International Communique No. 285 – 30th March 2021


Stocks are ending March with four weeks of consecutive gains under their belt. In contrast, the relative performance of the tech industry has taken a knock as regulatory risks have loomed large. In the line of fire are social media, targeted by Congress for allowing toxic content, and US-listed Chinese firms, in a replay of the earlier spat. Good news for banks, however: the Fed said it would remove restrictions on dividends and share buybacks for most by 30 June, depending on results from stress tests.

Investors are spooked by rising bond yields, which could tarnish the appeal of tech stocks. Yet history tells us that equities generally perform better against a backdrop of rising inflation expectations and quickening economic growth, which in turn lead to higher profits – including for tech companies.

Volatility in interest rates subsided last week. The yield on the 10-year Treasury dipped to 1.64%. Institutional investors are tending to rebalance their portfolios with a flight to safety. Demand for US corporate bonds from non-US investors also recovered. Concerns persist over a possible early end to central bank support, but for now there is no sign that the Fed is going to turn off the tap.

The price of crude oil fluctuated sharply last week but was lifted by the logjam in the Suez Canal, caused by a container ship that had run aground, and the rise in petroleum demand in the US. On the other hand, new lockdown measures in Europe and fears of another virus wave in the US are exerting downward pressure.

Some 10% of world trade transits through the Suez Canal, and the hold-up has been causing a shortage in some raw materials. Latest news that the container ship has been moved from the shoreline has sent the price of the barrel lower in the run-up to the ‘OPEC and co.’ meeting on 1 April to discuss minimum production quotas.

Durable goods orders sunk by 1.1% in February (worse than the -0.5% expected) as the cold snap cooled demand. At the moment, consumer appetites are intact but there can be problems supplying the goods. The latest metric for Q4 2020 GDP growth is 4.3%, driven by construction and business investment. Recent economic statistics point to strong growth for 2021.

In contrast to consensus estimates, the dollar is gaining against the currencies of its major trading partners. One reason may be the widening gap in the GDP growth trajectory between Europe and the US. Thankfully, global equities have not so far been affected.

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