Global bonds retreated sharply, led by the US Treasury bond market where yields rose back to pre-pandemic levels amid concerns that central banks may have to tighten monetary policy if a worldwide economic recovery from the pandemic generates inflationary pressures.

The sell-off in bonds undermined equities, particularly highly valued technology stocks.

UK

The FTSE 100 declined 2.1% over the week.

The UK government revealed its roadmap to easing lockdown restrictions, with a 5-week gap between each stage of relaxation to allow scientists to judge the impact on COVID-19 infections. Schools will return on 8 March, followed by non-essential shops on 12 April. Hospitality venues will also be allowed to open on 12 April – but for outside, seated service only – with inside service resuming on 17 May. The government says it is hoping to be able to remove all restrictions on 21 June. All dates are tentative and will be data dependent.

On Sunday, the UK reached the milestone of having inoculated more than 20 million people with at least one dose of vaccine, placing it on track to reach of its target of inoculating all over 50s and vulnerable people by mid-April. The remaining 21 million over 18-year-olds will be inoculated by the end of July.

US

The S&P 500 fell 1.7% over the week. The tech heavy Nasdaq was particularly volatile, closing the week up 0.6% after a 3.5% fall on Thursday. Rising long-term interest rates pose problems for high equity market valuations as they lower the present value of future earnings.

Fed chair Jay Powell hailed signs that the economic outlook was improving but stressed that the US central bank would continue to stimulate demand for the foreseeable future, arguing that stubbornly low inflation was still a greater danger than a durable acceleration.

The House of Representatives passed Joe Biden’s $1.9tn coronavirus relief package. The bill now needs to be approved by the Senate, which Democrats control thanks to the Vice-President’s deciding vote. Democrats have set themselves a deadline of mid-March when the current round of emergency unemployment benefits runs out.

Treasury Secretary Janet Yellen told G20 finance ministers that the US will drop a contentious part of its proposal for reform of global digital taxation rules, opening the door to a deal on global digital taxation.

The FDA approved the single-dose Johnson and Johnson COVID-19 vaccine, finding it 82% effective at preventing severe disease caused by the South African variant.

Europe

The FTSEurofirst 300 lost 2.4% over the week.

The European Central Bank indicated it will increase the pace of its emergency bond purchases to counter the recent sell-off in eurozone sovereign debt markets if borrowing costs continue to rise.

Eurozone inflation jumped to 0.9% year on year in January, breaking a five-month spell of deflation. Higher prices for energy and non-energy industrial goods were the biggest factor, as was the reversal of a temporary cut in German VAT. Input prices for  eurozone manufacturers rose this month at a rate not seen for almost 10 years, due to supply chain bottlenecks which are unlikely to ease in the short term.

Germany’s economy expanded by 0.3% in the fourth quarter of 2020. While the data was better than expected, it revealed the impact of the country’s lockdown on the economy.

Japan

The Nikkei 225 dropped 3.4% over the week.

Pacific Basin

Hong Kong Exchanges and Clearing tumbled after the city’s government said it would raise the stamp duty charged on equity trades. The announcement marked the first time Hong Kong had increased duties on equity trading in almost 30 years.

China’s CSI 300 index of Shanghai and Shenzhen-listed stocks suffered its biggest one-day drop in more than six months. The sell-off was prompted by concerns that the country’s rapid economic recovery from the Covid-19 pandemic could bring on the removal of policy support for asset prices.

New Zealand’s finance minister indicated that the Reserve Bank of New Zealand should take overheating house prices into account when setting interest rates.

Emerging Markets

The Czech Republic tightened social mobility restrictions and indicated it would turn to Russia’s Sputnik V vaccine without EU approval as soaring COVID-19 infections threaten to overwhelm the country’s health system.

Brazilian president Jair Bolsonaro sacked the well-respected chief executive of Petrobras and replaced him with a pliant army general who has already hinted that his predecessor’s policy of setting fuel prices in line with international levels could be suspended and price limits restored.

India’s GDP expanded 0.4% in the three months to the end of December 2020, as a sharp drop in COVID-19 cases allowed businesses and shops to reopen. The modest expansion followed a technical recession of two successive quarters of negative growth.

Bonds

The global bond market has suffered its worst start to a year since 2015 as investors grow increasingly confident that the rollout of Covid-19 vaccines will boost economic growth and fan serious inflationary pressures for the first time in decades.

The yield on the 10-year US Treasury bond surged to 1.61%, the highest since before the coronavirus pandemic, before closing the week at 1.5%. Australia’s 10-year yields also surpassed their pre-pandemic levels.

The 10-year German Bund yield closed the week at -0.26%, while the 10-year UK Gilt yield closed at 0.82%.

In Japan, the 10-year benchmark bond yield rose to 0.178%, the highest level since the Bank of Japan announced it would introduce a negative interest rate policy in early 2016, before closing the week at 0.15%.

Commodities

Copper climbed above $9,000 a tonne for the first time since 2011.

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Image by Gerd Altmann from Pixabay