Market Insights – March 15, 2021

Each week, a team of experts shares its market views with you!

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Essentials

In February, US inflation once again came in slightly short of economists’ expectations. Excluding energy and food, prices were up just 1.3% year on year. Inflation could, however, pick up in March, which will mark a year since the start of the public health crisis in the States.

US consumer confidence bounced back in February. The vaccination campaign is moving forward at an impressive pace and households will receive further stimulus support in March – both factors that drove up the confidence index figures published last week. This suggests that consumers will go on a major spending spree as the US economy reopens.

Although China’s industrial output and retail sales beat the forecasts in January and February, the country’s stock market has been lagging behind in relative terms since the start of the year. This is partly because of fears that strong economic data will prompt the Chinese government to withdraw its economic support earlier than expected.

Christine Lagarde asserts herself among fellow central bankers

Expectations were low in the run-up to the European Central Bank’s latest meeting. In recent weeks, much of the focus has been on how the US Federal Reserve will react to the sharp rise in long-term interest rates in the States, and so bond investors will be watching the Fed’s meeting this week very closely. But the upward pressure on US-dollar yields has had a knock-on effect on European bond yields – albeit to a lesser extent. The relatively sluggish pace of the eurozone’s vaccination campaign means this rise in interest rates is coming too early, since it could end up pushing off the region’s economic recovery.

The ECB meeting was a chance for Christine Lagarde to stand out from her predecessors and take a stance without waiting to see what Jerome Powell will do at the Fed meeting this week. The US economy is starting to reopen, but Europe is still a far cry from that, and several countries are even going back into lockdown in response to the third wave of COVID-19 infections. It’ll take action – rather than words – to rein in yields and prevent them from derailing the nascent economic recovery. 

Although she didn’t increase the size of the ECB’s support programme, Lagarde did announce plans to significantly ramp up the bank’s purchases of European government bonds. An amount of between EUR 80 and 100 billion will therefore be injected into the markets each month to tackle the surge in eurozone yields. Just as some investors are fretting that the Fed will stop injecting money into the economy too soon, the ECB has sent out a strong signal by starting this fresh round of easing despite the region’s already very loose monetary policy.

The ECB president’s determination should lessen the impact that the inevitable spike in US yields has on eurozone bond yields. And if yields are only really rising in the States, that could give the US dollar a temporary lift, which would also be good for the eurozone economy. That’s why we’ve decided to slightly increase our exposure to the greenback in our portfolios. We have, for instance, upped the US-dollar allocation to 15% in CHF-denominated profiles.

A turning point for Italy

A few weeks ago, Mario Draghi accepted the challenge of trying to bring Italy out of its political gridlock in the midst of the pandemic. His priority will be to implement structural reforms that will help to drive long-term growth.  That will be no walk in the park. Italy is the eurozone’s weakest link – its debt levels are very high, economic growth was already sluggish before the COVID-19 crisis and the country is lagging behind in the energy transition and digitisation. What’s more, whether Draghi can implement his plans effectively will depend on how long his government can stay in power.

But we think that he has certain advantages over his predecessors. First and foremost, his economic expertise is widely recognised, and he enjoys broad political support in Italy, most notably among populist parties. On top of that, he’s come to power when the country is still in recession but on the brink of a sharp upturn thanks to the vaccination campaigns. We expect there to be a period of robust and sustained expansion because Draghi will no doubt make sure that the EU subsidies and loans Italy receives are used wisely. 

The Italian stock market has started to pick up in the wake of these political developments and is now outperforming the rest of Europe. Even if the pandemic once again complicates matters in the short term, we think that these factors will have a positive impact in the medium to long term. When that happens, we will be bullish on companies with domestic exposure, since they are most likely to reap the full benefits of the sharp uptick in growth.

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