VIDEO: Market Snapshot February 2021
Our Market Snapshot provides an overview of key events that influenced financial markets over the course of February 2021.
Global equity markets were broadly positive in February amid wide-scale rollouts of Covid-19 vaccines and indications that the global economy was on the path to recovery. The growing likelihood of a massive stimulus package in the US helped increase sentiment towards riskier assets. Re-inflation worries, meanwhile, sparked a sharp sell-off in longer-dated government bonds, with the yield on the US 10-year Treasury bond reaching a one-year high. In the UK, sentiment was further bolstered by the news that the economy would fully reopen in late June this year. Turning to South Africa, local equities saw a strong rally on the back of the risk-on sentiment, the start of the government’s Covid-19 vaccination drive, and Finance Minister Tito Mboweni’s better-than-expected national budget, which was largely welcomed by investors.
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned 2.3% for the month. Developed markets outperformed emerging markets, with the MSCI World Index returning 2.6% and the MSCI Emerging Markets Index delivering 0.8%. The Bloomberg Barclays Global Aggregate Bond Index (US$) returned -1.7%, while the EPRA/NAREIT Global Property REIT Index (US$) produced 4.1%.
The spot price of Brent crude oil closed February 18.4% higher from the previous month at around US$64 per barrel thanks largely to the curtailment of supply from severe storms in Texas, plus ongoing OPEC supply curbs . In commodities, the gold price was 4.2% weaker, but other metals prices gained ground: platinum gained 12.6%, copper 16.4%, aluminium 10.8%, and palladium 3.4% for the month.
In the US, the yield on the benchmark US 10-year Treasury bond rose to a one-year high of around 1.6% amid expectations of a robust economic recovery, fuelled by further fiscal stimulus, low interest rates, fears of rising inflation, and the rollout of Covid-19 vaccines. Dovish comments from the US Federal Reserve (the Fed) helped ease the bond sell-off somewhat, with Chairman Jerome Powell indicating it would take around three years for inflation to return to within the Fed’s target range, while reinforcing that the central bank would continue to use the tools at its disposal to support the US economy.
In other positive news, the House of Representatives approved President Joe Biden's US$1.9trn pandemic aid package, which included a third round of US$1,400 stimulus payments for most Americans. The US economy expanded by an annualised 4.1% q/q in Q4 2020, slightly higher than previous estimates of a 4% increase. Composite PMI edged up to 58.8 in February from 58.7 in the previous month, signaling the sharpest pace of expansion in private sector activity in nearly six years. Meanwhile, retail sales rose 5.3% in January, following an upwardly revised 1% contraction in the previous month, significantly beating market forecasts of a 1.1% increase.
Equities closed the month broadly higher, with the S&P 500 returning 2.8%, the Dow Jones Industrial 30 posting 3.4%, and the technology-heavy Nasdaq 100 closing the month flat at 0.0% (all in US$).
In South Africa, market sentiment was supported by the news that the government had secured 80,000 doses of the Johnson & Johnson Covid-19 vaccine, after data showed that the AstraZeneca alternative offered minimal protection against the local variant of the virus. The government kicked off phase one of its three-phase vaccination campaign on 17 February, with the aim of vaccinating roughly 67% of the population by the end of the year.
Finance Minister Tito Mboweni unveiled his national budget, which saw the scrapping of proposed tax increases in favour of fiscal consolidation and reined-in expenditure to support the pandemic-battered economy. Mboweni outlined a proposed wage bill cut of R300bn over the next three years to help reduce government debt, and aid in the funding of the nation-wide vaccination programme. Other highlights included the lowering of the corporate income tax rate to 27% as of 1 April 2022, the first reduction since 2008, while the excise duties on alcohol and tobacco products were raised by 8%. Investors, however, remained cautious over the path of recovery outlined by Mboweni, with Moody’s stating that the lower budget deficits unveiled in the budget speech were unlikely to prevent debt from rising. Fitch said the country still faced "severe challenges" to implement fiscal consolidation.
In other news, South Africa's unemployment rate rose to 32.5% in Q4 2020 from 30.8% in the previous period, marking the highest jobless rate since 2008. Eskom was given the green light to hike tariffs by over 15% from 1 April. Retail sales slumped 0.8%, after a 2.1% rise in the previous month, while inflation remained within the lower band of the SARB’s 3-6% target range at 3.2% in January. Manufacturing production increased by 1.8% y/y in December 2020, beating market expectations of a 1.3% fall and well above the 4.1% decline posted in the prior month.
The FTSE/JSE ALSI returned a strong 5.9% in February. The standout performers were Resources with 11.6% and Listed Property (SAPY index) with 8.6%. Industrials returned 2.3% and Financials 4.8%. The FTSE/JSE Capped SWIX All Share Index, which we use as the equity benchmark for most of our client mandates, returned 6.2%. SA bonds were marginally positive at 0.1% (as measured by the FTSE/JSE All Bond Index), while SA inflation-linked bonds returned 1.8% and cash (as measured by the STeFI Composite) delivered 0.3%.
Finally, the rand was mixed against the major currencies, gaining 0.1% against the US dollar and 0.4% against the euro, while depreciating 1.4% against the pound sterling.
UK and Europe
In the UK, the pound sterling became the best-performing G10 currency of 2021, hitting a high of around US$1.42 for the first time since April 2018. Sentiment was further supported by hopes of a quicker economic recovery, aided by the UK’s rapid pace of vaccinations and the prospect of a post-Brexit trade deal with the EU. Prime Minister Boris Johnson unveiled the government’s plans to ease restrictions, stating that all restrictions should be lifted by 21 June. Meanwhile, the Bank of England left its key interest rate unchanged as expected, however reiterated that it would adjust its monetary policy if needed.
Turning to economic indicators, better- than-expected GDP figures helped lift sentiment, with the UK economy expanding by 1.0% q/q in Q4 2020. Manufacturing PMI expanded to 54.9 in February from 54.1 in January, beating market forecasts of 53.2. Retail sales slumped 8.2% in January while inflation edged up to 0.7%, in line with the previous month’s reading.
In the EU, the European Commission lowered its GDP forecasts for 2021 from 4.2% to 3.8%, stating that the resurgence of Covid-19 infections and the appearance of more contagious variants had forced many countries to reintroduce lockdown measures. Among the bloc's largest economies, Spain and France are expected to expand at the steepest rates for 2021, with GDP forecast at 5.6% and 5.5% respectively. The risks surrounding the Eurozone growth outlook remained tilted to the downside, but became less pronounced due to prospects of a global economic recovery and the launch of vaccination campaigns. Sentiment, however, remained under pressure due to the slow pace at which vaccinations have been rolled out and the impact this would have on the Eurozone’s economic recovery.
In other news, Eurozone GDP shrank by 0.6% q/q in Q4 2020, while manufacturing PMI increased to 57.7 in February from 54.8 in January, beating forecasts of 54.3 and marking the strongest growth in factory activity in three years.
For the month, the UK’s FTSE 100 returned 3.4%, the German DAX -2.5% and France’s CAC 40 5.5% (in US$).
China and Japan
In China, news that the People’s Bank of China (PBoC) would continue to provide economic support in 2021 lifted sentiment, along with reports that it would refrain from sudden shifts in order to provide stability. The PBoC left its benchmark interest rates steady for the tenth straight month in February.
In other news, the Chinese government increased its stamp duty on equity transactions from 0.1% to 0.13% for the first time in almost two decades, in a bid to help fund a widening budget deficit. Manufacturing PMI fell to 50.9 in February, below market consensus of 51.5 and the lowest recording since May last year. China's producer prices rose by 0.3% y/y in January, recovering from a 0.4% fall in the previous month, as months of strong manufacturing growth pushed the costs of raw material higher. Meanwhile, foreign direct investment in China grew by 4.6% y/y to CNY91.61bn in January, following a surge in investments from Japan.
The Japanese economy advanced 3.0% q/q in Q4 2020, beating market estimates of a 2.3% expansion. For the year 2020, the economy shrank 4.8%, marking the first contraction since 2009. The Bank of Japan left its key short-term interest rate unchanged at -0.1% and maintained the target for the 10-year Japanese government bond yield at around 0% for January. The central bank also upped its GDP growth projection for the next fiscal year to 3.9% from 3.6%, while the forecast for the current fiscal year shifted marginally from -5.6% to -5.5%.
Turning to economic indicators, Japan’s deflation persisted as consumer prices declined 0.6% y/y in January after falling 1.2% in the previous month. Meanwhile, manufacturing PMI increased to 50.6 in February from 49.8 in January, marking the first month of expansion in factory activity since April 2019 and the fastest pace since December 2018.
Japan’s Nikkei 225 delivered 2.9%, the MSCI China -1.0% and Hong Kong’s Hang Seng 2.4% (in US$).