Equity markets were largely propelled higher in February as the perceived success of vaccine rollout programmes, particularly in the US and UK, buoyed investor sentiment with governments signalling a possible timeline for the lifting of societal lock down measures. Moreover in the US, President Biden’s proposed $1.9 trillion stimulus package looks set to be passed by Congress further enhancing sentiment. Latterly, however, growing concerns over the inflationary implications of the the sheer magnitude of government spending in response to the pandemic caused longer dated Government Bond yields to soar and equity markets sold off giving up a lot of their gains towards the end of the month. Developed market equities, as measured by the MSCI World Index, outperformed their emerging counterparts over the period returning +2.6% in USD terms against the MSCI Emerging index’s return of +0.8%.
In the US, inflation expectations and dynamics within the Treasury market caused longer dated yields to spike in February leading to a rotation out of longer duration assets, notably technology stocks, which weighed down equity markets after an otherwise positive month for risk assets. Mr Biden’s stimulus package seems set to be passed by Congress in March providing payments of $1,400 directly to most American adults and extra funding to aide unemployment, both of which should increase consumption spending. Small cap stocks continued their outperformance in February with the Russell 2000 Index returning +6.2% whilst the larger cap S&P 500 and Technology heavy NASDAQ returned +2.8% and +1.0% respectively over the same period.
Delays to vaccine rollouts are still hindering the outlook in Europe, though, encouragingly the European Recovery and Resilience Facility was approved by the EU parliament, making €672.5 billion in loans and grants available to member states. Against this backdrop economic data remains mixed, with an improvement to Composite Purchasing Managers Indices (PMIs), rising to 48.8 from 47.8 in January, primarily due to the manufacturing sector’s sharp rebound to 57.9 (above 50 signals expansion). By contrast, with social restrictions still largely in place across Europe, the service sector remains weak with latest PMI print of 45.7 suggesting a contraction in activity. Equity markets were positive across Europe over the period with the broad MSCI Europe Index returning +2.6% in local currency terms.
In response to constructive progress being made in respect to the UK’s vaccination programme, Prime Minister Boris Johnson announced targets to the gradual reopening of the economy. Investors took the news positively and the FTSE All Share extended 2.0% over the month, whilst Sterling appreciated by 1.8% versus the US Dollar. Meanwhile, GDP data suggested the restrictions implemented to combat the pandemic caused the UK economy to contract by 9.9% in 2020.
The massive amount of stimulus being supplied to economies has fueled inflation expectations, bringing forward the prospects of interest rate hikes causing the steepening of yield curves. The level of volatility in the US Treasury market has drawn comparisons to that witnessed in the ‘taper tantrum’ of 2013. Benchmark US 10-year Treasury yields spiked 33bps over the month ending February at a level of 1.40%. The moves were just as pronounced in the UK and Europe with 10-year Gilt yields increasing 49bps and 10 year German Bunds 26bps to end February at 0.82% and -0.26% respectively (the price of bonds are inversely related to yields). High Yield spreads narrowed in this environment resulting in positive returns: the BofA/Merrill Lynch HY indices returning +0.5% and +0.3% for their respective Euro and US Dollar indices.
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