The Cambridge Weekly – 19th April 2021

New bond news gives green light for equity investors

We usually start by summarising equity market action over the course of the past week. Last week, it was developments in the bond markets that may be of more significance for investors, over the fact that equities continued to do well. Last Thursday, yields of long maturity bonds across global developed markets fell quite sharply, at the same time as economic data showed resoundingly strong activity. As readers will know from previous editions, bond yields tend to rise in response to an improving economic outlook – sometimes far enough to even undermine lofty equity valuations, due to added competition they bring to the returns equation for investors.

So, Thursday’s somewhat counterintuitive market action was a very good signal for equity markets, which duly went to new highs in the US. The FTSE100 still lags, but broke through 7000 on Friday – continuing on its path to recovery.

Are we due a ‘gangbusters’ earnings season?

As parts of the world economy slowly opens up, capital markets are pushing ever higher. That investor optimism has been a mainstay since the dramatic sell-off a year ago, driven by huge amounts of monetary and fiscal support, and the hope that global growth will come through in full force after the pandemic. But after the year we have had – the deepest global recession on record – this optimism has left assets at eyewatering valuations. Coming into this year, markets were not just hoping for a strong recovery in 2021; they were expecting it. Economically speaking, the first few months of the year have been much the same as 2020 – with businesses and consumers on hold until lockdowns can be eased. But eventually, markets will need more than just wishful thinking. And, as we move through the year, the need for solid performance to back up investor optimism will become more pressing.

Markets shrug off German political drama

For well over a decade, Germany’s political system has looked the picture of stability. Chancellor Angela Merkel has reigned for so long she is often considered the de facto leader of Europe as well as its largest nation – her tenure marked and prolonged by a history of compromise and coalition with Germany’s other leading parties. In recent years, this has stood in stark contrast to Britain, where four general elections in
five years and constant Brexit drama was followed by a particularly hard pandemic experience, littered with scandals.

Now, though, those tables seem to have turned. A rapid vaccine rollout and subsequent easing of restrictions has significantly cooled the pressure on Boris Johnson’s government. Meanwhile, Germany’s vaccination programme – just like the wider EU’s – has been notoriously slow, causing a recent spike in infections and another tightening of restrictions. Many German politicians have joined in the vaccine blame
game, threatening a rift in supply chains. And, in the midst of all this, the country’s leading parties have fractured over their political future – with only five months to go until general elections that will determine Merkel’s successor.

Read the full commentary here