By Rupert Thompson, Chief Investment Officer at Kingswood

Global equities slipped back last week, retreating 1.5% in sterling terms, and have also opened lower this morning. These declines, however, follow two weeks of strong gains and are nothing noteworthy.

Of rather more note, last Friday was exactly one year on from when equity markets hit their pre-Covid high. Remarkably, global equities are now up 10.5% in sterling terms since then. China is the stand-out winner with a gain of 36.2% while the US is up 12.1% and the UK trails behind with a loss of 6.7%.

But it was government bonds which were the main focus of attention last week. 10-year yields rose 0.15%- 0.20% in the UK and US to 0.73% and 1.38% respectively, and are now up some 0.4%-0.5% since the start of the year. Gilts have now lost 5.9% year-to-date, highlighting that UK government bonds are no longer the risk-free investment they once were – which is why we only have a small allocation in our portfolios.

The rise in the US has been driven by the prospect of another large fiscal stimulus over coming weeks. John Doe could well receive another $1400 cheque from the US Treasury, hard on the heels of the $600 they received only a few weeks ago. The latter incidentally was no doubt behind the unexpected 5.3% surge in retail sales in January.

In the UK, the January retail sales numbers also contained a big surprise – but of the negative variety. They plunged 8.2% as the lockdown took its toll. Moreover, no big give-aways are likely in the forthcoming Budget with any largesse limited to a grudging extension of the furlough scheme for a little while longer.

Instead, the spike higher in UK yields has been driven by the rapid vaccine roll-out and an end to speculation that rates could be pushed into negative territory. For all the talk from the Government at the moment of being driven by ‘data rather than dates’ and of only a cautious exit from lockdown, the markets are pencilling in a rapid rebound in the economy starting in the second quarter.

The current high level of equity valuations has been justified by the exceptionally low level of interest rates. The upward trend in bond yields naturally therefore raises the question of whether this increase poses a threat to equity markets. While far from complacent on this front, our view is that yields will have to increase significantly further than is likely before they pose much of a threat.

The rise in yields is being driven primarily by expectations of stronger growth and inflation, which are good news for corporate earnings and supportive for equities. It would be more problematic if it was down to worries that central banks were poised to start unwinding the massive monetary stimulus. But, as Fed Chair Powell will no doubt reiterate in his testimony to Congress this week, the Fed plans to remain ‘patiently accommodative’ to support the struggling labour market.

With no reduction in stimulus likely this year anywhere (possibly other than China), any further rise in yields should be limited. Back in 2013, in the so-called taper tantrum, US bond yields surged 1% in a matter of months on fears the Fed would start scaling back its QE. But even then, this caused no more than a brief correction and failed to halt the upward march of equities.

While bonds were the main focus last week, the pound did its best to grab the attention of UK investors, if not non-existent UK holiday makers. It hit $1.40 for the first time in just under three years, up from a low of $1.15 last spring, buoyed by the same factors driving up gilt yields.

Sterling’s gains, however, have been much more pronounced against a weak dollar than other currencies. Overall, the pound is only back to the top end of the trading range seen since its post-Brexit referendum slide in 2016. If as we expect, foreign investors start to appreciate the cheapness of UK equities, such inflows could drive the pound somewhat higher – hopefully in time for a resumption of foreign holidays later this year!

By Simon Jessop

LONDON (Reuters) – Britain’s investment industry trade body has warned companies they must show progress on boardroom ethnic diversity or risk pushback at their 2021 annual general meetings.

The call from the Investment Association, whose members manage 7.7 trillion pounds ($9.88 trillion) and own around a third of British companies, aims to spur greater action to meet the targets set by Britain’s Parker Review into the issue.

Under the targets, FTSE 100 companies would aim to have at least one ethnic minority board member by 2021, with every FTSE 250 company following by 2024.

Those that fail to disclose either the ethnic make-up of their board or a plan to have at least one ethnic minority member by 2021 would be flagged as a company of concern by the IA’s corporate governance team, it said in a statement.

“The UK’s boardrooms need to reflect the diversity of modern-day Britain,” said Andrew Ninian, Director for Stewardship and Corporate Governance at the Investment Association.

“With three-quarters of FTSE 100 companies failing to report the ethnic make-up of their boards in last year’s AGM season, investors are now calling on companies to take decisive action to meet the Parker Review targets.”

While the IA does not advise investors on how to vote, IVIS, the IA’s Institutional Voting Information Service, instead flags topics of concern at companies to the pension schemes and others that pay for the service.

A ‘Blue Top’ assessment indicates there are no areas of major concern; an ‘Amber Top’ highlights a significant issue to be considered; and a ‘Red Top’ flags a topic of major concern. Breaches of the ethnic guidelines will face an ‘Amber Top’.

(Reporting by Simon Jessop; Editing by Giles Elgood)

By Julien Ponthus, Aaron Saldanha and April Joyner

LONDON/NEW YORK (Reuters) – Bitcoin, shares of Tesla and a high-flying exchange traded fund (ETF) fell on Tuesday, retreating from recent rallies in a volatile session that gave investors a gut check.

It was the latest sign of a possible pause in a rally that has buoyed a broad range of assets. Investors may be growing wary of sky-high valuations, while recent rises in Treasury yields could dim the allure of stocks and other comparatively risky investments.

“We have been in a sustained rally and there was a lot of leverage in the system,” said Ty Young, cryptoasset research analyst at crypto data platform Messari, of Bitcoin. “Corrections are to be expected during a bull run and not surprising when looking at previous cycles.

Bitcoin was recently down 11% at $48,207, paring some losses after Jack Dorsey’s Square Inc said it bought around 3,318 bitcoins for $170 million. The cryptocurrency had fallen as low as $44,845 during the session.

Shares of Tesla, which recently disclosed a $1.5 billion investment in the cryptocurrency, fell as much as 13.4% and pared losses to end down 2.1%. The ARK Innovation ETF, which counts Tesla as its biggest holding, finished 3.3% lower.

Recently popular exchange-traded funds (ETFs) focused on industries such as blockchain, cannabis and renewable energy have also taken a hit in the past week-and-a-half, with some investors growing skittish.

The electric carmaker’s shares represent about 10% of holdings for the ARK Innovation ETF, which has fallen around 9% this week as volatile bitcoin prices have pushed Tesla’s shares down almost 11% in the same period. Bitcoin has tumbled 17% in two days.Some investors may have been preparing for downside in the ETF. Amy Wu Silverman, equity derivatives strategist at RBC Capital Markets, noted that options activity indicated a rise in demand for protection against a decline in ARKK.

Bullish sentiment for many holdings in the ARK Innovation ETF remains high, Wu Silverman noted. Despite recent weakness, outflows from the fund have been minimal, according to research from Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group.

“The ARKK ETF has been the poster child of momentum high fliers and is beloved by retail,” Wu Silverman wrote.

Many assets whose prices gyrated on Tuesday have experienced blistering rallies over the last year.

Even with the shake-out from a record high above $58,000 two days ago, Bitcoin is up 68% this year, increasingly accepted as a mainstream investment and means of payment.

Michael Saylor, chief executive of MicroStrategy, a major corporate backer of bitcoin, told CNBC on Tuesday that the approximately $1 trillion total value of the digital currency could subsume the market capitalization of gold at about $10 trillion.

Yet some signs point to investors becoming more cautious on Tesla. Skew, an indicator measuring demand for protective options positioning, has climbed for Tesla over the past few weeks, according to data from Trade Alert. Investors focused on environmental, social and governance (ESG) factors may also have cause for concern.

While Tesla has long campaigned to cut global auto emissions through use of its relatively environment-friendly cars, the company’s decision to invest in bitcoin could weigh on its ESG rating, Valentijn van Nieuwenhuijzen, chief investment officer at asset manager NN IP told Reuters on Friday.

(Reporting by Julien Ponthus, Thyagaraju Adinarayan, Karin Strohecker, Aaron Saldanha, Megan Davies, April Joyner and Gertrude Chavez-Dreyfuss; editing by Alden Bentley, David Evans, Sonya Hepinstall, Ira Iosebashvili and David Gregorio)