Weekly View - Saving Summer
Last week was dominated by news from central banks with those of the US, UK, Japan, Norway and Turkey all providing policy updates. Turkey’s raised short-term rates by 200 basis points. The central bank governor was then sacked by Turkey’s president immediately after. The others kept rates steady, although Norway’s Norges Bank brought forward its next rate increase to the end of this year. The Bank of Japan amended its stock purchase policy to intervene when the market falls rather than buying on autopilot. Meanwhile, the US Federal Reserve’s dot plot median shows that rate-setting committee members expect rates to remain unchanged until 2023, although just under half of them expect at least one rate rise in that year. Chairman Powell’s attempts to stay dovish as markets predict when the first round of rate hikes will arrive imply that the Fed wants to be behind the curve. All in all, these central bank actions appear to be driven by domestic considerations, reinforcing the theme of country diversification in 2021.
In bond markets, US yields continued to move higher and are now well above the 1.7% mark. Consequently, long-duration assets suffered. It is important to keep duration short in a bond portfolio today. There were more signs of divergence in economic outlooks, with the Federal Reserve bumping its 2021 growth forecast up significantly to 6.5%. In the week ahead however, purchasing manager indices will be key to watch for as Europe’s covid dynamics create uncertainty around the economic outlook with some countries announcing new lockdown measures on fears of a third wave.
Cyclical equities and value names did well last week after benefitting from the intra-equity market rebalancing. Higher earnings estimates come with higher GDP growth but picking the right winners remains key. Active management and diversification are ever more crucial this year. M&A activity appears robust, which should provide a boost to event-driven hedge funds. Last week, railway group Canadian Pacific agreed to buy Kansas City Southern for USD 28.9bn, at a 23% premium. The deal will produce the first US-Canada-Mexico railroad and validates our M&A theme.