Market Insights – March 22, 2021

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

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Scenic winter panorama


The vaccination campaign is pressing ahead rapidly in the United States. A quarter of the population has already received at least one of the two doses needed. And that figure goes up to 70% among the over 65s. We think this makes another big wave of infections there unlikely, meaning that the US economy should fully open up again very soon.

In February, Germany’s ZEW Indicator of Economic Sentiment recorded a surprisingly robust rise, with economic optimism picking up considerably. Expectations of an economic recovery have improved in light of the vaccination campaigns.

The sharp uptick in output in Asia following the Chinese New Year has exacerbated tensions in the industrial metals market, with supply falling short of demand. We therefore expect prices to start moving upwards again after a short-lived consolidation.

A dovish start to the US spring

In the English-speaking world, decision-makers are often divided into doves and hawks. Doves tend to be peacemakers and seek to avoid conflict, while hawks are warmongers. This very binary distinction is also used in monetary policy. Hawkish central bankers focus on rising inflation, while the dovish ones are more tolerant of price rises if they come alongside faster economic growth. Since the start of the public health crisis just over a year ago, major central bankers around the world have been extremely dovish – to an extent not seen since the 2008 financial crisis.

But as the economy starts to pick up, the hawks may gradually start making a comeback, first in the States, which is one of the countries farthest along in its economic recovery. Last week, all eyes were on the Chair of the US Federal Reserve for the slightest sign that the hawks would get back into the dove cage and that US monetary policy would change course soon.

But Jerome Powell’s comments were reassuring – the doves are still firmly in control. At the same time, the vaccination campaign is in full swing throughout the country, suggesting that the pandemic may soon be over. And the economic outlook is very much brightening, especially since Joe Biden announced a major rescue plan. Leading indicators of inflation point to an upcoming rise in prices, although for the moment Jerome Powell thinks that rise will be temporary. And he doesn’t think a rate hike will be necessary until late 2023.

At the meeting, the Fed Chair was seeking above all to ease investors’ fears and bring some calm to the bond market. Yields on longer-term US Treasuries have soared this year, and if that trend continues, it could weaken the economic recovery. A week after Christine Lagarde’s strong demonstration, Jerome Powell confirmed that the hawks would not be let loose anytime soon.

Emerging markets – premature signs of anger

In 2013, when there was a chance the Fed would begin tapering off its asset purchases, bond investors panicked, sending US long-term interest rates soaring and causing emerging-market assets to slide. These fears resurfaced a few weeks ago, with US-dollar yields rising sharply. But things are not exactly the same as they were eight years ago – at the Fed or among emerging markets.

Firstly, back in 2013 Ben Bernanke talked about tapering, but this time Jerome Powell has maintained an accommodative tone. In fact, the market has had a taper tantrum without even the slightest mention of any tapering. Among emerging market assets, the Latin America and EMEA (Europe, Middle East and Africa) regions are still relatively exposed to a rise in US interest rates, but these regions now make up only about 20% of emerging market equity indexes, compared with close to 40% back in 2013. 

And the ‘Fragile Five’, which back then referred to the five most economically vulnerable countries, now account for just 18%. Emerging markets in Asia, whose stock markets and currencies are more stable, have increased their weighting in global indexes. And while Asia makes up around 80% of emerging stock market indexes, it accounts for just a third of bond indexes.

That’s why we prefer emerging market equities to bonds. Although a sharp rise in the US dollar could weigh on emerging market assets, the change in the makeup of indexes since 2013 should lead to less volatility.


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