Market Updates

BlackRock see the path out of the Covid-19 shock as a “restart” – not a typical business cycle “recovery.” The key reasons are the distinct nature of the shock, broad-based pent-up demand and different inflation dynamics. The passage of a $1.9 trillion fiscal package and an accelerating vaccination ramp-up in the U.S. magnify these factors, and they believe the restart will likely be stronger than markets expect.

Last week saw stabilisation in European government bond yields, which in turn, led to rotation back into some of the more recent losers, and defensive stocks. Alongside this, the reopening trade was firmly in play.

The UK has led the developed world in the pace of its vaccine rollout, with the euro area set to catch up after a slower start. Vaccine rollouts and fiscal spending are paving the way for an accelerated global restart, reflected in a recent rise in real rates. This supports a broadening of the cyclical tilt in BlackRock’s tactical views, with their recent debut of a UK equities overweight and upgrading euro equities to neutral.

Last week, volatility in bond yields remained a key driver for equity market sentiment. In particular, mid-week commentary from US Federal Reserve (FED) Chair Jerome Powell was a key talking point.

BlackRock are incorporating the effects of climate change – and of the climate transition – in their return assumptions, as they believe avoiding climate-related damages will help drive growth and improve returns for risk assets. They see climate-resilient sectors as potential beneficiaries of a “green” transition, and are strategically overweight DM equities as they are skewed toward these sectors.

There is a clear ‘push and pull’ in markets at the moment between better-than-expected macro reports, unprecedented levels of stimulus, and a potential end to COVID-19 lockdowns vs. stretched valuations and concerns of the impact of interest-rate increases.

BlackRock broaden their tactical pro-risk stance in light of major developments since the publication of our 2021 outlook in December: the vaccine rollout and up to $2.8 trillion of additional U.S. fiscal spending this year. Inflation expectations have risen sharply while real rates are steady in negative territory.

Governments across Europe are trying to keep a lid on reopening optimism for now. The extent of the second wave of COVID-19, especially in the UK, Belgium, Italy, Austria and most of Eastern Europe, serves as a reminder of how this virus can spread if governments fail to strike the correct balance between managing social interaction and enabling economies to function.

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.