Market Overview – 03/03/2021

For the second time in a row, share prices had a wobble in the last few days of the month. In January it was the Reddit day traders forcing some hedge funds to de-risk. Last week, it was a spike in bond yields that sent share prices down. Neither event is connected, but it shows the sensitivity of markets to sentiment swings after the strong recovery we have seen over the past eleven months.

Despite central banks saying that they will not raise interest rates any time soon, there is some concern that the sheer volume of economic and monetary stimulus that has been (and will be) unleashed on the global economy may result in a boom that will force the authorities to push up borrowing costs sooner than expected. In response, bond yields moved up sharply last week, causing a sell-off in equities. The argument goes that with vaccine rollout now underway, economies will open more quickly than previously anticipated and that much of the extra stimulus proposed will not be necessary. Can you have too much stimulus? Yes, you can. However, it still seems unlikely that any rise in inflation (due to short-term excess demand and supply shortages) will be permanent. While certain sectors have seen capacity lost forever during the pandemic (think entertainment and leisure) any return to normality will surely see supply rise to meet demand. It still feels too soon for governments and central banks to remove support for the millions that need it.

Even though share prices dropped late last week, February was still a positive one for equity markets. The broad US index rose by 2.6% and the FTSE 100 was ahead by 1.2%. Major indices remain in positive territory for the first two months of 2021 reflecting optimism that a successful vaccination programme will help us navigate our way to a brighter future.