Market Update from the Global Asset Allocation Team – April 2021
The macroeconomic outlook continued to gather momentum heading into the second quarter as the global vaccine campaign accelerated, while plans for large-scale fiscal spending in the US also emboldened calls for a rapid recovery through 2021. Investors cheered President Biden’s ambitious multi-trillion dollar infrastructure proposal (the American Jobs Plan) that added to the stronger growth narrative, which when combined with the Federal Reserve’s dovish forward guidance has stoked fears of runaway inflation. However, while indeed acknowledging this upbeat trajectory for growth, the Federal Reserve stayed the course and emphasized that a full recovery is a long ways off, citing lingering and persistent labour market slack as grounds for a highly-accommodative monetary policy stance.
Global equity markets ended the first quarter on solid ground. The MSCI All Country World gained 2.5% in March, led by the S&P 500 (4.2%) and the S&P/TSX (3.6%). International stocks also eked out a modest (1.8%) gain. By contrast, the MSCI emerging market benchmark shed 1.7% as a resurgence in Covid outbreaks and fears over rising treasury yields thwarted developing nation assets.
Renewed optimism on the fortunes for the global economy weighed on fixed income markets in March. The Canadian Universe bond index slipped 1.5%, while the US aggregate bond index was down 1.3%. Yield curves steepened in a bond-bearish fashion. While the short-end remained pinned lower by the dovish forward guidance from major central banks, longer-dated bond yields pushed higher as the combination of massive fiscal stimulus and highly-accommodative monetary policy stoked inflation expectations. Of note, the Federal Reserve upgraded both its growth and inflation forecasts at the March gathering, but left their projections for policy rates unchanged as policymakers remain keen to let inflation run hot after several years of undershooting their goals.
The tug-of-war between the rampant virus and the global immunisation effort intensified in March and currency markets took notice. The greenback advanced and capped its first quarterly gain in a year, thanks to the relatively boisterous US growth dynamic versus its global peers. Indeed, the US has been faster out of the gate in vaccinating its population and reopening its economy, while the fiscal response has also been more expansionary. Meanwhile, the euro slumped for a third straight month as rising infections and a slower vaccination rollout prompted officials to extend lockdowns, which dampened near-term growth prospects in Europe. Encouragingly, the Canadian dollar maintained its resilience and capped a monthly gain even in the wake of a broadly stronger US dollar and secured its position at the top of the global leaderboard for 2021.
The commodity complex pushed broadly lower in March as underlying strength in the dollar cut into prices. Crude oil encountered some turbulence and slid back towards the $60-mark as investors contemplated some worrisome virus trends in Europe that brought into question the outlook for near-term energy consumption. Copper’s powerful surge also faltered somewhat and the red metal snapped a record run of eleven straight monthly gains in March, while gold edged lower as the sharp rise in bond yields curbed the appeal of the non-interest bearing metal.