Weekly Market Update 19/03/21

Shares in Europe have changed little in the last week. Even though central banks maintained their policy to stand behind an economic recovery, worries about a revival in coronavirus infections in some countries have limited the upside. In local currency terms, the pan-European STOXX Europe 600 Index ended the week approximately flat. Major European indexes were mixed. Germany’s Xetra DAX Index gained 0.82%, while Italy’s FTSE MIB Index advanced 0.36%. However, France’s CAC 40 Index fell 0.80%, and the UK’s FTSE 100 Index fell 0.61%.

Core eurozone bond yields ended a little higher. Germany’s 10-year bund yield climbed midweek, tracking U.S. Treasuries in response to expectations for an uptick in inflation. Yields eased somewhat on Friday on worries about the escalating number of coronavirus infections in Europe and consequent constraints on economic activity. Outer eurozone yields largely tracked core markets. UK gilt yields also increased, lifted in part by the Bank of England’s (BoE) positive tone relating to the economic outlook and its decision to keep interest rates the same.

The BoE’s policymakers unanimously voted to keep the benchmark interest rate at a record low of 0.1% and to carry on its existing bond buying program. The central bank said that global economic developments “had been a little stronger than anticipated” last month and indicated the U.S. fiscal stimulus package should provide “significant additional support.” It said bond yields had increased to demonstrate the stronger recovery while observing that the prices of risk assets had held up.

The Bank of France (BoF) increased its 2021 forecast for economic growth to 5.4% from 4.8% and said that activity at the end of last year held up better than predicted. The new projections may prove conservative, as they assume coronavirus constraints remain through the first half of 2021.

The major US indexes continued to move to record highs early in the week but then lost ground as bond yields reached their highest levels in over a year. Energy stocks fell sharply as oil prices saw their biggest daily drop since the summer, seemingly driven by rising U.S. inventories and demand worries due to renewed lockdowns and the slow vaccine rollout in Europe. The increase in yields read well for banks’ lending margins and supported financial shares for most of the week, but the sector fell back on Friday soon after the Federal Reserve announced it was not extending an exemption put in place early in the pandemic that allowed banks to hold lower capital reserves. The small-cap Russell 2000 Index fell the most, giving back some of its leadership for the year to date.

The equity rally stalled on Tuesday morning after longer-term Treasury yields resumed their rise– over the next two trading days, the yield on the benchmark 10-year note soared roughly 17 basis points (0.17%) and hit a new pandemic-era high of around 1.75% before retreating slightly.

The performance of Japan’s stock markets was mixed over the week. The Bank of Japan’s (BoJ’s) announcement, it will limit its purchases of exchange-traded funds (ETFs) to those tracking the TOPIX, contributing to the index’s 3.13% gain. The Nikkei 225 Stock Average underperformed, returning 0.25%. The yen strengthened slightly, closing at just below JPY 109 versus the U.S. dollar. The yield of the 10-year Japanese government bond finished the week at 0.11%.

Chinese stocks fell for the week, with the Shanghai Composite Index slipping 1.4% and the large-cap CSI 300 Index shedding 2.7%. Chinese stocks underperformed other Asian markets on Friday after negative headlines about the first day of talks at the US-China meeting in Alaska, with each side criticising the other. The yield on China’s 10-year bond rose after the release of strong economic data for January and February, but fell on Friday to 3.26%, unchanged from the previous week.

In commodities, oil rose by more than 2% in volatile trading on Friday and ended the week by about 7%, the biggest weekly decline since October. Friday saw Brent Crude settle up $US1.25 a barrel, or 2%, at $US64.53 a barrel while in the US West Texas Intermediate (WTI) crude rose $US1.42, or 2.4%, to $US61.42.

Gold and copper rose on Friday as the US dollar weakened slightly in the wake of a fall in bond yields. Gold rose 1% over the week after a solid session on Friday (up around 1.4%) with the price settling at $US1,740.70 and then rising further in after hours trading to end the week at $US1,744.50.

Copper rose by around 0.11% to end at $US4.11 a pound and fell nearly 1.3% for the week while silver eased at the end to finish the week at $US26.335 an ounce, up around 1.3% over the five days.