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LGT Navigator: Rising bond yields ensure keep up pressure on equities

February 26, 2021

Rising inflation expectations and higher yields on bond markets continue to depress sentiment on the stock markets. Better than expected economic data from the US failed to support share prices. On Wall Street, technology stocks in particular once again took a beating. The yield on ten-year US government bonds climbed above 1.6% and thus reached the highest level since February 2020.

Rising bond yields ensure keep up pressure on equities

On the New York Stock Exchange, inflation fears are spreading and yesterday caused heavy losses in standard stocks and to an even greater extent in technology stocks. While the outlook for overcoming the corona crisis is positive thanks to the, albeit slow, expansion of vaccination campaigns, fears of an uncontrolled rise in inflation and consequently rising interest rates are weighing on stock market sentiment. The Dow Jones Industrial slumped on Thursday by -1.75% to 31'402.01 points, after the leading index had risen in mid-week still over 32'000 points to record levels. The S&P 500 fell even by -2.45% to 3'829.34 points. Technology stocks were hit the hardest. For example, the Nasdaq 100 plunged -3.56% to 12'828.31 points – the strongest daily percentage loss since October 2020. On the one hand, tech stocks would suffer from a rise in financing costs and on the other hand, they are vulnerable to profit taking due to the above-average price increases in the recent past.

Following the rise in bond market yields, the negative trend in Asian stock markets continued. The broad MSCI Asia Pacific Index was recently down around -3%. Futures on Europe's stock markets also signaled a deep red start to trading.

Latest economic data point to sluggish but ongoing recovery of the US economy

The world's largest economy grew at a slightly stronger annualized rate of +4.1% in the final quarter than initially expected, but lost significant momentum compared to the strong recovery in Q3 (+33.4% annualized). At the same time, US companies reported a strong and ongoing increase in new orders in January. Orders for durable goods (e.g. machinery or aircraft) rose +3.4% month-on-month to start the year. Analysts had expected an increase of +1.1%. In addition, orders in December increased by +1.2%, which was stronger than the +0.5% assumed in one calculation. Orders thus increased in January for the ninth month in a row. New orders for civilian capital goods (excluding aerospace) – a key indicator of business investment – were +0.5% for the month.

ECB aims to prevent unwanted rise in interest rates

According to ECB Director Isabel Schnabel, the European Central Bank (ECB) will prevent an unwanted tightening of financing conditions. A too rapid rise in real interest rates due to an anticipated faster economic recovery could jeopardize the recovery, the ECB director warned. But a more optimistic economic outlook is warranted, she said. “We see light at the end of the tunnel,“ Schnabel said in a newspaper interview.

Money supply growth accelerates

Growth in broad-based money supply M3 accelerated in the euro area at the beginning of the year. The aggregate increased by +12.5% compared to the previous month, as reported by the ECB. Against the backdrop of the ECB's extremely loose monetary policy, the money supply in the euro zone thus increased in January at the fastest rate since November 2007. Commercial bank lending to households also grew by +3% and lending to businesses by +7% in January. The expansion of the money supply is expected to give the economy a boost, but it also increases the currently hotly debated risk of inflation.

Bundesbank expects renewed slump in Q1

The German central bank expects another noticeable drop in GDP in the first quarter due to the corona measures. The heavier burdens caused by the strict containment measures, which will be in place until at least the beginning of March, are likely to lead to a setback in overall economic performance in the first quarter of 2021, the Bundesbank commented in its monthly report published yesterday. However, the German economy should then return to a significantly higher level of performance from the spring onwards thanks to the gradual easing of the measures and the wider availability of vaccines the recovery should continue, according to the Bundesbank.

Consumer climate in Germany improved despite lockdown

The mood of German consumers recovered somewhat in February following the slump at the beginning of the year. According to the latest survey results from the Nuremberg-based consumer research company GfK, both willingness to spend and expectations regarding future incomes improved. The consumer climate index forecast on this basis for March improved by 2.6 points to -12.9.

Yellen calls for more support for global immunization programs

New US Treasury Secretary Janet Yellen emphasized the need for a coordinated response to the global corona crisis and called on G20 countries to expand support for global vaccination programs. A rapid and global vaccination program is the most powerful stimulus the global economy needs, Yellen commented.


Economic Indicators February 26

MEZ Country Indicator Last
08:45 FR Consumer Prices (February, y/y) +0.6%
09:00 SZ KOF Economic Indicator (February) 96.5
09:00 SZ GDP Q4 (q/q) +7.2%
09:00 SP Consumer Prices (February, y/y) +0.4%
14:30 US Personal Spending (January, m/m) -0.2%
14:30 US Personal Income (January, m/m) +0.6%
14:30 US PCE Price Index (January, y/y) +1.3%
14:30 US Trade Balance (January) USD -83.19bn
15:45 US Chicago PMI (February) 63.8
16:00 US Consumer Sentiment University Michigan (February) 76.2

Earnings Calendar February 26

Country Corporate Period
SZ LafargeHolcim Q4
GE Deutsche Telekom Q4
AUT Erste Group Q4
FR Engie Q4


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