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22 March 2021

Volatility hits US markets

With the inflation narrative developing over the last few weeks, some degree of volatility was expected in both the equity and bond markets on the back of the Federal Reserve’s (Fed) two-day policy meeting last week. The conclusion of the meeting came as no surprise, with the Fed reiterating its stance that monetary policy would not be changing in the near future; to put ‘near future’ on a time scale - four of the committee members anticipated rate hikes in 2022, seven in 2023 with the majority adopting a longer-term outlook. Forecasts also acknowledged the potential for strong economic growth and inflation rising above 2% in 2021. Inflation is now expected to run to 2.4%, above the previous estimate of 1.8%, while predictions for real gross domestic product (GDP) were upgraded to 6.5%, compared with the 4.2% forecast in last December’s meeting.

However, the anticipation of increased volatility did not play out as expected, at least not in US equities. The VIX (aka ‘The Fear Gauge’) recorded its lowest point in over 12 months throughout the Federal Open Markets Committee (FOMC) meeting, yet the US S&P 500 and Dow Jones simultaneously posted record highs on Wednesday. Bonds, on the other hand, suffered a more violent sell-off, with the US ten-year Treasury yield trading above 1.75% for the first time since January 2020. During the FOMC meeting, there was nothing to suggest that the Fed was concerned by the rise in longer-term yields or viewed the move as unwarranted. It is, therefore, possible that bond yields will continue to rise in the current environment, which would likely follow with the rotation into ‘value’ stocks such as banks, materials and energy resuming whereas ‘growth’ stocks are left in an unfavourable position.

Company performance within the market last Thursday (18th March) is reflective of this. JPMorgan & Goldman Sachs were up +1.77% & +0.86%, respectively, while technology stocks Apple (-2.40%), and Tesla (-6.93%) both fell. Overall, the US S&P 500 dropped -0.78% and the Dow Jones gained +0.26%, but it was not the best end to the week for the technology-heavy Nasdaq index, down -1.01% on Friday morning after a -3% drop on Thursday.

The Bank of England also re-visited its outlook for the economy, updating its forecast but making no change to quantitative easing targets or interest rates. The Monetary Policy Committee stated that the news “on near-term economic activity had been positive” and “recent plans for the easing of restrictions on activity may be consistent with a slightly stronger outlook for consumption growth in Q2 2021 than was anticipated in the February report.” The short-term future of the UK economy, therefore, appears to have been aided by a fast vaccination programme and the extension of COVID-19 support announced in the Budget earlier this month. However, the mid-term outlook does remain somewhat uncertain, with no real inclination on how much demand can be sustained after the initial post-lockdown period, and if supply networks are able to cope at first. The FTSE 100 was down 1.16% leading into Friday, pressured by the reaction in US markets and the unclear road ahead for inflation in the UK.

Closer to home, the Department for Transport has revealed plans for a new ‘Northern hub’ to be built in Leeds. Twinned with another hub in Birmingham, it will bring roughly 650 jobs to the two cities. As this comes just weeks after Rishi Sunak announced a new national infrastructure bank would be established in Leeds, the Government’s plan to relocate 22,000 civil servant jobs out of London to cities across the UK will no doubt benefit job prospects in the Leeds area and beyond.

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.
Volatility hits US markets
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