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Market Update 29/3/21

Shares in Europe rose on hopes of an economic recovery, turning around previous losses resulting from concerns about added restrictions to curb the spread of the coronavirus and the European Commission’s (EC) threat to stop vaccine exports. In local currency terms, the pan-European STOXX Europe 600 Index added 0.85%. Major stock indexes were mixed: France’s CAC 40 ended the week down modestly, while Italy’s FTSE MIB, Germany’s Xetra DAX Index, and the UK’s FTSE 100 Index posted gains. Elsewhere, UK inflation took a surprise dip and one of the world’s biggest container ships blocked a major trade route, the Suez Canal.

Core and peripheral eurozone government bond yields fell over all. Concerns over Europe’s sluggish vaccine rollout amid the onset of a fresh wave of coronavirus infections drove demand for high-quality government bonds. Data showing an EUR 7.1 billion increase in the European Central Bank’s weekly bond purchases also weighed on yields. Gilt’s yields fell on worries the EC could block vaccine exports to the UK, potentially slowing down the country’s vaccination campaign. Weaker inflation data, which pushed out expectations of the Bank of England to tighten up its monetary policy, also led to lower yields.

The major US indexes have been mixed for the week, as investors seem to continue to weigh a positive outlook about reopening against inflation and interest rate concerns. Small-cap stocks lagged for the second consecutive week, signalling a potential pause or turn around in their recent market position. Likewise, communication services stocks fared worst within the S&P 500 Index, dragged down by sharp declines in shares of several traditional media companies following a stretch of strong performance.

Inflation data – perhaps at the top of the list of current investor concerns – remain muted. The personal consumption index (excluding food and energy) increased by 1.4% year-on-year in February, down from 1.5% in January and still well below the Federal Reserve’s 2% target. On Wednesday, both Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen testified before Congress that they saw little danger of an overheating economy.

The yield on the 10-year U.S. Treasury notes fell much of the week, but seemed to rise in response to Thursday’s claims data. Stability in the yield of the notes boosted the performance of high yield bonds. However, the asset class experienced some weakness due to growing virus concerns throughout Europe.

Japan’s stock markets suffered considerable losses, even though they were able to recover some lost ground later in the week. The Nikkei 225 Stock Average fell 2.1% while the broader TOPIX gave up 1.4%. The yen weakened, closing at just below JPY 110 compared to the US dollar. The yield of the 10-year Japanese government bond ended up the week lower, at 0.08%.

Chinese stocks recorded a weekly gain, thanks to a rally on Friday after the country’s central bank signalled it was not about to tighten monetary policy. The Shanghai Stock Exchange Composite (SSEC) Index rose 0.4% to 3418.3, while the large-cap CSI 300 Index ended up 0.6% at 5038.0, its first weekly gain after five straight weeks of losses. Since reaching a record high on February 18, the CSI 300 has fallen 15%, while the SSEC is 8% below a 5 1/2- year high also touched on February 18. In China’s bond markets, the yield on the sovereign 10-year bond closed at 3.22%, off four basis points from the previous week, amidst expectations that monetary policy would remain supportive in the near term.

The fiasco in the Suez Canal reigned over commodity markets last week and will do so this week as oil prices kicked higher again on Friday, copper and gold rose, as did iron ore. The Suez blockage saw US West Texas Intermediate crude rise 4.1% to $US60.97 a barrel on Friday while Brent crude in Europe was up 4.04% a barrel to $US64.43. But for the week WTI fell 1.1% and Brent eased 0.4%. Gold rose 0.4% to $US1,732.30 on Friday, but shed 0.5% for the week for the first negative week in the last three.

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