Bassanese Bites: Rates relief – March 29 2021

Global markets

Despite new lockdowns in Germany, risk-on sentiment improved last week thanks to a stablisation in bond yields, U.S. inflation relief, further progress in the U.S. vaccine rollout, and new freedoms for U.S. banks to pay dividends and buy back stock.

U.S. Fed chair Powell spoke several times last week and continued to reiterate that while inflation may pick up in the next few months (for technical reasons as explained last week) it should slow back down again thereafter and the Fed still has no intention of tightening policy for some time. That seemed enough to cap bond yields, with the U.S. 10-year rate easing back 4bps to 1.68%. Helping ‘value’ sectors like financials, moreover, was the Fed’s Friday announcement that banks are now strong enough to be allowed to pay dividends and buy back stock once again.

With 100 million now vaccinated, U.S. President Biden also upped the ante last week – pledging to have a further 100 million vaccinated within the next few months. In Europe, meanwhile, COVID is still wreaking havoc, with Germany announcing a hard 5-day lockdown over the Easter period and France seemingly on the verge of something similar. More attractive U.S. bond yields and America’s recent relative success in dealing with COVID is perhaps one factor behind renewed strength in the U.S. dollar of late. Also providing some relief to markets on Friday was the U.S. consumption deflator, which revealed core consumer price inflation remained relatively benign in February – with the annual rate dipping to 1.4% from 1.5%. That said, the annual rate is anticipated to jump to 2% next month, reflecting a very low monthly result in March last year.

In terms of key global trends, the overall S&P 500 Index continues to grind higher, while the U.S. dollar has firmed of late. Gold remains weak while the uptrend in oil prices has been checked in recent weeks. Bond yields eased last week, but it’s too early to suggest the strong lift in recent months has run its course.

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