Market Commentary 22nd February 2021 from Charlie Hancock

Posted by melaniebond

Market Commentary 22^nd February 2021

Equity Indices

The FTSE 100 outperformed most major equity indices around the globe, gaining 0.52% across the week. Strong performance in banking, mining and oil stocks outweighed a rising Pound to lift the large cap index. The FTSE 250 index was broadly flat at -0.01%.

Rising commodity prices lifted stocks in the mining sector, with Anglo American rising by 7.77% and Rio Tinto seeing a 7.04% rise. Oil prices remained close to their recent high, which contributed to BP shares rising by 4.03% across the week. Royal Dutch Shell gained 3.06%.

Rising bond yields, together with Barclays announcing that they will resume dividend payments, helped to lift banking stocks. Barclays shares rose by 5.31% across the week, NatWest Group gained 5.14% and Lloyds Banking Group climbed by 2.94%.

Europe

European equity indices were mixed last week. The broad FTSE All World Index – Europe ex UK gained 0.11%, aided by strong performance in French equities. Germany’s DAX index fell by 0.40% across the week.

News reports continued to highlight difficulties in the roll out of COVID-19 vaccines across Europe, with the EU still waiting to receive 10 million Pfizer doses which were due to be delivered in December. Newly appointed Prime Minister Mario Draghi delivered a speech to the Italian Parliament, pledging to accelerate the vaccination programme and use monies from the EU recovery fund to implement structural reforms.

Purchasing Managers Index (PMI) data showed that business activity in the Eurozone contracted during February. With lockdown restrictions in place across much of the continent, the reading for the services sector showed a continued decline, however, the manufacturing sector remained relatively strong.

During a shorter trading week, with US markets closed on Monday, US equity indices also saw mixed performance. The S&P 500 fell by 0.71%, the Dow Jones Industrial Average gained 0.11% and the technology heavy NASDAQ 100 fell by 1.64%.

US coronavirus cases continued to decline and headlines regarding the vaccination programme were positive. Bloomberg reported that vaccine supply is expected to double by April, whilst President Joe Biden stated on Tuesday that all Americans will have access to a vaccine by July.

Markets appeared to be hoping for more fiscal stimulus, with a worse than expected weekly jobless claims figure indicating that further stimulus may be required to help lower the unemployment rate. As the week progressed, US equity indices moved lower, with investors appearing concerned about the prospect of rising inflation and higher interest rates.

Asia

The broad FTSE All World Index – Asia Pacific was broadly flat with a rise of 0.04%. The Chinese stock market re-opened from the Lunar New Year holiday, with the Shanghai Composite Index gaining 1.12% for the week. Japan’s Nikkei 225 index gained 1.69% to climb above 30,000 points for the first time since 1990.

Official economic data showed that Japan’s economy expanded by an annualised rate of 12.7% during the 4^th quarter last year. The Gross Domestic Product (GDP) figure was better than expected and confirmed that the economy shrank by 4.8% during 2020. PMI data showed that the Japanese manufacturing sector returned to expansionary territory in February, with growth in exports helping to drive up activity.

A campaign from the Beijing administration discouraging travel for the Lunar New Year holiday celebrations appeared to work as intended, with tourism related businesses reportedly seeing revenues suffer. This was somewhat offset by consumer spending in other areas remaining buoyant.

Bond Yields

The 10-Year Gilt yield saw a significant rise last week, moving from 0.52% to 0.70%. The Pound advancing against most major currencies provided a tailwind for yields to move higher, but the main driver appeared to be investors selling government bonds on concerns of rising inflation.

Europe

The 10-Year German Bund yield moved from -0.43% to -0.31%. Italian government bonds bucked the recent trend of declines, with the 10-Year yield moving from 0.49% to 0.62%.

Government bond yields in Europe mirrored the movement in US treasuries, with inflation concerns prompting investors to reduce exposure to low yielding bonds.

The 10-Year US Treasury yield rose from 1.21% to 1.34%, reaching the highest level since February 2020. Continued strength in commodity prices prompted investors to focus their attention on the prospect of stronger than anticipated inflation. With government bond yields expected to provide low to negative real returns over the coming years when factoring in inflation, investors reduced their exposure to treasuries.

Currency

GBP / USD – Current 1.4016 Previous 1.3896

GBP / EUR – Current 1.1561 Previous 1.1447

The Pound gained 0.86% against the US Dollar and 1.00% against the Euro. Prime Minister Boris Johnson praised progress in the vaccination programme, with 15 million people in the UK having received a first dose. Speculation on the phasing out of lockdown restrictions also improved sentiment on Sterling across the week.

Commodities

Gold

Gold continued to display weakness, with rising Treasury yields putting downward pressure on the precious metal. The spot price declined by 2.05% to $1,784.25 per ounce.

Oil

Oil prices moved slightly lower across the week, but remained relatively strong, with supply limits expected to remain in place even as demand picks up over the coming months. The Brent Crude spot price was 0.57% lower at $62.91 per barrel.