Bi-Weekly. February 2021 II
Macro Update: Government bond yields are rising
Over the last weeks the expected amount of the next US fiscal stimulus packages has constantly increased. This was mirrored by a rise of US treasury yields. The 10y yield has risen since the beginning of the year from 0.92% to above 1.3%. There is an ongoing debate about the need and size of a fiscal package.
Larry Summers, democrat, former member of the Fed, believes that the announced stimulus of USD 1.9 trillion will be by far too much and the US economy will overheat. He reckons 50% of the announced amount would be more than sufficient. This would still be around 4-5% of US GDP on top of the approved package of a similar size before Christmas.
Meanwhile we do see a possible start of a new super cycle at the commodity market. Besides oil futures, cooper has reached a new high. Other industrial metals like palladium and platinum have risen as well. The market is anticipating a strong rebound of the economy once the lockdown measurements will be lifted.
Similar situation can be observed in the development of total outstanding amount of negative yielding debts which has decreased from USD 18.4 trillion dollars to less than USD 14.6 trillion.
The rise in global government bond yield has accelerated over the last trading days. This can be seen not only in the outstanding negative yielding debt chart but also in the strong steeping of the US yield curve. The short end of the yield curve has not moved while the longer end has seen a rise of more than 40 basis points.
Aggregated global profit expectations for all MSCI world companies have risen sharply. We therefore do see now a refection of the expected strong global synchronized economic recovery in most financial markets.
The open debate is the inflation outlook. While commodities indicate that we will see soon a rise in PPI most likely to be followed by rising consumer prices. The US Fed and the US treasury department keep constantly playing down this risk. The main argument is that the actual spike in commodity prices is a temporary and short-lived phenomenon.
The discussion of still present, but expected US inflation, based on the development of US TIPS (inflation linked bonds), has risen sharply.
Therefore, we continue to expect a very strong rebound of GDP data in the coming months. Japan has just released very strong Q4 GDP figures.
Markets in 2021: Currencies, Commodities, Equity & Bond Indices
We can see in US REITs and in the real US housing market an interesting conundrum. While government bond yields rise REITs have risen together with the equity market as well.
In the area of New York, we do see a real boom in housing. It is now quite normal that houses are sold 50% above the advertised sales price. There is a strong trend to move out of the city in the suburb.
Also, nation wide the existing home sales have risen almost 15% YoY in 4Q2020. The US housing markets send therefore a strong signal that the economic recovery is gaining momentum.
Similar is the picture in Asian REITs. The surge was even been more pronounced. Short-term REITs are strongly correlated with the regional equity market, which explains why Asian REITs have outperformed.
Eurozone REITs on the other hand have lost value since the beginning of 2021. However, we must differentiate between commercial (weak) and residential (slightly positive) REITs.
In the UK we do have a special situation due to BREXIT and some clarification since the last-minute deal. UK equities and REITs have in 2020 underperformed due to the uncertainty of Brexit and are now catching up.
Investment Outlook: When will rising yields cause equity markets to correct?
CHF has strengthened against the USD and is now trading around 0.90 CHF/USD. But we see a slightly lower CHF against the EUR which takes some pressure from the SNB to intervene.
EUR has lost against the USD over the last trading days. But now we see another strengthening phase against the USD. The USD weakness is mainly driven by higher US yields and fear of a pickup of inflation in the US.
USD has continued to strengthen until the 5th February. Since then, we do see a weaker USD. We expect USD to stay weak for the coming weeks.
Global equity markets continue to rise, and most are reaching new record levels like US markets, or CSI 300 (multi year highs), or the NIKKEI (first time above 30’000 since 1990).
Most markets show sings of overheating, we therefore must expect that this will be corrected over the coming weeks. Having said that we’d like to add that the outlook for bottom-up equity EPS forecast have risen globally. Emerging market analysts expect that aggregated Q1 EPS 2021 earnings will overpass the pre COVID level. This supports a further rise of emerging market equities.
The rise in US government yields has accelerated. We have gone up to 1.33%. It is interesting that US corporates bond yields for IG and high yield have not (yet) risen sharply. However, they will not be decoupled forever.
The total amount of global negative yielding debt has decreased from around USD 18.4 trillion to around USD 14.6 trillion since the beginning of the year. We therefore see a global rise of government bond yields, which indicates that the market is anticipating higher inflation and growth.
On the other hand, corporate non-investment grade bonds continued to outperform due to further spread tightening. We continue to prefer the non-investment grade area, as the yield to maturity in IG bond benchmarks stayed below 0.35% for USD bonds.
Gold: The price has dropped below its 200-day average and is testing support levels at 1’750 and might even fall to 1’700 before rebound.
Industrial metals rallied more than 4.% over the last week. Notably, copper rose by 4.5% to the highest level since 2012, based on tight supply and strong demand. Production from 25 of the largest producers indicates 2021 will be a deficit year for copper.
WTI and Brent rallied by around 5% The market strength was driven by inventory drawdowns. Crude oil curves remain in backwardation, providing investors with positive roll return. But the push for carbon neutrality is disincentivizing investments in oil projects, as can be seen in the lack of pick-up in US shale gas production. Market participants are concerned that this will constrain supply in the near term, pushing prices higher.
National Fuel Gas Company
Hidrovias do Brasil
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Rally or crash? – Part II
Inpependent Swiss financial news portal moneytoday.ch has published the second part of analysis of Managing Partner of Blackfort Investment Partners Wanja Eichl and our Associate Elias Schuhmacher Please check it out via the following link.
Rally or crash? – Part I