NEWS, VIEWS & TRUTHS (01/03/21)

Published on: March 1, 2021

Good morning everyone and welcome to another News, Views and Truths.

The news in the past seven days, once again, has been of rising bond yields; although now, this has accelerated to such levels that concerns surrounding global economic growth have begun to directly affect equity markets.

Source: Morningstar

Concern that rising bond yields will create a more difficult backdrop for companies to refinance in the future and that the exuberance over a reopening of global economies is too optimistic, saw a fall across most equity markets last week, with Emerging Markets falling over 5% as the desire for risk-off assets increased.

The UK FTSE 100 fell by close to 2% over the week, with the mid-cap FTSE 250 holding slightly under, at -0.58%.  The tech-heavy Nasdaq also suffered more than most, as investors continued to offload some of the most successful stocks of 2020, crystallising gains. 

However, of greater interest were central banks’ statements, in particular the growing divergence between the US and UK, against the stance of the European Central Bank and across Asia.

Addressing the topic for the first time late last week, Bank of England policymakers echoed US Federal Reserve officials in viewing the recent rise in bond yields as a product of optimism about a rapid recovery. Their remarks suggest that the U.K. central bank has no immediate plans to counter the sell-off that quadrupled yields on 10-year government bonds since the start of the year. 

And all of this in the lead up to Wednesday’s Budget to be delivered by Rishi Sunak; the most anticipated budget in years.  The commentary by the Bank of England will be a boost to Mr Sunak, who may use this rhetoric to repair the UK balance sheet without the worry of increasing bond yields.

And again, the topic of inflation was never far away.  Andy Haldane, the Bank’s chief economist and one of the most hawkish members of its rate-setting committee, suggested that central banks and financial markets could be underestimating the risk of inflation as the economy reopens.

The bottom line is that these comments together have shifted speculation away from further bank stimulus and toward the question of when policymakers might pare back the support they have in place now.  

Has the Bank of England passed the monetary baton to the hands of the fiscal Chancellor?  We shall see more on Wednesday.

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Updated: November 2020