Global equities continued to grind higher last week in the absence of bad news. Biden’s massive U.S. fiscal stimulus package remains the ‘gift that keeps on giving’ as it slowly winds it way through Congress and gives equity bulls something positive to talk about on quiet days. The U.S. Q4 earnings season is also winding down, with results again pleasantly surprising to the upside. Contrary to some fears, the January U.S. CPI inflation report also remained fairly benign.
Indeed, probably the main market concern these days, apart from any COVID relapse, is that the synchronised global demand rebound seemingly underway – coupled with lingering supply bottlenecks – could lead to an upsurge in consumer price inflation over at least the short-term. Pricing pressure is certainly evident in many commodity markets, with oil prices pushing higher – and the recent move higher in bond yields is also worth watching. Indeed, both U.S. and Australian 10-year government bonds yields have lifted around 25-30bps so far this year to almost 1.25%. For what it’s worth, this is where my modelling suggests yields should be given current low cash rates and market expectations for no move in official rates in either country over the next 12 months – suggesting further upside should be limited.
That said, while central banks are unlikely to change their tune any time soon, yields nonetheless appear vulnerable to an inflation surprise and an associated knee-jerk market response. Of course, whether inflation (in particular U.S. inflation) picks up remains to be seen – while I don’t rule out a short-run spike higher, I’d see this as an overdue buying opportunity rather than a cause for longer-run concern. Of note, moreover, apparent inflation concerns are not being validated by gold prices – which continue to weaken in the face of rising bonds yields and despite a still subdued U.S. dollar.
In terms of the week ahead, news is likely to remains fairly market-supportive, with strength in January U.S. retail sales and industrial production expected. Although unlikely, inflation hawks might find something to worry about in the U.S. producer price (wholesale) inflation report, while the U.S. fiscal stimulus gift will keep on giving.
Global equity trends
In terms of key global equity trends, there is still no clear bailing out of the U.S./growth thematic relative to the non-U.S./value thematic. Indeed, the U.S. market has been holding its own of late and the battle between global growth and value exposures has been fairly even. That said, emerging markets are still tending to outperform, while Australia’s relative performance (even allowing for $A strength which is hurting unhedged global equity returns) remains lacklustre. My blog on Wednesday will explore in more detail Australia’s relative equity performance.
As expected, surveys of business and consumer sentiment remained fairly upbeat last week. CBA released an encouraging profit result and a lift in dividends, continuing a pattern of generally better than feared outcomes at this early stage of the six-monthly earnings reporting season. As was the case in the U.S., local bond yields marched higher and the $A and resource stocks (reflecting the global reflation theme) had a good week. Technology also continues to bound higher.
Of course, the encouraging news was marred by Victoria’s snap lockdown on Friday, but markets appear increasingly comfortable with these – provided they are not nationwide wide and fairly short!
The local earnings season rolls on this week, which should in general remain market supportive. January’s labour market report on Thursday is also expected to reveal another chunky lift in employment of around 30k, with the unemployment rate edging lower to 6.5%. Vaccines are coming and the RBA is waiting Godot-like for a decent lift in wage growth which should still be at least several years away! At over 20 times forward earnings, the market’s PE valuation is historically expensive to be sure, but with earnings and the economy recovering and any global inflation scare at worse likely to be short-lived, it’s hard to be too bearish.
Have a great week!