In February, the equity markets rose by nearly 3% in euros in developed countries. However, the end of the month was tumultuous due to the rise in American 10-year sovereign yields. The bond markets are beginning to worry that inflation will return as a result of successive recovery plans and the publication of encouraging macroeconomic figures.
The eurozone was not spared: rising sovereign yields elicited a reaction from the representatives of the European Central Bank (ECB) who said that they were ready to take action. They also underscored the fact that a sustained rise in rates could slow the economic recovery and prevent the ECB from reaching its inflation objective.
Be that as it may, financial conditions have not yet deteriorated in either the United States or Europe. They remain solidly anchored in accommodative territory and continue to shoulder the economy and equity markets.
Given this context, investors are keeping a close watch on the vaccination campaigns, as their successful roll-out is the indispensable condition for a return to normal. While Europe has fallen behind, with about 7% of the population receiving one vaccine dose, the United States and the United Kingdom have published encouraging figures: 22% and 30% of their respective populations have received one dose.
At that pace, herd immunity could be achieved by the end of the third quarter in developed countries. This would enable the gradual lifting of restrictions which are hampering the economic recovery.
In the meantime, the combination of an accommodative monetary policy and an expansionist budget policy should continue to support the global economy on the road to recovery.
At the end of February, the United States’ House of Representatives passed a new recovery plan in the amount of $1.900 billion dollars, which the Senate should also quickly approve. This recovery plan comes in addition to the previous $900 billion plan which will be paid to households until the end of March. The recovery plan again guarantees funds for lower income households, which should receive $1.400 payments plus additional resources enabling them to access vaccinations and tests.
As we stated above, macroeconomic figures have been beating the economists’ expectations constantly over recent weeks. In addition, manufacturing sector data has been particularly remarkable. Confidence indexes, production levels and demand for manufactured goods indicate that the sector is currently leading the global recovery.
The recovery in international trade corroborates this trend at global level: the exporting strength of Asian economies stands out in particular, as the congestion in the ports and shortages of electronic components demonstrate.
The Services sector, which accounts for the major portion of developed economies, has remained sluggish, notably in Europe, where lockdown measures and curfews continue.
In this context of economic recovery, we believe that the increase in rates will not impact the economy or market sentiment long term. That is why we are maintaining an overall allocation which gives preference to equities over bonds. From a sector standpoint, we continue to believe in technology and have gradually increased our weighting of cyclical sectors which should benefit from the economic recovery over the coming months.
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