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European stock markets rose in early trade as the churn in and out of growth and value continues on rising bond yields. US 10-year benchmark yields hit fresh 1-year highs on Friday, driving the Nasdaq lower and helping lift the Dow Jones industrial average to a fresh record high. The Dow rose 293 points, or 0.9%, to close at a record at 32,778.64.  Boeing rose over 6%, while Caterpillar tracked over 4% higher as investors bet on a strong industrial recovery in the US. 10-year Treasury yields hit 1.64%, their highest since February 2020. The broadly positive mood is lifting all boats – the FTSE 100 is back to 6,800 whilst the DAX and Euro Stoxx 50 are trading at or around record highs. I touched on the relative underperformance of the UK market last week – you’d expect to see 7,000 taken out before long.

 

The passing of the $1.9tn relief bill and the imminent arrival of stimulus cheques in the US is clearly positive for risk. As is the growing confidence that things will be back to normal by the summer, at least in the US and UK. Even in Europe with all its vaccine trouble, there is confidence things are looking better and economies are able to withstand the virus much better than last year. The Federal Reserve meeting this week will be the main event for markets but so far Jay Powell has not sought to lean against the rise in bond yields – no Twist mk3 it would appear. I think this plays to the narrative that rising yields (see Bailey below) are simply a reflection of a rebound in the economy, and not a sign of financial market stress that the Fed needs to worry about. You can make the point that this time is different in as much as the recession (expectations of) led to the crash, whilst in 2008/09 it was the reverse – crash led to recession and years of worry about financial market stability. I don’t think the Fed is that worried if the S&P 500 drops 5% like it used to be. The Fed, as Powell will reiterate on Wednesday, is more concerned about full employment than it is about yields. The risk remains that this will force yields higher and inflation expectations become unanchored, forcing the Fed into tightening well before the dots currently indicate.

 

Bitcoin rose to a fresh all-time high over the weekend as the $58k resistance gave way. This level has now become support which is being tested this morning as the price retreated from close to $61k struck overnight. Growing institutional demand is central to the appreciation in Bitcoin in recent months and increasingly investors who have been on the side lines until recently are saying ‘how can we continue to ignore this asset class?’.  Regulation remains the elephant in the room: India is proposing a strict ban on cryptocurrencies. India will seek to prohibit ‘possession, issuance, mining, trading and transferring crypto-assets’, according to Reuters.  

 

We’re starting to see the effect of big year-on-year comparisons due to the pandemic. China’s industrial output rose 35.1% in the first two months of 2021, whilst retail sales were 33.8% higher over the same period. A better gauge is the 2019 comparison: industrial output was 16.9% higher than the same period two years ago, and retail sales were 6.4% stronger. Stronger Chinese economic helped sentiment in crude oil markets with Brent close to $70 again and WTI above $66. Citi says Brent could touch $80 this year as OPEC+ continues to underpin the market.

 

The Bank of England meets this week; we got an amuse-bouche for the main event this morning with Governor Andrew Bailey on the wires. He stressed that the impact of lockdown is less than it was a year ago – the economy is more resilient to lockdowns than this time last year – and the Bank has a more balanced picture of risks and expects the economy to return to pre-pandemic levels around the end of this year. Bailey expects to see a pickup in inflation towards 2% in the next few months but does not see inflation rising towards 4% or 5%. He also said that while the BoE is asking banks to get ready for negative rates, there is no view on whether they should be used or not. Nothing terribly new here. He also said that the rise in rates in the market is consistent with the change in economic outlook…which reaffirms the view that central banks may not be terribly worried about the rise in yields as has been made out.

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