Markets last Week
Summary
- Global equities fell slightly last week, but year-to-date returns have been solid at 5.6% (FTSE All World Index in GBP)
- Bond yields fell, with the 10-year UK gilt yield dropping by 0.14%, going below the 4% mark. Bond prices rise when yields fall
- Bonds have been inversely correlated to equities this year indicating a normalisation in the behaviour of financial markets which is a better environment for investors
- US Federal Reserve (Fed) Chairman Powell maintained a dovish stance in Congress
- Good news for the Fed: the US employment report showed 275K new jobs in February, but unemployment rose to 3.9%, indicating a cooling labour market
- European equities rose 0.8%, taking year-to-date gains to almost 8% in sterling terms
- The European Central Bank (ECB) kept rates on hold; President Lagarde emphasised the need for more comprehensive data before considering rate cuts
- Good news for the Bank of Japan (BoJ): Japanese labour cash earnings rose, suggesting potential sustained wage-driven inflation; the Japanese equity market gained 1.2%
- Gold had a strong week, rising 4.6% to post a new all-time high of US$2193/oz, supported by Powell’s dovish congressional testimony, falling bond yields and a continuation of the medium-term structural drivers
- Gold mining stocks surged 8.5% flanking the rally in the spot price
- Next week, while generally subdued in terms of economic events, will see US Consumer Price Index (CPI) inflation data on Tuesday, which will offer valuable insights into the ongoing finely balanced trajectory of inflation.
Analysis
It was a mixed week for markets in what has been a relatively solid year so far. Global equities finished down -0.9% taking year-to-date gains to 5.6% (as measured by the FTSE All World Index in sterling terms). Bond yields fell during the week with the 10-year UK gilt yield falling by 0.14% taking it back below the 4% mark. German bund yields and US treasury yields also fell by a similar magnitude. Bond prices rise when yields fall.
One of the most positive signs from this year – which continued last week as the upward trend took a slight breather – has been the return of diversification. Multi-asset investors rely on the inverse relationship of stocks and bonds to build diversified portfolios. Since the COVID-19 recovery this diversification hasn’t worked as the correlation between bonds and equities has been positive. This year the negative correlation has returned as bond prices have fallen whilst stocks have risen, illustrated last week as equities fell marginally, bond prices rose. The return of this diversification points to a normalisation in the behaviour of financial markets and therefore to a better environment for traditional multi-asset investors such as ourselves.
It was a relatively busy week on the economic calendar. The UK’s Spring Budget revealed minimal surprises, with the most significant adjustment being a 2% reduction in National Insurance contributions. There was little headroom to make any drastic changes, but many had hoped for more with an election on the horizon.
Fed Chairman Powell was in front of Congress this week for his semi-annual congressional testimony. Many analysts had predicted that Chairman Powell would strike a more hawkish tone given the persistence of inflation. Instead, he reinforced the narrative of rate cuts later this year saying that the Federal Open Market Committee are “not far from” the level of confidence needed to begin loosening policy. The US employment report on Friday was hotter than anticipated as 275K new jobs were reported in February. There were a few caveats though including downward revisions to the estimates for the prior two months. Unemployment also increased more than expected to 3.9% and broadly speaking, although the US labour market remains tight there is evidence that it is cooling, which is good news for the Fed.
European equities had a good week rising 0.8% taking year-to-date gains to almost 8%, while benefitting from stability in both interest rates and economic data. A few of the larger companies in the European index have performed well this year particularly in the consumer discretionary, technology and healthcare sectors. This continued last week with strong performance from many of the large cap names. The ECB kept rates on hold last week as the Governing Council, led by President Christine Lagarde, remains cautious and inclined to await additional data before contemplating any rate cuts. The ECB’s staff economists have notably revised their inflation forecasts downward, providing further impetus for interest rate cuts. During the press conference on Wednesday President Lagarde emphasised the need for more comprehensive data, particularly on wage growth, before any monetary policy actions are taken. It was good news therefore that last week’s economic data reflected a cooling trend in wage growth across the Eurozone.
Data in Japan showed a significant rise in labour cash earnings indicating a potential for sustained wage-driven inflation. This aligns with expectations that the BoJ may end the negative interest rate policy soon. This adds to the upward momentum behind Japanese government bond yields, increases the potential for a stronger yen and coincides with rising domestic enthusiasm for Japanese stocks. The Japanese equity market continues to perform well, delivering a 1.2% gain last week taking year-to-date gains to almost 10% in sterling terms.
Gold had a fantastic week rising 4.6% in US dollar terms, to reach an all-time high of US$2193/oz. The surprisingly dovish congressional testimony of Powell and the fall in bond yields was supportive of the gold price. Gold tends to perform poorly when real yields are high or rising as they represent the opportunity cost of owning gold. In recent years gold has been particularly strong despite rising real yields and this is because other catalysts have overridden real yields. This includes strong buying in Asia due to high jewellery demand in India and low investor sentiment in China, meaning investors have preferred to buy the safe haven asset over riskier domestic Chinese equities. The biggest catalyst however has been central banks, which have bolstered their gold reserves against a backdrop of increased economic and geopolitical volatility. Gold mining stocks were up 8.5% last week supported by the rally in the spot price.
The week ahead
Tuesday: US CPI inflation
Our thoughts: Core inflation, which excludes the volatile food and energy components, is anticipated to have slowed slightly since January from 0.4% to 0.3% month-on-month. This is unlikely to be comforting for households however, as the increase in gasoline prices is expected to have pushed headline inflation higher from 0.3% to 0.4% month-on-month. The road back to the Fed’s 2% target is proving more challenging than most analysts previously anticipated. This CPI report comes with a lot of uncertainty, but things do seem to be moving in the right general direction pointing to disinflation over reflation.
Tuesday: UK jobs data
Our thoughts: Wage pressures have been easing recently in the UK on the back of falling inflationary pressures elsewhere and as the labour market has softened slightly. The recent pace of the fall in wage growth is expected to have slowed in January’s report. The low response rate to the labour force survey continues to be an issue and the accuracy of the data is poor.