Market Update from the Global Asset Allocation Team – May 2021
The second quarter got off to a roaring start. Investors welcomed the latest wave of robust economic and corporate earnings results, while an accelerating vaccine campaign stoked confidence in the global economic outlook. At the same time, central bank officials reiterated their explicit pledges for highly-accommodative monetary policy, even as the rapid recovery took hold. Regrettably, new global COVID-19 cases are running at the highest level since the start of the pandemic, with the latest flare-ups in India and Brazil. Still, optimism on the fortunes for the global economy outweighed these worrisome virus trends, with investors keenly focused on the highly-anticipated return to economic normality through 2021.
The global equity market rally lingered-on in April, with all major regions recording healthy gains. However, market internals revealed a shift in leadership as the reflationary rotation that commenced in November stalled-out. More generally, defensive and growth-oriented sectors outperformed their cyclical-value counterparts, owing to the decline in bond yields throughout the month. Technology and consumer discretionary sectors outperformed the broad market, while the energy sector lagged. As a result, the tech-heavy S&P 500 led the charge and outperformed its global peers during the month.
The selloff in fixed income markets took a breather in April as government bond yields edged lower. Federal Reserve Chair Powell pushed back on the prospect for policy tightening given persistent shortfalls in the labour market, while attributing near-term pricing pressures to transitory factors. Indeed, several officials have reinforced that its premature to contemplate reigning-in highly-accommodative policies at this time. In response, the U.S. 10 year treasury yield slid 11 basis points to 1.63% in April as investor expectations for a hawkish policy-turn were dialed back. Despite the move in treasuries, the Canadian 10 year government bond yield barely budged after the Bank of Canada became the first G7 central bank to begin scaling-back on stimulus and reduced its bond-buying program by CAD1 billion/week.
After a strong start to 2021, the US dollar reverted lower in April. By contrast, the euro strengthened as speculation for a nascent recovery emerged given the expedited distribution of vaccines across the European Union. Meanwhile, the Canadian dollar extended its spectacular run and soared to a three-year high, maintaining its status as global currency leader in 2021. While the sharp revival in commodity prices has been instrumental in guiding the loonie higher, some hawkish-leaning rhetoric from the Bank of Canada alongside a steadfast and still-dovish Federal Reserve saw interest rate differentials between Canada and the United States widen in Canada’s favour.
In commodity markets, oil capped an impressive month as improved growth prospects spanning from the U.S. to China added to optimism that a rebound in global energy consumption is underway. Similarly, copper surged to a decade-high amid the brighter growth trajectory and increased spending prospects on green infrastructure. Of note, President Biden’s infrastructure plan and continued demand from China are key tailwinds for industrial metal prices. Finally, gold posted its first monthly gain of 2021 as declining treasury yields and softer dollar conditions bolstered prices.