Weekly View - Pockets of exuberance
Data out of the US continued to outperform last week, with economic growth numbers from retail sales and housing starts coming in stronger than expected. In the weeks ahead, the employment numbers and CPI print in the first week of May will be key to watch for. So far, inflation has not risen to any concerning levels and Federal Reserve officials have reiterated that they will accept higher inflation numbers without adjusting their dovish positioning. At the same time, there was strong demand in last week’s 10- and 30-year US Treasury auctions, driving US 10-year yields down by 10 basis points despite the stronger-than-expected economic data and Q1 earnings. A goldilocks environment for equities has resulted and we emphasise the importance of remaining cautious, especially given the pockets of market exuberance that have emerged—for example around pricy tech IPOs and SPACs. Better growth numbers and rising commodity prices should push interest rates higher at some point, putting richly valued equities at risk. To combat this, we added protection to portfolios last week, thereby benefitting from the low volatility environment which has subdued the price of protecting portfolios.
As countries around the world scramble to protect their populations from further covid waves, the vaccination pace has slowed on the back of the recent side-effect issues AstraZeneca’s and Johnson & Johnson’s vaccines are contending with. While this has hindered progress in some countries, it will not derail the broader effort. Europe remains considerably behind the US in its vaccination drive, but financial markets are more focused on the European Commission’s decision to issue debt to finance the EU Next Generation Fund, which should stimulate the continent’s growth over coming years. Meanwhile, the European Central Bank increased its pace of asset purchases, thereby keeping real interest rates in check.
Growth data out of China also came in strong at 18.3% year over year for the first quarter of 2021. Domestic demand was solid but industrial growth is slowing. The base effects will be less favourable going forward, so this could likely prove the peak of China’s growth momentum. We are neutral emerging-market equities. In Chinese dept markets, how state-backed Huarong Asset Management’s debt gets restructured following the company’s credit outlook downgrade will be important for the Chinese corporate bond market outlook, potentially calling into question the government’s guarantee of its state-owned enterprises.