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The prospect of another large U.S. fiscal package has fed debates about potential economic overheating. BlackRock believe central banks for now have strong incentives to lean against any rapid rise in nominal yields even as inflation rises, supporting their
tactically pro-risk stance.

The United Kingdom remains far ahead of its European counterparts in terms of vaccination progress, which helped sentiment. It is also encouraging to see new COVID-19 cases fall sharply in the United States, and the vaccination programme continues to make good progress with over 1 million people there being vaccinated per day.

The pandemic has turbocharged transformations that were already under way – from sustainability to inequality. Yet markets have not fully priced in the durability of these trends, BlackRock believe, even with the glimpse into the future offered by the pandemic. They favor technology and healthcare on a tactical horizon, as they offer both quality characteristics and are likely beneficiaries of structural growth trends.

Global equities were stronger across the board last week. Improving sentiment around vaccination programmes, together with the positive developments in Italian politics, were the focus in Europe, while in the United States, stimulus hopes boosted markets.

Equity valuations have been top of mind after major stock indexes have scaled new highs. Last week’s volatile market moves as a result of technical deleveraging added fuel to these concerns. BlackRock do not see risk asset valuations as obviously stretched overall, and expect low interest rates – and a vaccine-led restart – to support risk assets over the next six to 12 months.

Last week was certainly an interesting one for markets as the GameStop/Reddit/Melvin saga dominated headlines and let to volatility and deleveraging. It was also a big week for corporate earnings, with a number of US heavyweights reporting.

BlackRock have long flagged the potential for higher inflation in the medium term, and markets have awoken to this prospect amid expectations for large U.S. fiscal stimulus. They don’t see this derailing the risk asset rally in the near term. We expect a muted response of nominal yields to inflation – our new nominal theme.

COVID-19 and the economic impact of prolonged lockdowns continues to be a driver for Europe’s markets. However, many market observers remain positive on economic outlook, particularly in the United States.

The pandemic has accelerated the rewiring of globalization – with a bipolar U.S.-China world order at its center. The Biden administration is taking a sharply different approach to China in trade and climate policy. Yet overall tensions look set to stay elevated amid ongoing economic and technological competition.