Weekly View - Freedom day
The US economy continues to improve, with capital goods new orders up in January for the ninth straight month, albeit at a declining rate. The US House of Representatives passed President Biden’s USD 1.9 trn stimulus package, continuing the recapitalisation of the powerful US consumer. This drove a rise in nominal bond yields, causing a market correction. This move was driven by a move up in real yields however, rather than increased inflation expectations, and also triggered a correction in gold and appreciation of the US dollar. When it comes to impact on equities markets, the speed of rising bond yields is what matters, whereas absolute levels are significant for market multiples. That said, we are very positive on the earnings outlook for this year, but bearish on multiples and negative on bonds.
Brazil made headlines last week after President Bolsonaro intervened to remove state oil group Petrobras’s CEO over a dispute about fuel price increases. This move plays to our Who pays the bill theme for 2021 and reinforces our view that country selection will play a key role in performance this year. As does Hong Kong’s move last week to raise stamp duty on equities trades for the first time in three decades. We continue to like macro hedge funds.
The formal approval of J&J’s covid vaccine by US regulators over the weekend should add steam to the global vaccination effort, especially in emerging markets, given the jab’s relative cost effectiveness. The UK, which has inoculated over a quarter of its population against covid, laid out an encouraging reopening timeline. Key dates of the UK plan include 12 April, when non-essential shops and outdoor dining reopen and 21 June, “freedom day”, when all restrictions could be lifted. In the week ahead, we expect expansionary measures totalling around GBP 60bn in the UK’s new budget. This could, however, be compensated for by higher taxes. We remain positive on UK equities and negative on UK bonds. More broadly, global markets were hit by the covid selloff between 4-23 March of last year, so 12-month returns over the next 30 days may prove a reminder of the benefits of staying invested.