Market Update from the Global Asset Allocation Team – February 2021
After a solid start to the new year, sentiment deteriorated and the global equity market rally stalled-out even as the ramped-up global vaccination campaign and the prospect for increased U.S. fiscal spending emboldened calls for a rapid recovery. Even a dovish-leaning bias from the Federal Reserve wasn’t enough to halt the pullback after Chair Powell vowed to keep the monetary taps wide open for an extended time. Instead, investors took some pause to navigate the tug-of-war between economic recovery optimism and the immediate challenges and uncertainties posed by the pandemic. Meanwhile, an explosion of speculative retail trading activity in the small cap space sparked some volatility in late-January, with the retail-driven short-squeeze roiling the hedge fund industry and forcing some deleveraging at month-end.
Global equity markets lost some steam in January, with the MSCI All Country World slipping 0.5% during the month. Regionally speaking, developed markets assumed the brunt of the weakness and underperformed their developing counterparts. Both the S&P 500 and the MSCI gauge of international equities shed 1.1%, while the S&P/TSX slid more modestly (-0.6%). By contrast, emerging market stocks defied the downward move and generated positive results (+3.0%), with Chinese equities leading the global performance charge (+7.4%) in January.
Somewhat surprising was that fixed income markets did not act as a hedge in the environment of wavering risk appetite. Instead, bond markets took their cue from the improved global growth trajectory and the prospect for additional U.S. fiscal stimulus, which saw investors boost their expectations for inflation and pushed the long-end of the curve higher. In contrast, the short-end remained pinned lower as central banks reinforced their pledges for unrelenting support. Specifically, the U.S. 10 year treasury yield backed-up 15 basis points to 1.07%, while the 2 year treasury yield declined by 1 basis point to 0.11%. Consequently, the yield curve steepened, with the spread between the ten and two-year treasury yield rising to 95 basis points, the highest since mid-2017. In the end, fixed income markets generated a negative return in January, with government bonds leading the monthly decline.
The U.S. dollar reversed course in January as unnerved investors flocked to the safe haven currency. In turn, underlying strength in the greenback weighed on the Euro, Canadian dollar, and the yen. The pound managed to eke out a small gain as Britain’s vaccine progress and the long-awaited Brexit deal tempered wagers for negative interest rates from the Bank of England. Meanwhile, the Chinese yuan soared higher as tightening liquidity conditions drove the money-market rate to its highest in almost six years.
Commodity markets produced some mixed results. Oil prices powered higher as signs of dwindling U.S. stockpiles and ongoing discipline from OPEC and its allies overshadowed the lacklustre near-term demand backdrop. Indeed, the OPEC consortium estimated that they implemented 99% of their agreed production curbs in January. Copper prices held firm amid robust demand trends in China and ongoing signs of a tightening supply backdrop. Finally, gold lost some ground even as sentiment faltered, with higher treasury yields and the bounce in the U.S. dollar weighing on bullion prices in January.