Increased volatility in the financial markets

This has been another week marked by heightened volatility in the financial markets, swayed in part by upward pressure on interest rates on both sides of the Atlantic, but above all by an increase in inflation expectations.

The upward trend in commodity prices amid hopes of an economic recovery remains among the main reasons.

On the other hand, positive developments in the health situation continue to fuel hopes for a quicker-than-expected end to the crisis and support a positive underlying trend for international equity markets.

And speaking of equities, growth stocks, particularly Technology stocks in the United States, continued to show extreme sensitivity to this new interest rate system, with the Nasdaq entering into correction territory (-11% since the end of February). Conversely, value and cyclical sectors stocks to outperform as the economic recovery becomes an undeniable reality. The main indices such as the Eurostoxx, the S&P and the Nikkei are up from the start of the year.

In bond markets, long-term yields continued to increase: Today the 10-year yield on US Treasury Notes stands at 1.55%, at 0.72% for UK Gilts and at -0.31% for German Bunds.

Regarding commodities, the best asset class in this context remains the oil sector.

Hopes of increasing demand, OPEC’s announcement that it will continue to limit production and the recent attacks on one of Aramco’s production sites in Saudi Arabia allowed Brent and WTI to cross $70 and $65, respectively.

Gold, on the other hand, continues to fall, dropping below the key $1,700 resistance.

Lastly, in the currency market, the dollar gained on the euro by coming down below $1.20 to later hover around the $1.19 support. The safe-haven Swiss franc, however, fell back to CHF 1.11 against the euro.  The Chinese yuan also fell lower in this context to reach ¥6.54 against the dollar, ¥6.51 today.

This week brings eagerly awaited inflation data as well as weekly US employment figures.
Despite Jerome Powell’s considerations last week on maintaining an accommodative monetary policy and a temporary upward trajectory in inflation, the bond market should continue to remain volatile as it awaits these publications. The market still expects a return to full employment and a target inflation of 2%.

Lastly, the final vote on the $1.9 trillion fiscal stimulus package should be approved in the near future by the Biden administration and become its first electoral success. These data should help maintain short-term pressure on US yields, inflation and US growth stocks.

The latest US employment data released on Friday also brought encouraging news about the economic recovery. The number of jobs created for the month of February was 379K against an expectation of 200K – an increase of 128% compared to the month of January. This trend could continue in the short term

On the emerging markets side, China also published encouraging news on its exports, which rose 60.6% in February.

Finally, on the European side, the event of the week will be the ECB meeting, which the bank should also maintain an accommodative strategy in the face of the current economic situation.

Stock markets should continue to be marked by a sectoral and style rotation in favour of industrial and cyclicals but also by a continued decoupling of the US and European markets.