Global risk assets rose in the wake of positive developments on the two main fronts that have dominated headlines over the past 12 months – pandemic and stimulus. On the former, despite concerns over mutations and more virulent variants, infection rates have dropped, and the vaccination rollout has ramped up, at least in the US and the UK. Comprehensive data from Israel, where over half of the population has received at least one vaccine dose, has indicated an effectiveness ranging from 95 to 99 percent, raising hopes that a return to normal could be in sight. Meanwhile, the Biden administration cleared the first major hurdle for its USD 1.9 trillion economic relief plan after approval in the House of Representatives, following public support from hundreds of business leaders and notwithstanding Republican opposition. In addition to championing the new stimulus bill, Chairman Powell also played his part in visits to Congressional committees, stating the Fed would keep its foot to the pedal given lingering uncertainties over the recovery path.
The combined prospects of huge additional fiscal largesse and economic reopening fueled inflation expectations and precipitated a major selloff in global bonds. A disappointing auction of 7-year Treasuries led to an unwinding of approximately USD 50 billion of longer maturities and a continued steepening of the yield curve. The message seems clear: investors are expecting the Fed to follow through on its promise to keep short-term rates lower for longer and allow inflation to rise above 2%. The yields on the US 10-year and 30-year Treasury bonds soared by 35 and 32 basis points, respectively, their largest monthly increase since 2016. Sovereign bonds in Canada, Germany and the UK also sustained meaningful losses. Surprisingly, the US Dollar managed a small gain (as measured by the Dollar Index) and sizable gains against emerging market currencies. Unsurprisingly, gold fell by more than -6% as real-interest rates increased, followed by an almost -2% loss in silver. But broad commodities had yet another strong month, with huge gains in energies followed by base metals and varied agriculture markets. Europe, Canada and Asia led the equity pack, whereas US stocks were mixed – small caps enjoyed strong gains while the technology, growth-oriented companies sold off in the wake of the rise in long-term rates.
In the early days of March, global bonds have continued to suffer intense selling pressure. While CPI's have yet to confirm the resurgence of inflation, investors are increasingly uneasy in the face of mounting signs of cost-push, and expectations of imminent demand-pull dynamics. The rise in grain and energy prices, in and of themselves a worrying development, impose major downstream effects to costs of living around the globe. While the former impacts livestock and biofuels, the latter cascades into transportation and logistics, the backbone of our modern economy. The new US government has ordered a review of critical supply chains focused on semiconductors, batteries, pharmaceuticals and all key underlying minerals and ingredients, following recent supply chain disruptions particularly affecting the technology sector. The move sparked criticism from China – which controls approximately 90 percent of rare earth metals production – warning this would only harm global trade.