Market Update from the Global Asset Allocation Team – June 2021
Investor optimism lingered-on in May as the post-pandemic global economic revival gained further momentum, with the ramped-up vaccine rollout and fading new coronavirus infections setting the stage for a rapid and all-encompassing recovery. Investors have thus far weathered concerns that accelerating pricing pressures could force an earlier-than-expected withdrawal in central bank support, with Federal Reserve officials going to great lengths to downplay the threat of a prolonged period of higher inflation and reiterating their pledges for ongoing accommodation, which provided a sense of calm across the financial markets.
The global equity market rally extended into May, with the MSCI All Country World closing the month at a new all-time high. The S&P/TSX led the charge as the value rotation gained further ground. The resource-heavy benchmark has been a prime beneficiary of the commodity market rally and even managed to break through the 20,000-mark for the first time in early June. Meanwhile, the S&P 500 eked out a smaller gain and underperformed most major indices as technology stocks lagged, while European equities hit new records as investors braced for a wider reopening as restrictions were eased across much of the region. Finally, emerging market stocks outperformed the broad index of world equities as softer dollar conditions and an improved global economic outlook boosted appetite for risky assets.
Fixed income markets were fairly quiet and bond yields traded in a tight range. Bond markets revealed little in the way of reaction to the latest string of solid economic and inflation results in the US, with the Federal Reserve’s dovish-leaning bias ultimately placing a cap on longer-dated yields. The 10 year treasury yield fell by 3 basis points to 1.59%, while the Canadian 10 year government bond yield slipped 6 basis points to 1.49%. North American fixed income benchmarks were positive for the month, with government bonds marginally outpacing their corporate peers.
The US dollar relinquished some gains and edged lower in May. The Canadian dollar thrived given the sharp rally across the commodity spectrum and maintained its position at the top of the global currency leaderboard for 2021, while the yuan soared to multi-year highs as attractive yields, a healthy economy, and robust demand for Chinese goods spurred foreign inflows.
Gold made a nice comeback in May and erased its 2021 losses. Investors flocked to bullion due to its allure as an inflation hedge as pricing pressures firmed, while dovish rhetoric from central bank officials also boosted the appeal of the non-interest bearing metal. Oil prices broke above $67/barrel for the first time since 2018 owing to the improved outlook for global demand, which helped to alleviate concerns about an increase in supplies should sanctions on Iran’s exports be lifted. Finally, after a rocky start to the month, copper rebounded as investors shifted their focus to the tightening supply backdrop given the global economic recovery and the prospect for higher green spending, which bolstered the longer-term outlook for the red metal.