Stock markets have managed to hang on to their recent gains this week despite ongoing concerns that interest rates could start to rise later this year.
As the global economy starts to recover from the Covid-19 pandemic and the lockdown policies that have restricted business activity over the past 12 months, inflation rates look likely to rise. This is a worry for investors because it means central banks could increase interest rates in the medium term in response – a move which could negatively impact not just companies’ ability to raise finance, but also the value of their future earnings.
In the short-term, however, the vaccine-led economic recovery has started to generate a good deal of positive news for markets – in particular for stocks in hard-hit sectors such as travel, leisure and hospitality.
While bond yields have risen again this week (a sign that investors expect higher interest rates soon) central bankers have reiterated that they are not at present overly concerned about the threat of inflation. On Wednesday, the Federal Reserve chair Jerome Powell again said he would be reluctant to tighten monetary policy until the post-pandemic recovery was well under way – indeed, under current forecasts, the Fed does not anticipate raising interest rates until 2023 at the earliest.
Similarly, the Bank of England on Thursday said it saw no reason to change policy at such an early stage in the expected recovery.
US markets
On Wall Street, the Dow Jones Industrial Average ended trading on Thursday 0.3% up for the week so far, with the S&P 500 shedding 0.7% by the same point. The difference in fortunes can largely be explained by losses suffered by the technology stocks which feature more prominently on the latter index.
The likes of Apple, Tesla and Google have been more susceptible to concerns about higher interest rates, in part because rising rates mean that their future earnings are less valuable in today’s money.
In a sign that the expected economic recovery will not necessarily be plain sailing, retail sales figures in the United States fell sharply in February – but with government stimulus cheques being issued this month, an immediate turnaround is expected.
The UK and Europe
In the UK, the FTSE 100 ended Thursday 0.3% ahead for the week, having hit its highest point since January at Tuesday’s close. The success of Britain’s vaccination programme continues to generate optimism about the pace of the UK recovery, although news later in the week that the government was facing short-term vaccine supply problems provided something of a reality check.
In Frankfurt, the DAX index continued its recent outperformance, ending Thursday’s session up 1.9% for the week. German investors appear to be focusing on the recovery in major export markets such as the US and China, while downplaying concerns about the slow pace of the domestic vaccination programme and rising infection rates. France’s CAC 40, meanwhile, rose 0.3%, with gains limited by the news that new lockdown policies were set to come into effect in parts of the country.
Mar 12 | Mar 18 | Change (%) | |
|---|---|---|---|
FTSE 100 | 6761.5 | 6779.7 | 0.3 |
FTSE All-share | 3851.0 | 3862.1 | 0.3 |
S&P 500 | 3943.3 | 3915.5 | 2.8 |
Dow Jones | 32778.6 | 32862.3 | 0.3 |
DAX | 14502.4 | 14775.5 | 1.9 |
CAC 40 | 6046.6 | 6062.8 | 0.3 |
ACWI | 674.5 | 673.4 | -0.2 |
Note: all market data contained within the article is sourced from Bloomberg unless stated otherwise, data as at 18 March 2021.
