Weekly market update - 1st of March 2021
Written and accurate as at: Mar 01, 2021 Current Stats & Facts
Equities dropped and bond yields rose as markets tested policy makers’ commitment to keeping rates lower for longer in the face of fiscal stimulus. The pace of rising bond yields was material in a historical context. It implied the first-rate rise would be brought forward to 2022. Central banks stepped in by the end of last week in a coordinated move to stabilise yields. The challenge facing central banks is not so much how to drive yields lower again — but ensuring the pace of increases remains slow and controlled. The next few weeks will be a key test of their ability to do so.
The S&P 500 fell 2.4% to finish the month up 2.8%. The S&P/ASX 300 lost 1.5% for the week and is up 1.5% for February. The change in bond yields saw a further rotation from growth to cyclical.
Reporting season ended up as one of the strongest in years including upgrades for F21 EPS from about 7% to 14%. This was driven by sharper bounces in earnings from resource-related stocks and Covid “winners” like retail. That said, the latter were some of the worst performers for the month as growing confidence in the vaccine roll-out – coupled with the bond sell-off – dragged on momentum names.
In the context of the overall market, the biggest shift in market expectations came from the banks. The expectation for FY21 EPS growth shifted from flat in January to more than 20% by the end of February.
Covid and vaccine outlook
It is more of the same on the Covid front internationally. Countries rolling out vaccines continue to see falling new cases and hospitalisation rates.
Poor weather weighed a little on the rate of vaccinations. But in recent days the US has been nearing 2.3 million shots a day as the pharmacy network is brought into distribution. The approval of Johnson & Johnson’s vaccine — plus increased production of existing vaccines — has the potential to drive US to more than 3 million shots a day.
The UK’s program is also showing momentum. But European vaccination rates remain far lower, apparently due to greater public scepticism. This is likely to see Europe’s recovery lag that of the US. This could also act as a dampener on US bond yields. If the spread between European and US bonds widens we could see a shift in capital flows between them.
Policy and economics outlook
Bond yields are the current key issue. The bond sell-off is material in a historical context — particularly given its speed. It was exacerbated by a poor auction of US 7-year bonds, with the worst bid-to-cover ratio in ten years.
There are two factors to note:
- The increase in short-term rates indicates expectations of a first-rate hike at the end of 2022. Expected rates for mid-2023 are now 40bps higher than they were at the start of the month. These expectations are well ahead of the Fed’s stated position. This effectively tests its resolve given the expected scale of growth coming through.
- The volatility occurred in real rates as opposed to break-even rates. The market is effectively saying they don’t buy real rates staying this low given the fiscal stimulus. The question is whether the Fed can hold its nerve as we see growth and inflation begin to rise.
One paradox was that inflation expectations actually started to roll over. This would be inconsistent with a continued rise in real yields. The yield curve continued to steepen, which has been supportive of financials in the equity market. We saw a bigger move in Australian bonds than the US. This has taken our yield curve to its steepest in more than 20 years. The RBA increased Quantitative Easing to hold the 3-year yield. This worked but also reinforced concerns about the 10-year yield.
We have seen a concerted effort by central banks to ease concerns in response to these moves. The issue for countries outside the US is that they are seeing the rise in yields, but do not have the same degree of stimulus as the US. Therefore the rise in rates is negative for any recovery.
Markets
Equities sold off, led by growth stocks. US 10-year bond yields stabilised to end last week up only 7bps — but they are up 34bps for the month. Australian 10-year yields rose 48bps for the week and 78bps for the month. There was strength in commodities as an inflation hedge. Brent crude was up 6.3% and copper 4.3%. The rotation from value to growth — when seen via proxies such as US regional banks (value) and Cloud-tech ETFs (growth) — had a move of similar scale to November’s, when the first surge in vaccine optimism occurred. Banks may pause here following strong gains. Equity fund inflows across the globe have remained very strong. US$414 billion has flowed into equity funds in the past four months, dwarfing anything seen since the GFC. This — along with solid corporate earnings — should help support the market if we see a stabilisation in bonds.
Key news and results
A seeming resolution between the federal government and global social media and search platforms is expected to deliver up to $65 million in extra annual EBIT to Nine Entertainment (NEC, +8.7%). Nine is also benefiting from a strong recovery in advertising and good subscription numbers for Stan.
Qantas’s (QAN, +8.2%) result was messy, as expected. But there were two key underlying points. First, debt remains at the lower end of the expected range and they expect to be effectively net free cash flow positive in the second half of this year. Utilisation is expected to be at about 60% this quarter — potentially rising to 80% in the next quarter (helped by Easter) as long as borders remain open. Secondly, the benefit of a return to normal for working capital could be more than $2 billion (20% of the market cap).
Ramsay Health Care (RHC, +6.2%) was helped by a good performance from its offshore assets.
REITs such as Scentre (SCG, +5.5%) and Vicinity (VCX, +6.2%) did well, driven more by optimism around re-opening than by results. The malls continue to be challenged by weak foot traffic and pressure on leasing spreads.
On the negative side, Appen (APX, -22.7%) downgraded expectations. This was partly due to currency, but there were also operational issues.
A2 Milk (A2M) issued another downgrade, flagging concerns about growing inventory. The market is asking serious questions about management’s guidance. At this point, it appears the stock is propped up by the company’s potential takeover appeal.
Seek (SEK, 15.4%) delivered a good result but flagged the sale of its stake in China’s Zhaopin at below market price.
Overall it was a strong reporting season, with FY21 EPS growth increased from +6.9% at the start of February, to +14.8%.
The ratio for companies upgrading guidance by more than 5%+ to downgrading by 5%+ was two-to-one. It was the same for dividends.
Banks delivered the biggest surprise sector-wise. Lower bad-and-doubtful debts, better margins and volumes encouraged FY21 earnings growth expected to climb from 0% earlier in the year to more than 20%. Stock-wise reporting season was very much a story of inflation hedges and less-loved stocks turning the corner while tech, gold and high-performing retailers all got hit.