Weekly View - Jobs are back
Bonds stole the show last week, with the 10Y US Treasuries yield falling below 1.15%, the entire German Bund curve going negative and the 2Y Italian BTP yield dipping below the ECB’s deposit rate (-50bp) for the first time. The value of negative-yielding bonds approached USD 17 trillion as a result. Good news out of the US reversed this trend somewhat, with the ISM Services report touching new highs and US nonfarm payrolls exceeding expectations, reinforcing a strong US economic reopening. The jury is still out on inflation. Factories in some Asian countries have shut on rising infections as the Delta variant spreads, further disrupting the covid-battered global supply chains. This will likely prolong the current parts shortages in the manufacturing sector, keeping input prices high and potentially hitting consumers down the line.
The Bank of England signalled that it could start shrinking its balance sheet once its Bank rate reaches 0.5% (from 1.5% previously). This would make it the first central bank to embark on quantitative tightening by a large margin. In contrast, the Federal Reserve is suggesting the mere tapering of its balance-sheet expansion later this year. Meanwhile, in China, the focus remains on the ongoing pressures from the regulator, although the overall tone last week was less aggressive than the preceding one.
Global mergers and acquisitions (M&A) activity continues at record-breaking levels as companies take advantage of the current low interest-rate environment to borrow cheaply. M&A activity reached USD 1 trillion in volume, year to date, adding further support to our event-driven theme in the hedge fund space. Pockets of leverage in the financial system came to light following the probe by the US Department of Justice on a German asset manager, leading it to issue a profit warning. Given that current equities valuations are rather stretched, markets have penalised companies for missing numbers and barely rewarding those that beat expectations.