Despite concerns about vaccine rollouts and their efficacy, economic repair appears to be underway in markets, and fiscal support has spurred consumer confidence.
News on the vaccine front remains finely balanced. Preliminary results from Israel, which has been leading the vaccine rollout, have shown very promising results on both critical illness and transmission. At the same time, the efficacy of the current vaccines against new strains or variants of the virus has been much lower than expected. Although the science allows for new formulations that can target the variants better, it does take time, which means the world continues to work hard to stay ahead of the evolving Covid-19 virus.
The oil price hit a 13-month high in February as a cold snap hit the United States. Texas, home to the Permian Basin, one of the largest petroleum-producing areas in the world, experienced arctic temperatures, which resulted in a decline in oil production of an estimated two million barrels a day or a fifth of US refining output.
This came after OPEC+ already tightened supply a month earlier. Gas production was also severely disrupted, leaving the grid with ‘rotating outages’ and consumers without heating and power.
Equity markets across the globe strengthened, despite increased volatility towards month-end. The S&P 500 gained 2,8% over the month, with technology-heavy Nasdaq delivering flat returns. Emerging markets gained a marginal 0,8%, while the MSCI World Index added 2,6%, benefitting from strong US gains. In contrast, bond markets across most categories and regions were hard-hit by increasing bond yields. In US dollar terms, the Barclays Global Aggregate Index declined by 1,7% while emerging-market debt weakened by 2,6%.
Manufacturing production around the world has remained resilient, despite continued restrictions and supply chain disruptions. This has helped mitigate the impact from weaker services sectors and is one of the reasons for more robust economic data in the last months of 2020. Notably, China’s fourth-quarter GDP exceeded expectations, leaving the country with 2020 economic growth in positive territory at 2,3%.
Resilient manufacturing has supported higher commodity prices, while an improvement in global activity, alongside supply constraints, has driven the oil prices close to pre-Covid-19 levels, translating into higher fuel prices. Vaccine rollouts and fiscal support have also spurred confidence and, in some cases, improved consumer spending. In January, US retail sales recorded its strongest gain in seven months. More seem to be on the cards if President Biden gets his stimulus plans passed.
It is therefore unsurprising that global bond markets have started pricing for economic recovery, but also a picture of reflation or increasing inflation – both from a low base created by 2020. The pace of change has been rapid and has accelerated sharply over the last month.
The US ten-year bond yield briefly traded above 1,6% in February, having started the year at 0,9%. Future inflation expectations are being priced in excess of 2%. These moves tend to spill over into global bond markets. Central banks have cautioned that economic repair is still underway, and inflation is set to moderate after peaking in mid-2021 due to base effects. The risk of rising inflation will likely remain as prominent as the volatility it is creating in markets.
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