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Market Update 5/3/21

Shares in Europe ended higher this week, buoyed by the possibility that easing restrictions implemented to suppress the coronavirus’s spread and encouraging monetary and fiscal policies could set the stage for an economic recovery. However, growing expectations curbed gains that central banks would act to stem inflation. The pan-European STOXX Europe 600 Index rose 0.91% in local currency terms. Major stock indexes also advanced, while the UK’s FTSE 100 Index climbed 2.27% on the week, lifted by finance minister Rishi Sunak’s annual budget, which called for more fiscal stimulus, and the Office for Budget Responsibility’s forecasts that the economy would recover to its former size earlier than previously expected.

Core and peripheral eurozone bond yields rose as long-term inflation expectations strengthened. Doubt about whether the European Central Bank would act to suppress the increase in borrowing costs, combined with the Federal Reserve reiterating its pacifistic stance, gave yields another boost. UK gilt yields broadly moved higher, lifted by Sunak’s unveiling of the annual budget.

In his budget speech to Parliament, Sunak pledged GBP 65 billion of additional fiscal spending in a temporary tax and the short term break for business investment. He extended welfare payments and the jobs-support program until September. But most individuals will have to pay more tax over time, and corporate taxes would rise to 25% in 2023 from 19% currently.

The major US benchmarks finished mixed as longer-term interest rates continued their ascent. The rise in rates again weighed on growth stocks by increasing the discount on future earnings, while value stocks managed gains, according to Russell indexes. Within the S&P 500 Index, energy shares outperformed as oil prices hit their highest levels in over a year. Technology shares were broadly weak, while consumer discretionary stocks continued to be dragged lower by electric vehicle maker Tesla.

The US Treasury sell-off rattled on this week, intensified by assurances from Federal Reserve chair Jay Powell, the central bank would stick to its monetary policy and better than expected US non-farm payroll figures. The 10-year Treasury yield traded flat at 1.56% after popping above 1.61% to hit a 2021 high following the employment growth. The superstar US tech stocks continued to bear the heat with shares in Apple, Amazon, Microsoft and Alphabet losing more than 2% on Wednesday.

Japan’s stock markets produced mixed returns for the week, with the Nikkei 225 Stock Average dropping 0.35% and the broader TOPIX Index gaining 1.70%. The yen weakened and closed above JPY 108 versus the U.S. dollar. The yield of the 10-year Japanese government bond finished the week at 0.09%, its lowest level since mid-February, on dovish comments from the Governor of the Bank of Japan.

Chinese shares fell in choppy trade as rising U.S. yields and inflation expectations spilled into the country’s stock market. The large-cap CSI 300 Index fell 1.4%, while local currency A shares shed 0.2%. Technology shares fell in sympathy with recent highflying names related to consumers, electric vehicles, and property management. The yield on China’s sovereign 10-year bond rose to end the week at 3.36%, and the renminbi currency ended broadly flat against the U.S. dollar.

How soon China will normalise economic policy after the coronavirus crisis is a more urgent concern to investors. On Friday, China unveiled its official 2021 growth target of above 6%, a goal widely perceived as conservative. Beijing also decreased its fiscal deficit target to 3.2% of gross domestic product from 3.6% in 2020, as widely expected.

Oil prices rose sharply for a second day in a row on Friday, hitting their highest levels in more than a year, after the stronger-than-expected US jobs report and decision by OPEC and its allies not to increase supply in April. The surge took weekly gains to between 5% and 7% for Brent and West Texas Intermediate (WTI) crude as prices reached levels last seen in January 2020. Gold drooped again, as did silver, iron ore faded, but copper bounced on Friday. Gold finished the week under $US1,700 an ounce and at a 9-month low. While the stronger US dollar played a significant part in the weakness on Friday, it didn’t impact copper (or oil) which rose by nearly 2.5% on the day.

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