This week we have seen the same story played out in financial markets as last week. Hopes of quick economic recovery have sparked concerns about rising inflation, which in turn leads to fears that central banks will withdraw market stimulus and/or increase interest rates. The economic picture is improving, but many economies are smaller than they were this time last year, unemployment is higher, inflation remains well below official targets and central banks appear committed to low interest rates to aid recovery. But this doesn’t appear to have much weight with markets at the moment and the narrative appears fixed that what is good for the economy is bad for asset values.
The one major exception to market turbulence was the UK which saw gilt yields fall slightly this week while equities increased. Chancellor Rishi Sunak’s Budget painted a picture of an improving economy and included additional stimulus to ease transition from lockdown to a, hopefully, fully reopened economy. Meanwhile tax rises to claw back Covid relief spending have become a problem for another day.
UK: BUY NOW, PAY LATER BUDGET SEES TAXES RISE NEXT YEAR
Rishi Sunak didn’t produce too many surprises in this week’s Budget, with most measures briefed in advance. With the UK getting ready to reopen after lockdown, the chancellor has been careful not to choke off recovery before it has begun and this year will see even more stimulus with more support for furlough, business rate holidays and business restart grants. Estimates now put the UK on track for a slightly faster recovery, with projected GDP growth of 4 per cent in 2021.
The chancellor stuck to a manifesto pledge not to raise income tax, National Insurance and VAT but put the country on notice to pay for the increased spending by freezing income tax thresholds between 2022 and 2026, while corporation tax is set to increase sharply from 19 to 25 per cent in 2023. Markets reacted positively to the news and the FTSE All Share bucked the global trend for falling share values this week. House builders have been amongst the biggest winners from the Budget as the stamp duty holiday was extended to June and further support for first time buyers was announced.
US: EQUITIES AND GOVT BONDS FALL AS CENTRAL BANK FAILS TO REACT
After a calmer start to the week, the return of inflation concerns and an impassive US Federal Reserve saw more selling of US Treasuries and US equities which rippled out to many global equity markets. An improvement in business sentiment and expanding vaccinations programmes is leading to expectations of faster economic recovery and that the US central bank will begin to increase interest rates. However, in a speech this week US Fed chair Jerome Powell said the bank would be patient in its approach to withdrawing its market support and although it is watching market movements they would need to be disorderly before the Fed considered taking any action.
It appears that many investors wanted to hear more concrete proposals and the lack of action prompted a bout of selling on Thursday, pushing 10-year Treasury yields up to 1.55 per cent (a level last seen in February last year). US equities also sold off once more and the technology-focussed Nasdaq index turned negative for 2021 so far.
COMMODITIES: OIL PRICE RISES AS OPEC MAINTAINS OUTPUT
The oil price rally has continued this week, helped by the OPEC nations deciding to maintain production at its current level. Saudi Arabia had been expected to announce an increase in its output but the organisation, along with non-OPEC member Russia, agreed to a more cautious approach in the face of continued economic uncertainty due to Covid-19 and current production will be maintained to the end of April. Prices increased sharply to push the price of Brent Crude above $67 a barrel, the highest level since before the pandemic.
Low oil inventories, expectations that economic activity will recover as vaccination programmes speed up and predictions of only a gradual increase in oil supply is expected the keep pushing the price of oil upwards. Goldman Sachs this week said it expects to see Brent Crude reach $80 a barrel later this year, while Bank of America said it expects oil to hit $100 a barrel at times over the next five years.