- Return of volatility a healthy sign as ultra-low levels increased market risk
- Over time markets will become less sensitive to Trump’s outbursts
- Global economic outlook remains strong if you look past the near term noise
David Jane, manager of Miton’s multi-asset fund range, comments:
“There has been much commentary regarding equity market volatility of late, attributing it to factors such as trade wars, inflation, Donald Trump or even the Russians. We think the return of volatility is absolutely normal, to be expected and even embraced.
“For most of history, volatility has stayed around current levels; we have only seen it drop to an abnormally low point in the past few years. Reasons often given for the period of ultra-low volatility include QE, or a very benign market environment. It is much more likely that the short volatility strategy, which has been both highly profitable and highly popular, had driven near term volatility down to unreasonably low levels.
“Essentially, ‘investors’ were selling short the VIX ETF or writing short-dated options and it had been a profitable strategy. As is often the case, when the market knows something irrational is occurring, at the first sign of weakness, the market smells blood and mean reversion occurs in a dramatic and at least for the leveraged investors, very painful way.
“So, we see the return of volatility as a very healthy sign, as ultra-low volatility was disturbing and increased market risk. These more ‘normal’ conditions mean there is one less thing to worry about.
“When we consider the other near term market worries, they can also seem largely overblown. Rising inflation was the first concern, putting a dampener on markets if bond yields spiked, however, while we think yields and inflation will rise over time, inflation pressures actually appear to be easing at least in the near term.
“The apparent trade wars also seem to be an overblown worry. Donald Trump’s approach on many issues appears to be to tweet loudly as a negotiating tactic and then negotiate a reasonable solution. So, what has been achieved? China has agreed to reduce the barriers to some foreign firms operating in China, which will better protect intellectual property rights, while Trump has obviously won some votes from the rust belt.
“While Trump’s approach to these types of negotiations are clearly unconventional (being so public and blunt), we think the market will, over time, become more used to his style and less sensitive to the outbursts.
“The potential for Donald Trump to be impeached or a greater scandal to develop might provide a further reason for volatility but in reality it is unlikely to affect markets over anything but the short term. It is ultimately economic and financial factors that drive financial markets, politics being important only in as much as how it impacts the economy.
“We hold the same view regarding the West’s recent run in with the Russians. Russia has been an increasingly hostile actor on the world stage for some time but we don’t think there is much probability that tensions will escalate to materially damaging levels as none of the parties care enough on the issues at stake. Whether around the Syrian issue, or the use of nerve agents in the UK, the Wests’ responses seem designed more to placate the media than to genuinely escalate the issues.
“So ultimately, if you look through the near term noise, what do you see? Economic growth is strong, although less so possibly in Europe than before, and inflation is not accelerating to a worrying degree, which means rate rises will continue at a steady, but not uncomfortable, pace. Company earnings growth is strong, making valuations more reasonable than previously thought. Real interest rates also remain very low or negative and the yield curve still slopes upwards suggesting the bond market regards the outlook as benign.
“Of course, this may in time change but having seen a near term correction we feel the medium term trends for strong performance of economic sensitive regions and sectors can reassert.”
World shares sink as bond yields, commodities surge
By Ritvik Carvalho
LONDON (Reuters) – World shares sank on Monday as expectations for faster economic growth and inflation battered bonds and boosted commodities, while rising real yields made equity valuations look more stretched in comparison.
MSCI’s All Country World Index, which tracks shares across 49 countries, was down 0.4% after the start of European trade.
The pan-European STOXX 600 index was down 1%, at its lowest in 10 days. Germany’s DAX, France’s CAC 40 and Spain’s IBEX 35 index fell 1% each, Britain’s FTSE 100 lost 0.85% and Italy’s FTSE MIB index fell 0.9%. [.EU]
S&P 500 futures fell to their lowest since Feb. 4, down 1% on the day. [.N]
Bonds have been bruised by the prospect of a stronger economic recovery and greater borrowing as President Joe Biden’s $1.9 trillion stimulus package progresses.
Federal Reserve Chair Jerome Powell delivers his semi-annual testimony before Congress this week and is likely to reiterate a commitment to keeping policy super easy for as long as needed to drive inflation higher.
“The coming week is relatively thin on the international data agenda, but after the recent rise in long bond yields, Fed Chairman Powell’s hearings in both chambers of Congress (Tuesday / Wednesday) will be attracting great interest,” said Elisabet Kopelman, U.S. economist at SEB.
“The fact that the most recent rise in long bond yields has been driven by higher real interest rates and not just inflation expectations increases the probability of a dovish message.”
European Central Bank President Christine Lagarde is also expected to sound dovish in a speech later Monday.
Yields on 10-year Treasury notes have already reached 1.38%, breaking the psychological 1.30% level and bringing the rise for the year so far to a steep 43 basis points.
Analysts at BofA noted 30-year bonds had returned -9.4% in the year to date, the worst start since 2013.
“Real assets are outperforming financial assets big in ’21 as cyclical, political, secular trends say higher inflation,” the analysts said in a note. “Surging commodities, energy laggards in vogue, materials in secular breakouts.”
Earlier in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan went flat, after slipping from a record top last week as the jump in U.S. bond yields unsettled investors.
Japan’s Nikkei recouped 0.8% and South Korea 0.1%, but Chinese blue chips lost 1.4%.
A COPPER-PLATED RECOVERY
One of the stars has been copper, a key component of renewable technology, which shot up 7.7% last week to a nine-year peak. The broader LMEX base metal index climbed 5.5% on the week.
Oil prices have gone along for the ride, aided by tightening supplies and freezing weather, giving Brent gains of 22% for the year so far. [O/R]
On Monday, Brent crude futures were up 0.7% at $63.33 a barrel. U.S. crude added 0.7% to $59.65.
All of that has been a boon for commodity-linked currencies, with the Canadian, Australian and New Zealand dollars all higher for the year so far.
Sterling reached a three-year top at $1.4050, aided by one of the fastest vaccine rollouts in the world. British Prime Minister Boris Johnson is due to outline a path from COVID-19 lockdowns on Monday.
The U.S. dollar index has been relatively range-bound, with downward pressure from the country’s expanding twin deficits balanced by higher bond yields. The index was last at 90.342, not far from where it started the year at 90.260.
Rising Treasury yields has helped the dollar gain against the yen to 105.60, given the Bank of Japan is actively restraining yields at home.
The euro was steady at $1.2104, corralled between support at $1.2021 and resistance around $1.2169.
One commodity not doing so well is gold, partly due to rising bond yields and partly as investors question if crypto currencies might be a better hedge against inflation. [GOL/]
Gold stood at $1,793 an ounce, having started the year at $1,896. Bitcoin was off 3.3% on Monday at $55,535, but started the year at $32,216.
(Reporting by Ritvik Carvalho; additional reporting by Wayne Cole in Sydney; editing by Larry King)
Sterling steadies around $1.40, long positions at one-year high
LONDON (Reuters) – The pound hit a new three-year high of $1.4050 in early London trading on Monday, before stabilising around the $1.40 level, as bullish investors bet on the UK’s vaccination rollout bringing about an economic recovery.
Sterling rose to its highest levels since April 2018 when it crossed $1.40 on Friday, having risen 2.4% so far in 2021.
Analysts attributed the recent strengthening to the UK’s relative success in providing COVID-19 vaccinations, which is expected to help Britain’s economy rebound from its biggest contraction in 300 years.
Relief that a no-deal Brexit was avoided at the end of 2020 is also supporting the pound, as is a lessening of fears that the Bank of England could introduce negative interest rates.
Speculators added to their net long position for the third week running in the week to Feb. 16, CFTC positioning data showed. The market is at its most bullish in one year.
At 0839 GMT, the pound was at $1.3992, down 0.1% on the day. Versus the euro, it was up around 0.2% at 86.42 pence per euro, having touched a one-year high earlier in the session EURGBP=D3>.
“The move higher in cable this year has been primarily driven by pound strength rather than US dollar weakness,” wrote MUFG currency analyst Lee Hardman in a note to clients.
“If the highs from April 2018 are taken out it will encourage expectations that the pound is adjusting to a new higher equilibrium now that Brexit risks have diminished,” he said. “Whereas if those highs remain in place, market participants may then start to question whether recent pound strength is overshooting and thereby increasing the risk of a correction lower.”
British Prime Minister Boris Johnson will set out a plan on Monday to release the UK from its third national lockdown.
Some 17.6 million people, over a quarter of the 67 million population, have now received a first dose of a COVID-19 vaccine. The UK is behind only Israel and the United Arab Emirates in vaccines per head of population.
The yield on British government bonds jumped on Monday, boosted by the prospect of heavy U.S. fiscal stimulus and the UK economy reopening.
“Markets are still adjusting to the fact that the Bank of England is unlikely to implement negative rates for now, leading to a narrowing of the US-UK 10-year yield differential,” UBS strategists wrote in a note to clients.
(Reporting by Elizabeth Howcroft; Editing by Bernadette Baum)
FTSE 100 falls as inflation concerns weigh
(Reuters) – London’s FTSE 100 fell on Monday as higher commodity prices sparked fears of a spike in inflation, while investors awaited Prime Minister Boris Johnson’s plan for a phased easing of business restrictions.
The blue-chip FTSE 100 fell 0.6%, led by declines in consumer staples and industrials stocks.
Oil heavyweights BP and Royal Dutch Shell dipped 0.1% and 0.3%, respectively, despite higher crude prices. [O/R]
Johnson will plot a path out of COVID-19 lockdown on Monday in an effort to gradually reopen the battered $3 trillion economy, aided by one of the fastest vaccine rollouts in the world.
The mid-cap index fell 0.3%, led by declines in financials and industrials stocks.
British Airways-owner IAG rose 1.1% after it said it raised total liquidity by 2.45 billion pounds ($3.4 billion), reaching final agreement for a 2-billion-pound loan, and through a deal to defer 450 million pounds of pension deficit contributions.
Pub operator Mitchells & Butlers shed 0.5% as it reported a plunge in sales due to all its sites having been forced shut under the latest lockdown.
(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V)
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