After a patchy January for major markets, February got off to a promising start, driven by the global vaccination efforts.
A vaccine miracle, but a growth lull
Despite its third national lockdown, the UK’s vaccination programme paced ahead, and the government met its target of vaccinating 15 million people by mid-month, despite fears of supply issues. This cemented a record for delivering one of the most successful vaccination programmes in the world. There was further cause for optimism as the roadmap to easing lockdown restrictions was announced, and helped lift prospects for the travel and leisure sectors.
The Office for National Statistics also announced its latest GDP figures for 2020, confirming the UK economy shrank by nearly 10% in 2020 due to the COVID-19 pandemic. It was the worst contraction in 300 years with the UK faring the worst out of the G7 countries as shown in the chart below.
The Bank of England also cut its growth forecast for 2021 to 5% as they felt the third lockdown would weigh on recovery. Fortunately, the government seems in no hurry to remove stimulus measures which should prove supportive for the economy.
Across the different ponds
In Europe, there have been talks on how to implement the Brexit trade deal which was expected to be ratified by 28 February. However, the EU have sought a two month extension, causing prolonged uncertainty for businesses and individuals. On the plus side, Mario Draghi, former president of the ECB, came out of retirement to form a new government in Italy. Markets welcomed this and Italian bonds yields rallied on the news.
Meanwhile in the US, President Joe Biden pressed on with his $1.9 trillion American Rescue Plan. The proposals put forward would provide more support for the unemployed, small businesses, states and local governments, while also increasing funding for vaccinations and testing. This stimulus bill was passed by the House of Representatives, and marked the Democrat’s first test of full control since Donald Trump’s impeachment trial earlier in the month.
A bumper yield for markets?
Most major equity markets began the month with much optimism, and even more esoteric investments such as Bitcoin reached new highs. But by mid-February markets ran out of steam as shown in the chart below. This was largely due to inflationary fears setting in which prompted concerns over prospects for longer dated government bonds.
Government bond yields rose over the month led by 10-year US treasuries which stood at around 1.40% by month end. The yield on 10-year UK Gilts more than doubled over the month to around 0.79%1. Similarly, the yields on European and Japanese government bonds also rose.
What caught investors by surprise was the fast pace of these rises, and the question to ask is how high will governments let yields go before intervening? It’s also worth noting that, while this could price in a stronger recovery, there are still deflationary factors at play, such as unemployment. In the UK for instance, the full extent of its unemployment won’t be known until the furlough scheme unwinds. If unemployment (which currently stands at 5%2) turns out to be higher than expected, this could dampen inflation expectations and potentially limit the rise in bond yields.
1Bloomberg, United Kingdom Rates & Bonds, bloomberg.com (accessed on 26/02/2021).
2ONS, Employment in the UK: February 2021, ons.gov.uk (accessed on 09/03/2021).
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