Market updates from March

It’s now been a year since we first went into lockdown and equity markets hit their lows. Whilst perhaps few saw the prolonged disruption the pandemic would bring to our lives, over this time and largely thanks to governments and central banks stepping in and taking the necessary steps to support incomes and shore up market confidence and liquidity, risk assets have shown considerable strength, with equity markets up around +40%!

With vaccination programs gaining traction and continued fiscal and monetary support, a return to more normal times seems close, but if anything, investors are now beginning to worry growth is going to be too fast. With both inflation expectations and growth expectations being revised upwards, bond yields have continued to climb, particularly at the longer end, steepening the yield curve further. This has continued to hinder long duration bonds and support the rotation in equity markets away from large cap growth stocks and towards more cyclical and value areas.

All eyes moved towards how central banks would respond to this and even more importance and focus was placed on the US Federal Reserve’s March meeting than usual. First, the dot-plot which shows the aggregate views of where Fed Officials think interest rates will be over coming periods essentially showed rates on hold until the end of 2023. This was followed in the press conference after the announcement, with Chair Powell underlining that the bulk of the committee does not see a rate increase and noted it was also not yet the time for them to discuss reducing asset purchases. Their economic forecasts for 2021 shifted up, with GDP growth at 6.5% and inflation at 2.4%. Overall they essentially continued the rhetoric of recent weeks in that the current policy support remained appropriate, inflation would be transitory and they did little to push back on how yield curves had shifted. Perhaps this reinforced the Fed’s policy stance of focusing on average inflation and as a result they would let inflation run a little hot if necessary, to even out times when it was more tepid. This is fine if any inflation is indeed transitory. The real problems will start if this proves not to be the case. If anything, all this reaffirmed the market moves we’ve seen over the last couple of months. Steeper yield curves and higher yields at the long end but moves not yet sharp enough to really unsettle risk assets in any meaningful way just yet. If anything, markets still don’t quite believe the Fed and are still pricing in the potential of rate hikes before the end of 2023, and we may well see a change of tack from the Fed should credit spreads or equity markets take a more serious turn.

Elsewhere, notably the Bank of England made no change to their monetary policies, but indicated stronger growth. Bank of Japan made an adjustment by slightly widening their yield target band, whist the ECB were perhaps the most vocal in trying to talk down yield curve moves saying they may act if financial conditions tighten too much. But overall monetary support is extensive and should keep the front end of curves pinned down. However, with that, movements further along the curve may continue to be more unsettled and investors may well need to become more used to bouts of volatility in bond and equity markets.

Important information:

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.