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Earlier increases in US interest rates are now expected, which negatively affected equities

February 2021

Share markets, exchange rates, commodities, international developments, domestic economic indicators

  • A strong showing in international equities in February abruptly ended in the last week of the month.

  • This was caused by increasing US bond yields as investors expect inflation to rise beyond the Fed’s 2% inflation target sooner than initially estimated. As such, earlier increases in interest rates are now expected, which negatively affected equities. However, Federal Chairman Jerome Powell stated that reducing unemployment is a bigger concern for him than rising inflation. He considers rising inflation as transitory and for it to revert to its normal path.

  • Fears of rising inflation was caused by indications of a strong recovery in the US economy. This is expected to be boosted by a COVID-19 vaccination programs and $1.9 trillion fiscal stimulus.

  • US personal income and consumption increased strongly in January following receipt of December’s stimulus checks - and the new stimulus should accelerate economic growth. Consequently, this year’s economic growth expectations for the US had been adjusted upward from around 5% to above 6%.

  • However, talk in Europe is the opposite as what is happening in the US. Governments are looking to end fiscal stimulus sooner rather than later and for the European Central Bank to carry economies during the pandemic.

  • The same happened during the global financial crisis when European governments applied austerity measures too soon, causing economies too tumble.

  • In the UK a path for ending the lockdown on 21 June was laid out by Prime Minister Boris Johnson. This will, however, depend on the success of the vaccination programs.

  • China’s economy is hampered by the lockdown in Europe, affecting exports and services growth.

  • Japan’s prospects are held back by lockdowns in the Tokyo region and lower consumer spending.

  • Share markets ended the month higher despite the sell-off during the last week of February.

  • In the US the S&P gained 2.6%, the UK FTSE 1.2%, the German Dax 2.6%, the French CaC 5.6%, the Japanese Nikkei 4.7%, the Hong Kong Hang Seng 2.5%, the Chinese 0.7% and the Australian ASX 1.0%.

  • Rising bond yields had a negative impact on the gold price which declined by 6.5% to $1 728 per ounce. However, due to an expectation of higher world economic growth and below capacity production Brent oil increased another 18% to $66 per barrel. Platinum rose 10.5% to $1 192 per ounce.

  • The US$ was weaker for most of the month. The rand gained 1.5% to R15/US$, and also strengthened by 1.1% to R18.26/€ by month end. However, the currency lost 0.8% against the pound to R21.03/£.

  • In South Africa, the national treasury announced a budget that is bonds positive as it will reduce the fiscal deficit and future borrowing compared to the previous estimate. It also expects the economy to grow by 3.3% in 2021. However, bonds and equities were also negatively impacted by the international sell-off.

Courtesy: Multivest Economic Division

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