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    Weekly multi-asset update: February

    Weekly multi-asset update: February

    19 February 2021 Multi-asset
    Week to 19 February, 2021

    Summary

    • Government bond yields rise amid optimism regarding the US economic recovery
    • Manufacturing PMIs remain resilient as we move through February
    • Next week sees a potential vote from the House of Representatives on US stimulus, as COVID-19 remains in focus

    Weekly review

    Government bond yields rise amid optimism regarding the US economic recovery

    Global government bond yields moved higher over the week, with the 10-year Treasury yield rising to its highest level since late February of last year. Growing optimism regarding the US economic recovery, given Joe Biden’s planned $1.9trn stimulus package, positive data prints, rising COVID-19 vaccinations and strong corporate earnings, drove yields higher. US retail sales significantly exceeded market expectations, printing at 5.3% for the month of January (well in excess of the 1.1% increase expected). The report was bolstered by lockdown restrictions easing in some areas, as well as the arrival of stimulus cheques. The January PPI reading was also higher than expected, with the headline figure rising 1.3% (vs 0.4% expected).

    Minutes of the latest Federal Reserve were released, which showed that the US central bank is not overly concerned about inflation. We believe the Fed needs to take special care when delivering forward guidance on policy, in recognition of the large volumes of both public and private debt that has amassed through the pandemic, noting that an increase in interest rates is likely to have a greater effect in the current economic environment. As we move out of strict lockdown conditions and economic growth sees a material pick-up, we believe that the Fed will see the boost to inflation as transitory. Indeed, there was evidence of this in the Fed minutes, where there was emphasis on looking through “temporary factors affecting inflation - such as low past levels of prices dropping out of measures of annual price factors”.

    Global equity returns were volatile this week as concerns amongst the market continued to rise regarding higher sovereign bond yields, and whether they could have an impact on risk assets. The European Central Bank also released minutes of their recent meeting mentioning that “stock prices could eventually become vulnerable to a rise in real yields globally". It is clear that policymakers are aware of this risk.

    Manufacturing PMIs remain resilient as we move through February

    The other highlight this week was the provisional PMIs from around the world, which provide an indication of how the global economy has progressed into February. Prints across Europe were strong, especially on the manufacturing side – Eurozone manufacturing printed at 57.7, an improvement over last month’s 54.8. Services were slightly weaker falling to 44.7, a slight drop from 45.4 last month. Overall, the data paints a positive picture on the growth outlook.

    Next week sees a potential vote from the House of Representatives on US stimulus, as COVID-19 remains in focus

    Markets look ahead next week to a potential vote of the House of Representatives on the new US stimulus package, if Speaker Nancy Pelosi’s plan remains on track. COVID-19 is likely to remain at the top of the agenda, with next week marking the anniversary of the first large sell-off in markets. With case numbers globally decreasing with vaccination programmes being rolled out, attention turns to authorities who have a difficult job in timing the roll back of restrictions. Indeed, UK Prime Minister Boris Johnson is set to outline a lockdown exit map on Monday.

    Week to 12 February, 2021

    Summary

    • Market sentiment boosted by comments from Fed Chair Powell and developments on the US stimulus package
    • COVID-19 cases are falling; however lockdown restrictions are keeping mobility and economic activity subdued
    • Next week provisional February PMIs are released, and Lunar New Year means limited market activity across parts of Asia

    Weekly review

    Market sentiment boosted by comments from Fed Chair Powell and developments on the US stimulus package

    Risk assets continued to perform well as the week progressed. Sentiment was boosted by confirmation from the Federal Reserve (Fed) that monetary policy will remain loose throughout the pandemic recovery, and progress is being made on the closely watched US stimulus plan. On the former, Fed Chair Jerome Powell’s speech focussed on the recovery in the labour market and called for government and the private industry to provide more support. Powell pushed back against the idea that a large fiscal stimulus bill could cause the economy to overheat, referencing very few signs of inflation even with the jobless rate at multi-decade lows prior to the pandemic. Importantly, he noted the Fed will continue to provide support throughout the pandemic and it is yet to start thinking about changing the pace of asset purchases.

    On the fiscal side, the US stimulus bill continues to move through various committees. Whilst some measures have passed, such as providing $400 weekly supplemental unemployment benefits until the end of August, others, such as providing cheques to individuals, are still to be voted on. We expect Congress and the Biden Administration to pass a COVID-19 relief bill by mid-March. While it is not clear whether a bipartisan deal is possible, or if the Democrats will use budget reconciliation, we expect the final package to be materially smaller than the $1.9 trillion proposal given political and legal restraints. Some portions of the proposal will avert fiscal tightening, such as extending the expiring unemployment benefits, while others, such as direct cheques, will represent a genuine boost to the fiscal impulse. It is our view that the fiscal impulse will peak in the 2nd or 3rd quarter of this year and start to fade away through 2022. Overall, we forecast US GDP growth to be 5.4% in 2021 and 4.2% in 2022.

    Whilst on the topic of the Biden administration, it is worth mentioning the President’s call with his Chinese counterparty Xi Jinping this week. Biden took the opportunity to raise concerns over China’s economic practices, human rights abuses in the Xinjiang region, and the growing restrictions on the political freedoms in Hong Kong. China pushed back against concerns on the latter two, claiming that these were internal affairs, however it is open to re-establish mechanisms for dialogue to ensure a mutual understanding around policy intentions.

    COVID-19 cases are falling; however lockdown restrictions are keeping mobility and economic activity subdued

    In positive news, there has been a meaningful slowing in case growth across Europe and the US. However due to lockdown restrictions remaining tight (indeed, this week Germany moved to extend their lockdown until 7th March), the mobility data we track remains subdued. As vaccination programs continue to be rolled out and case numbers continue to fall, it’s over to authorities to decide on a plan to start unlocking areas of the economy. In the UK, Prime Minister Boris Johnson is preparing to unveil a road map out of lockdown on 22nd February, after the most vulnerable people in the country have been vaccinated. After this, we will be closely tracking to what extent the pent-up savings individuals have amassed over the pandemic period provide a boost to economic activity.

    Keeping with positive news, this week saw the World Health Organisation recommend that the AstraZeneca vaccine can be used on all adults over the age of 18. This move should help wider use across the world, and particularly in Europe where some countries refused to use the vaccine on the elderly due to concerns around insufficient data.

    Next week provisional February PMIs are released, and Lunar New Year means limited market activity across parts of Asia

    With Lunar New Year on Friday 12th, markets across Asia next week will either be closed or offer limited liquidity. Outside of that, the main data highlight for next week will be the preliminary February PMIs, which should offer an indication of how the global economy has fared into February. With the US strongly outperforming in the January prints, it will be interesting to see if the divergence with Europe continues.

    Week to 5 February, 2021

    Summary

    • Risk assets supported by positive news on stimulus, vaccine rollouts and economic data
    • Manufacturing PMIs held up better in this downturn, and stimulus in the US is on the horizon
    • The Bank of England (BoE) held monetary policy steady and forecasts recovery from the second quarter
    • Earnings season winds down with current EPS growth at -4% and management guidance looking more positive

    Weekly review

    Risk assets supported by positive news on stimulus, vaccine rollouts and economic data

    It was a better week for risk assets, with positive sentiment supported by further hopes for fiscal stimulus, success in the rollout of vaccination programs and strong economic data.With risk assets performing better and the pathway to reopening economies becoming clearer, government bond yields have risen with market participants expecting to see a pick-up in inflation numbers. Whilst we agree headline inflation will begin to rise, partially due to base effects, and return to levels seen prior to the crisis, our view is that central banks will view these upticks as transitory. Indeed, this view was supported by Federal Reserve Chair Jerome Powell in a recent Q&A session. 

    Manufacturing PMIs held up better in this downturn, whilst stimulus in the US is on the horizon

    The composite PMI in the Eurozone fell to 47.8 from 49.1 in December, but above the market consensus of 47.5. Manufacturing held up better than previous phases of strict lockdown restrictions. The ISM PMI was also released, with manufacturing dipping to 58.7 from 60.5 and services rising to 58.7 from 57.7. These numbers are encouraging in the face of the third wave of COVID-19 the US is experiencing, with no sign of an extreme collapse in economic growth in the latter parts of last year.

    That said, providing further stimulus is of key importance to US President Biden. This week, the House passed the budget resolution for the 2021 fiscal year, which has now been sent to the Senate. We anticipate that any pandemic relief will likely include direct cheques to those who the administration deems need financial support.

    The Bank of England (BoE) held monetary policy steady and forecasts recovery from the second quarter

    The UK's monetary policy remained unchanged. The prospect of an immediate implementation of negative interest rates faded after a report from commercial banks indicated that it would take a minimum of six months to prepare operationally. BoE Governor Andrew Bailey suggested that the economy would bounce back strongly, especially as the vaccine rollout is well under way, with over 10m adults inoculated in the UK. Further, the BoE forecast the economy would contract by around -4% in Q1, and projected it would bounce back strongly after that, with CPI inflation above the 2% target by the first quarter of next year. Gilt yields jumped and sterling rose as a result.

    Earnings season winds down with current EPS growth at -4% and management guidance looking more positive

    We are now at the tail end of US earnings season with most S&P 500 firms having reported results. The current earnings per share (EPS) growth rate is -4% (year on year), which leaves the EPS contraction for 2020 around -15%. This is a better result than expected in the middle of last year, and positive relative to the scale of economic contraction. US earnings have been cushioned, relative to other regions, due to heavy weighting in those sectors which have most benefitted from COVID-19. This trend was further reinforced this quarter with several mega-cap technology firms posting record numbers. However, share price reaction has been notably negative, and at the time of writing the average price reaction to earnings beats is the worst on record. A portion of this may reflect profit taking, however it does indicate that positioning looks stretched in those areas of the market which have done particularly well. There are however some signs of optimism, with the ‘tone’ of management commentary more positive. Guidance has been sparse for many of the more cyclical sectors in the past few quarters however, this season several key growth bellwethers re-instated guidance for 2021.

    Earnings season starts to wind down next week with a further 82 companies from the S&P 500 reporting. Other than that, it should be a relatively quiet calendar for markets with fewer macroeconomic data points out. Therefore, focus will likely remain on how successful countries are in continuing the rollout of vaccination programs.

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