After closing January on a weak footing, global stocks posted their best weekly performance since November. Meanwhile, bond yields rose.

UK

The FTSE 100 rose 1.3% over the week.

As the UK government said it would inoculate all vulnerable people and those over the age of 50 by the start of May, the Bank of England forecast a rapid recovery for the UK economy in the second half of this year. The Bank kept its monetary policy unchanged but said it would prepare contingency plans for the implementation of negative interest rates if needed in six months’ time. This follows a consultation with key lenders. The Bank emphasised that it did not want to send any signal that it intended to set a negative bank rate but wished to have the option to do so if needed.

US

The S&P 500 bounced 4.6% over the week, taking the index to a series of fresh highs.

The US Senate passed a ‘reconciliation’ bill allowing Democrats to pass President Biden’s stimulus measures with a simple majority.

Non-farm payrolls increased 49,000 in January. The unemployment rate dropped to 6.3% from 6.7% in December, although that was driven by workers exiting the labour force.

The ISM non-manufacturing purchasing managers’ index increased to a reading of 58.7 in January, from 57.7 in December. January’s reading was the highest since February 2019.

The ISM manufacturing purchasing managers’ index fell to a weaker-than-expected reading of 58.7 in January, compared to 60.5 in December which was the highest since February of 2018.

Europe

The FTSEurofirst 300 rallied 3.3% over the week.

The eurozone economy contracted 0.7% over the fourth quarter of 2020, leaving the economy 6.8% smaller than at the start of the year. However, the contraction was less than many had feared. At a country level, Italian GDP shrank 2% in the fourth quarter, while Austria’s GDP declined 4.3%. In contrast, Spain and Germany both eked out slight growth.

Headline consumer price inflation in the eurozone hit an 11-month high of 0.9% in January, up from -0.3% in December. The jump ends five months of deflation and was the fastest jump in more than a decade. However, it was driven by a combination of one-off factors rather than a revival in underlying demand. The reversal of a temporary reduction in German value added tax at the start of this year played a role, as did higher energy costs and supply chain disruptions that have raised container shipping prices for retailers and manufacturers. Core inflation, which excludes volatile food and energy prices, rose from 0.2% in December to 1.4% in January.

The IHS Markit purchasing managers’ index for Italian manufacturing rose to 55.1 in January, from 52.8 in the previous month. This represented the fastest growth rate in three months, due to strong exports to Asia. By contrast, the Spanish IHS Markit manufacturing PMI fell to a seven-month low of 49.3, down from 51 at the end of last year.

Italian assets rallied as former European Central Bank chief Mario Draghi agreed to try to form a national unity government after the nation’s power-sharing coalition collapsed in January. The move raised hopes that Mr Draghi can bring some stability to Italian politics.

Japan

The Nikkei 225 jumped 4.0% over the week.

Pacific Basin

The Caixin manufacturing purchasing managers’ index (PMI) fell to a seven-month low of 51.5 in January from 53.0 in December. The official manufacturing PMI fell to 51.3 in January, from 51.9 a month earlier, representing the weakest growth in factory activity since last August, due to a resurgence of local COVID-19 infections ahead of the Lunar New Year holidays.

Bonds

The yield on the 10-year US Treasury bond closed the week at 1.14%, while the yield on the 30-year Treasury rose to 1.93%, its highest level since last February. With short-term rates pinned by near-zero interest rates, the yield curve continued to steepen: the gap between two-year and 10-year yields widened to more than 100 basis points, the largest difference since 2017, while the five- to 30-year yield gap neared 150 basis points, the widest since October 2015.

In Europe, the 10-year German Bund yield ended the week at -0.45%, while the yield on the 10-year UK Gilt rose to 0.48 %, the highest level since the market tumult in March, as bets that the Bank of England would implement negative interest rates were unwound.

Currencies

The British pound rallied as the possibility of negative UK interest rates was seen to fade.

Commodities

Oil prices rallied, with Brent crude approaching $60 a barrel, its highest level since February 2020, just before the steep pandemic-induced sell off.

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Top image by Gerd Altmann from Pixabay