Please see below market analysis received from Brooks Macdonald yesterday evening. The article comments on how the continuous rise in yields is affecting market volatility and refers to political developments during Biden’s first 100 days in Office.
The US Federal Reserve (Fed) enters its communication blackout period at a crucial time for sentiment
European and US equities had a pretty subdued Friday until after the European close, when US equities picked up to close higher for the day and the week. Market expectations are now for the first Fed rate hike to occur in early 2023 and with the Fed now absent due to the communications blackout, further assumptions could be baked in given the policy void1.
Rises in yields continue to drive market volatility
US 10-year yields are now over 1% higher than their lows last August2. This is a testament to the dramatic moves seen over the last few months. Of course, for context, a circa 1.6% yield is still on a par with the lowest rates seen in 20193, so perhaps it’s remarkable that rate expectations had stayed so low in Q4 2020 when more economic optimism was being priced in. In Q2 and Q3 last year, the equity market was drawing its optimism from the low rate environment and the relative support this gave to high growth equities. Since November 2020, and the first vaccine efficacy trials, we have seen a boost to economic expectations which brought cyclical equities into vogue and has catalysed this reappraisal of bond yields. The big question in markets is whether the Fed are comfortable with this rapid rise, albeit only to 2019 lows, and to find that out we need to wait another week.
The Senate passes President Biden’s $1.9 trillion US fiscal stimulus package
The Senate passed President Biden’s $1.9 trillion package on Saturday meaning it will now move to the House for a final vote before going to the White House for Biden’s signature. The economic growth expectations that have been revised up since November 2020 take account of both the expected post-COVID-19 recovery but also the size of US stimulus. With the package’s total size having survived Congress intact, despite some concessions to moderate Democrats, we are likely to see a supercharged period of economic growth and short-term inflation.
With the Democrats only able to use the budget reconciliation process for a fiscal stimulus package once in 2021, the instinct was always to ‘go big’. Market concerns that the support would be too large and therefore inflationary has been one of several factors being priced into equity and bond markets this year. With the package likely to enter law early this week, and the Fed blackout period ongoing, rising inflation expectations could be a major driver of volatility this week.
Please check in again with us soon for more news updates and interesting analysis.
Stay safe.
Chloe
09/03/2021