Market dynamics in February were marked by strong volatility, especially in the last week of trading, which wiped out much of the monthly performance. All because of the prospect of faster than expected inflation growth. This expectation increased investors’ fears that central banks will have to tighten monetary policy measures sooner than expected, which has led to a sharp sell off on government bonds and a rise in the yield on the 10-year US Treasury. In the United States, where the economy is recovering, the 5-year breakeven inflation rate, a rate that is an indicator of market expectations for inflation, has doubled in the last 6 months. This has led to fears that the Fed may scale down its bond-buying program. This situation reminded financial traders of the “Taper Tantrum” of May 2013 (with then-FED Governor Ben Bernanke announcing that he would start cutting stimulus by end of the year); longer-term Treasuries yield have soared, pushing up the 2/10 year curve considerably (to levels not seen since mid-2017).
Despite a slight contraction in yields, this episode serves as a reminder that the risks associated with a change in monetary policy will persist throughout the course of this year.
Having said that, we do not believe that a short term rise in inflation would force the Fed to scale back stimulus. Inflation in the U.S. will not reach 2% until 2022, so the market should hold, albeit accompanied by periods of volatility for the current year.
As initially said, stocks had a rather nervous last week of the month, with technology and industrial stocks suffering the most. In the United States, the S&P 500 index (+1.47%) reached a new all-time high towards the middle of the month, with value, banking and oil stocks in the front row. The Nasdaq, on the other hand, was down 1.57%. Europe also rose, with the Euro Stoxx index up 2.99% and Italy up 5.67% (driven by the Draghi effect). Badly the Swiss SMI index with a performance of -2.03%.
Positive news from the COVID front with the FDA approval of the Johnson & Johnson vaccine. The company expects to deliver 4 million doses in the first week, 20 million doses by the end of March and 100 million doses by the end of June. This is a very important news because it is the only vaccine on the market that requires only one dose.
The decline of gold continues, which loses 6.75% with a month-end price of USD 1,734 per ounce.