Market Analysis 19/03/2021
The Fed expects a clear acceleration of growth and inflation this year in the United States
The knock-on effect in Europe was limited
Cyclicals continue to be favored
Rising US yields dominated sentiment as 10-year US Treasuries hit 1.75% during the week. On Wednesday 17th of March, the Fed said higher nominal yields were due to growth and inflation improving all the time. The Philadelphia Fed survey, for example, surged in March to levels not seen since April 1973. The prices-paid component was extremely high, and many companies are suffering from labor shortages as they struggle to find the skilled workers they need. A spike in bond yields is possible soon and the Fed said it would be unhappy to see them at levels which would jeopardize its targets. That could lead the bank to reinforce its communication efforts. Long-term yields are rising for the right reasons. The impact on interest-rate sensitive equities was varied: bad for technology, good for banks due to yield curve steepening. There is more pressure on emerging country assets. The knock-on effect in Europe was limited as the European Central Bank (ECB) will probably increase asset purchases and has also been crystal clear on its policy. Meanwhile, the Bank of England stayed on the sidelines, keeping its bank rate at 0.1% and its asset purchasing program at £895bn (£875bn on gilts and £20bn on corporate bonds). The bank acknowledged the improvement in the United Kingdom’s sanitary situation and growth outlook but said recent inflation would only be temporary: low comparison base effects for energy prices were over and the labor market was probably not as healthy as the 5.1% unemployment rate would suggest. The Bank of Japan also cemented its commitment to support measures. The rate target introduced in 2016 remained unchanged and there was a marginal 25bp increase in the long-term rates for 10-year bonds that the bank will accept. Meanwhile, France decided on a fresh lockdown for parts of the country after a rapid deterioration in the situation in the Paris region and in the North. The new measures will affect around 30% of the population and 40% of GDP. The decision will push back the cyclical recovery in France but the Eurozone is showing real signs of improving. Intra-zone exchanges rose 4.9% to €168.3bn, or more than in the pre-pandemic period. Against the backdrop of the uneven pace of recovery between the United States, Europe and the emerging zone, we are sticking with our preference for equities. We will, however, be scrutinizing valuations in interest-rate sensitive sectors.
The environment is still promising for equities. Bond yields are still low, monetary normalization will be very gradual and the economic outlook is improving. The Fed said it expected both growth and inflation to accelerate significantly this year. The bank thinks any discussion of gradually reducing bond buying is premature. Cyclicals like banks and automobiles remained in vogue as they stand to gain from higher rates. However, the oil sector underperformed as prices fell on increasing crude and petrol inventories in the United States as well as the resumption of Iranian exports. Automobile manufacturers led gains over the period after Volkswagen delivered optimistic guidance on operating margins in coming years. The group expects them to be at the top of the spread thanks to efforts over fixed costs and the development of electric vehicles. BMW followed suit as it has the same growth levers. Renault said it expected to double sales of electric and hybrid vehicles this year to 30% of overall production. The news largely overshadowed the European Automobile Manufacturers' Association’s announcement that new car sales had fallen 20% in February. Elsewhere, Sartorius (pharma and lab equipment) raised guidance for 2021 after new orders rose for the first 10 weeks of the year. Management now see sales rising 38% with an EBITDA margin of around 33%. Most of the new orders are due to the pandemic as many of the group's products are used in vaccine production. Some sectors, however, continued to struggle. Accor’s CEO sounded an optimistic note on the size of the rebound for hotels but was less sure about the timing. He called for government aid to be extended in coming quarters.
In a mixed week for US indices, the Dow Jones rose 1.16% while the S&P500 and the Nasdaq shed 0.61% and 2.11%, respectively. Joe Biden is targeting July 4 as the date when things will start to return to normal. He hopes increasing vaccinations will allow Americans to be optimistic. Transport secretary, Pete Buttigieg, said he was considering funding road projects with a tax on the number of miles driven rather than on petrol, a move that would therefore include electric vehicles. The first meeting between the Biden administration and China’s foreign secretary was particularly tense. Both sides accused each other of cyber-attacks, commercial sanctions, and infringements of human rights. The United States president will present the broad outlines of his infrastructure renovation and new energy development plans this coming Thursday. According to Reuters, the plan could amount to $2 trillion.
Traders focused on the Federal Open Market Committee (FMOC) as well as the Bank of Japan’s policy review. The Nikkei 225 advanced 1.68% and the TOPIX gained 2.94%. Sentiment continued to bet on an economic recovery and hopes for progress in the vaccination campaign. The Nikkei 225 index revisited the 30,000-yen level, anticipating the Bank of Japan’s decision to raise its annual ETF purchase program to JPY 6 trillion while allowing long-term interest rates to move by plus or minus 0.25%. Marine Transportation (+9.30%), Air Transportation (+7.54%) and Automobiles (+4.37%) continued to rise on the global economic recovery story. Banks (+6.50%) were also strong as US bond yields rose further. Mitsubishi UFJ Financial Group jumped 8.71% and ANA Holdings added 7.04%. On the other hand, Mining and Oil & Coal Products underperformed as oil prices fell back. As expected, the government said it would be lifting the state of emergency for the whole country from March 21.
The MSCI Emerging Market index was quasi-flat, down 0.02% as of Thursday’s close. Brazil outperformed other regions, up 1.27% in USD. China edged 0.6% higher while the MSCI India was down by 3.04%. The first high-level talks between the United States and China since President Joe Biden took office had a rocky start in Alaska and weighed on market sentiment. China continued its upward recovery trend with retail sales up 33.8% YoY in the first two months of 2021, or more than the 32% estimated, due to a favorable base effect. Industrial production rose 35.1%, beating the 32.2% forecast, while fixed-asset investments fell short of expectations of a 40.9% rise. Alibaba is reportedly creating a mini program on Tencent’s Wechat platform which will allow shoppers to use Wechat Pay, thus easing antitrust concerns. Wuxi Biologics is to acquire Pfizer’s biologic drug plant in China. The deal would allow it to meet surging manufacturing demand for drug substances and drug products. PinDuoDuo’s fourth-quarter results showed it now had more annual active users than Alibaba and had become China’s biggest e-commerce company.