Market Commentary 1st March 2021 from Charlie Hancock

Concerns around rising inflation and higher interest rates intensified with equity indices declining as a result. Government bond yields rose sharply during the week, prompting weakness in stocks which are sensitive to higher interest rates.

Stocks which typically benefit from inflationary conditions, such as those in the banking and energy sectors, saw strong performance. Barclays gained 3.88% across the week, whilst Lloyds Banking Group rose by 2.12%. BP gained 7.12% and Royal Dutch Shell saw a rise of 3.52%

Eurozone economic data was positive last week, with official Gross Domestic Product (GDP) growth for the 4^th quarter of 2020 revised higher. For 2020 as a whole, the Eurozone economy contracted by 4.9%.

Further news reports citing difficulties in the vaccine roll out across Europe added to the pessimistic mood amongst investors in Europe last week. The President of the European Commission, Ursula von der Leyen, said that only 6.4% of the European Union’s population have received a vaccine dose.

Rising bond yields prompted investors to sell high duration assets, with technology and growth stocks declining as a result. There was evidence of a rotation into more cyclical areas of the market, such as airlines, with American Airlines Group seeing a rise of 12.10%. Stocks in the travel sector also received a boost from the Food and Drug Administration approving a single-dose vaccine from Johnson & Johnson.

Rising oil prices contributed to strong performance in the energy sector, with Exxon Mobil gaining 3.72% and Chevron rising by 4.13%.

The Shanghai Composite Index came under pressure as a result of Chinese technology and internet stocks being sold off heavily. Alibaba Group declined by 9.80% and Tencent fell by 9.34%, whilst Tesla rival NIO saw a fall of 15.30%. Investors did appear to be more positive on stocks which have been heavily impacted by the pandemic, with Macau hotel and casino operator, Galaxy Entertainment Group, rising by 5.98% across the week.

Japanese equities held up well, with the Nikkei 225 index having a relatively strong weighting to cyclical areas of the market. The Japanese finance minister delivered a downbeat message last week, stating that the government expects economic growth to slow across the 1^st quarter of 2021.

Investors reduced their exposure to government bonds as a result of concerns around growing inflationary pressures, partly driven by stronger commodity prices. As a result, yields moved sharply higher during the week.

The rise in yields prompted comment from the European Central Bank President, Christine Lagarde, who stated that the central bank was closely monitoring rising borrowing costs.

Concerns around rising inflation prompted investors to reduce their exposure to Treasuries, with the sell off intensifying on Thursday following an auction for $62 billion worth of new 7-year Treasury stock, which attracted little support from buyers. Demand for the new Treasury stock fell to levels not seen since 2009.

GBP / EUR – Current 1.1540 Previous 1.1561

The Pound rose to its highest level since 2018 during the first half of the week, before pulling back on Thursday and Friday. Across the week, Sterling was 0.59% lower against the US Dollar and 0.18% down against the Euro.