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08 March 2021

US Markets Remain Cautious

Rishi Sunak’s Budget has helped the FTSE 100 rise at a modest rate throughout last week, up 1.52%, as the UK firms expected to benefit most from the budget and relaxed lockdown conditions were the main performance drivers. The budget provided some fiscal certainty by promising continued support for UK businesses throughout the pandemic, including an extension of the furlough scheme, no change in VAT rates or Income Tax, and no immediate raise in Corporation Tax. The market seemed to digest the news quite positively, with the FTSE 100 holding up well compared to the US and other global indices.
 
The extension of the stamp duty holiday and the recent introduction of a 95% help to buy mortgage, has shown UK housebuilders to be the most obvious beneficiaries of the proposed government plans. York-based housebuilder Persimmon recorded the top performance across the FTSE 100, rising 12.16%, kicked off by a resilient earnings report earlier on in the week and a further boost from the budget. As the government plan to turn ‘generation rent’ into ‘generation buy’, it will be interesting to see how Persimmon performs against competitors Taylor Wimpey and Barratt, who were also in the top 10 risers last week.
 
In US markets, sentiment has remained cautious as all eyes were on Federal Reserve (Fed) Chair Jerome Powell for any remarks addressing the sell-off in bonds and concerns around inflation. However, the pressure on US equities that arose from the rise in bond yields was not the only factor that has left investors seeking Powell’s reassurance. The fixed-income market awaits comment surrounding a policy known as the “Supplementary Leverage Ratio” (SLR), which the large US banks have benefited from a regulatory break since last March, but is due to expire at the end of this month. If the Fed does not extend the break, banks will essentially have to hold more capital against their treasury bonds and deposits stored with the Fed. A discontinued SLR break could cause banks to reduce their exposure to government debt while also decreasing funding available to other market participants to purchase bonds. This would bring increased volatility to the bond market, and as seen in recent weeks, would have a knock-on effect to equities. Although only one factor in a mixture of market anxiety, investors will want the Fed to address this sooner rather than later.
 
The Nasdaq and S&P 500 have felt the tension, down -4.56% and -1.90% after Powell’s comments towards the end of the week. The speech reiterated the Fed’s stance and did little calm inflation nerves, although, Powell mentioned the move in bond yields had “caught his eye” and he would be monitoring any tightening of financial conditions that threatens the achievement of the Fed’s goals. Unsurprisingly, the tech-concentrated Nasdaq saw the largest drop last week – now down 10% from its all-time high in February - with tech companies facing a rotation into cyclical stocks and the potential impact higher rates would have on valuations, which are heavily weighted on future earnings.
 
On the other side of the pacific, a major reconstruction of the Hang Seng index is set to reduce the weighting of state-owned enterprises and financial firms to include a wider scope of Chinese companies – especially the evolving technology industry. The aim is to make the Hang Seng a more attractive index to benchmark against and address its underperformance over previous years. Weightings for all shares will now be capped at 8% rather than 10% and will be selected based on their sector. At least 20 Hong Kong companies are required to be featured in order to maintain the local status, but the companies set to be added will better reflect the influx of mainland companies using Hong Kong as their preference to list shares. Despite the positive news for those invested in the Hang Seng index, it declined -1.28% last week.
 
Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
US Markets Remain Cautious
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