Global stock markets have largely bounced back from the losses sustained late last week (ending 26 February), but investors remain concerned about the possibility of higher levels of inflation and rising interest rates in the months ahead.
With vaccination programmes accelerating around the world and Covid-19 infection rates apparently on a downward trend, the end of the pandemic does seem to be in sight. But while a relaxation of lockdown rules is likely to provide a boost to global economic activity, stock markets are worried that recovery could lead to a rise in prices and, consequently, the imposition by central banks of higher interest rates.
At the moment, market movements reflect the tension between optimism over the post-pandemic upturn and fears that an overly rapid rebound could lead to a sudden tightening of monetary policy – which would likely have a negative impact on company performance and valuations.
All eyes this week have been on bond markets, where recent falling prices and consequent rising yields reflect the growing view that inflation and interest rates are on the up in the medium term. Investors are desperate for guidance from central bankers on this topic – but, to their disappointment, US Federal Reserve chair Jerome Powell reiterated in a speech on Thursday 4 March that his focus remains firmly on economic recovery rather than bringing bond yields under control.
Meanwhile, oil prices have hit new highs for 2021 after producers decided not to increase output despite expectations of a global economic recovery this spring.
On Wall Street, the Dow Jones Industrial Average ended trading on Thursday 4 March flat for the week so far, with the S&P 500 down 1.1% – despite having posted its biggest single-day gain since June 2020 on Tuesday 2nd. Tech stocks in the US were again among the major losers, as recent volatility in the likes of Apple and Tesla continued.Nonetheless, a fall in the US unemployment rate provided some cheer this week, while the national vaccine programme has started to bounce back from recent weather-related disruption.
In the UK, the FTSE 100 ended Thursday 4th 2.6% ahead for the week, with positive news about the end of lockdown and a possible economic recovery helping to more than offset last Friday’s sharp losses.
Shares in London were also boosted by Chancellor Rishi Sunak’s second budget, which offered continued support for the sectors that have been hit hardest by the coronavirus, while postponing major tax rises to 2023. The construction industry received a shot in the arm thanks to an extension of the current stamp duty holiday and a new government programme aimed at providing credit to first-time buyers.
In Frankfurt, the DAX index ended Thursday 4th’s session up 2% for the week, having surged to all-time highs on Wednesday 3rd. Investors in Germany were cheered by solid economic data as well as the news that the country would shortly start to emerge from its winter lockdown.
Meanwhile, France’s CAC 40 gained 2.2%, with eurozone manufacturing activity recording a welcome increase since the start of the year.
Note: all market data contained within the article is sourced from Bloomberg unless stated otherwise, data as at 5 February 2021.