in Apple shares weighed on the information technology sector. Energy stocks outperformed as oil prices rose. 

Consumer inflation data published earlier in the month surprised on the downside, but producer prices, reported at mid-month, rose 1.3% in January, much more than consensus expectations and the largest increase in data going back to 2009. Inflation has also been pronounced in the housing sector, and Tuesday brought news that home prices had increased 10.1% in December from a year before. Relatedly, lumber futures have reached record highs, while copper prices are at their highest levels in a decade.

Inflation concerns, stronger-than-expected economic data, technical factors, and weak auction results combined to push the yield on the benchmark 10-year U.S. Treasury note to around 1.61% on Thursday afternoon, its highest level in over a year. The broad municipal bond market also was affected through most of the week as tax-exempt yields continued to follow Treasury yields upward.

Shares in Europe dropped along with global markets. Trading was volatile during the week as worries grew that central banks might need to act sooner than anticipated to subdue inflationary pressures that could come with an economic recovery. In local currency terms, the STOXX Europe 600 Index ended the week 2.38% lower. Major Continental stock indexes decreased, as did the UK’s FTSE 100 Index, which came under pressure from a stronger British pound. The currency rose to its highest level in almost three years, reaching USD 1.42 before pulling back from this peak, as the swift rollout of coronavirus vaccines fuelled recovery hopes and investors priced in an interest rate hike over the next two to three years.

Core and peripheral eurozone government bond yields rose, tracking moves in U.S. Treasury yields. Pacifistic rhetoric from Fed Chair Powell triggered a sharp bond sell-off throughout most developed markets as it struggled to ease fears of inflation rising. Christine Lagarde, president of the European Central Bank, and other policymakers warned markets they were keeping an eye on borrowing costs, but the consequent decline in yields was temporary. Gilt yields also rose in line with other developed markets.

British finance minister Rishi Sunak is predicted to extend the jobs support program until at least May in his budget next week, and there may be state support for sectors hit the hardest by the lockdowns, such as aviation. Denmark also said it would ease restrictions in the retail sector and allow some schools to reopen on March 1.

Fourth-quarter German gross domestic product (GDP) data were revised up unexpectedly to a growth rate of 0.3% from an initial estimation of 0.1% on strong exports and solid construction activity. The full-year figure was increased to -4.9% from -5.0%. The Eurozone Economic Sentiment Indicator rose to 93.4 in February from 91.5 the month before, the highest since March last year, the EC said. 

Japan’s stock markets tumbled on Friday, the last trading day of the month, ending sharply lower for the holiday-shortened trading week. Japan’s stock markets were closed on Tuesday, February 23, in observance of the Emperor’s Birthday. For the week, the Nikkei 225 Stock Average declined 3.5% (1,052 points) and closed at 28,966.01. Chinese shares fell in tandem with the global sell-off. The Shanghai Composite Index shed 5.1%, while the large-cap CSI 300 Index fell 7.7% in its worst weekly performance since October 12, 2018.

Important economic data being released next week include the PMI composite, jobs data, and consumer credit levels.