Tech tumble drives sector rotation
- Global equities fell -0.6%, taking the YTD rally to +9%. Stronger-than-forecast US inflation stoked fears of an early tightening of monetary policy. This accelerated the so-called ‘rotation’ trade, with the tech sector dragging down markets from NASDAQ to Emerging Markets, whilst financials were boosted.
- Equity corrections (10%+ falls) are reasonably rare, with 24 over the last four decades for the S&P 500, and clustered around crises. It has also paid to buy them, with markets on average higher a year later.
- We see markets as well-supported, with GDP and earnings surprises offsetting likely lower valuations as inflation and bond yields rise. This reflationary environment increasingly favors cyclical sectors and international market leadership vs tech and the US.
Inflation scare contained
- US inflation surprised on the upside last week, at a 10-year high 4.2% yoy, and unsettled investors.
- Inflation will keep rising as we lap 2020 lows, with commodities rising, and supply-chain bottlenecks. But Central Banks will see it as transitory and keep rates low as long as wage rises remain contained.
- Markets have been stress-tested, with long-term US inflation forecasts soaring above 2.5%, and equities rising despite the near doubling of bond-yields YTD.
The vaccine rotation to build
- European assets are benefiting from an acceleration in vaccine rollouts, with a third of the population now with at least one dose, double a month ago. LatAm one-dose rates are also up 60% in a month, to 14% vs a global average of 8%, as Asia and Africa lag.
- Vaccine rollouts will drive sustainable economic re-opening, and markets. We see a building rotation from the early leader US towards Europe and beyond.
- Bitcoin pressured, easing below US$50,000, with US administration’ capital-gains hike tax plan and last week Tesla announcing it would stop taking bitcoin payments given environmental concerns.
- This may put a positive focus on green mining platforms, and those assets not ‘mined’ or using energy intensive proof-of-work (PoW) systems, but rather pre-mined or consensus mechanisms (PoS).
Commodity rally breather
- The rally took a breather, with the Bloomberg Commodity Index +18% this year, as no. 1 importer China began voicing concerns on the pace of price increase, and sought to ease economic stimulus.
- End of the six-day US Colonial pipeline shutdown eased prices, but has boosted cyber security fears.
- Investors have not seen significant inflation in over 30-years. US inflation averaged 7.4% annually in the 1970’s. Hard assets, commodities and housing, led gains then, given their intrinsic value and scarcity.
The week ahead: Taking global growth pulse
- Minutes of the last Fed meeting closely watched for views on unfolding ‘transitory’ inflation spike (Wed).
- Forward looking purchasing manager indices (PMI) for continued US, UK, EU, JP growth strength (Fri).
- Leading retailers including Walmart and Home Depot report Q1. New issues from webhoster Squarespace direct listing, to IPO from Swedish alt-dairy Oatly.
Written by a team of experienced financial analysts at eToro.
This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation. Past performance is not an indication of future results.