Although indicators show that the global economy is on the mend, slow vaccine rollouts in certain regions and supply chain disruptions pose a threat to the recovering economy.
A year on from the first global lockdown and related market rout, the world is still grappling with the pandemic, but is slowly on the mend. Expectations of a third wave of infections are prevalent, with a resurgence in cases already evidenced in Europe. Several countries in the region, including Poland, Germany and France, have reintroduced stricter lockdown measures. Slow vaccination rollouts and extended lockdowns threaten the economic recovery in the region and highlights the risks faced by other countries with lack of access to vaccines or slow distribution. This troubling picture stands in contrast to some of the other large economies, including the US, UK and China, who are much further along with vaccinations and are showing stronger signs of recovery.
In early March OPEC+ members surprised markets by keeping output unchanged, despite expectations of higher future demand as economies reopen. The oil price hit a high of close to $70 a barrel but settled the month closer to $65, as the threat of slowing activity in Europe spilled over into commodity prices.
It was a volatile first quarter, with duration-exposed assets in the crossfire with bond yields and earnings trending higher. The S&P 500 gained 4,4% over the month and 6,2% over the quarter. Emerging markets declined in March against a stronger US dollar and heightened volatility, as Turkey unexpectedly replaced its central bank governor. The MSCI World index gained 3,4% over the month, benefiting from strong US returns. Global bond markets lost further ground on higher bond yields. In US dollar terms, the Barclays Global Aggregate Index declined by 4,5% over the first quarter, while emerging market debt weakened by 4,7%.
Global trade and activity data continue to signal improvement in economic activity and mobility. Supply chain disruptions have been common over the last year but have increasingly been problematic as demand for goods pick up. A shortage in shipping containers has been a noteworthy pain point for exporters. The largest deficits have been experienced by Asia and Europe, which has led the cost of transporting a 40 ft container on the trading routes between the regions to quadruple since the fourth quarter of 2020. New containers have also become more costly as the price of raw materials such as steel has increased. To add insult to injury, one of the world’s largest containers ships, Ever Given, ran aground in the Suez Canal, blocking a major global trade route and incidentally also the primary route for container ships moving goods between Asia and Europe. While some of these challenges will be transitory, longer delays have the potential to increase input costs, either eating into producer margins, or increasing inflation for consumers if costs are passed on. In both cases, these trends warrant close monitoring.
The OECD has now joined the ranks of entities that have lifted their economic growth forecasts to account for vaccine rollouts and greater US fiscal stimulus, now expecting global growth of 5,6% in 2021 (up from 4,2%). Their advice to governments is to vaccinate fast, invest fast and support people. Global central banks have done all they can to communicate their preference to remain accommodative, especially given the uneven nature of vaccine rollouts and economic recovery to date. Bond markets are, however, already pricing a future of expansion in fiscal support, economic growth and potential for related inflation, as reflected in higher bond yields. With these two opposing forces, central banks are being forced to think carefully about ways to keep financial conditions from becoming tight, such as accelerating asset purchase programmes. The Federal Reserve, Bank of England and European Central Bank all kept interest rates on hold in March, but emerging markets have already seen their first interest rate hike from Brazil (granted with a different inflation backdrop) as their bond yields have also risen. Time will tell whether markets will force policy makers to act, but for now, the tussle will continue to impact broader asset prices.
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