The rapid vaccination rollout continued to be a positive catalyst for markets in February.
Global equity markets rose 2.7%, while UK equities ended the month up 1.8%. However, the strong pound held back returns of overseas assets and in sterling terms, the MSCI World index increased by only 0.8%.
The month was notable for the outperformance of value stocks. Sectors such as energy and financial services outperformed thanks to expectations of a rapid return to a post-pandemic normality. More traditionally defensive sectors, such as utilities and consumer staples, lagged.
In the UK, the vaccination campaign reached 20 million people by month end, with a target of achieving full coverage of the adult population by July. While economic data continues to reflect the economic recession induced by the COVID crisis, flash PMIs surprised to the upside, indicating improving sentiment.
The improvement in economic conditions has led to investors pricing in higher inflation expectations. US and UK yield curves steepened (meaning the gap between short-term and long-term sovereign yields widened) which is typically associated with stronger economic growth. This led to losses from UK gilt indices, down 5.8%, and US Treasuries, down 1.8%.
Given that inflation is a year-on-year measure, the rate is likely to increase over the coming months to above central bank targets in the UK and US. However, it is unlikely we will see interest rate rises in the near term given the current weakness in economic growth and employment.
Higher commodity prices have contributed to higher inflation expectations. Oil prices have risen back close to pre Covid-19 levels. Cold temperatures forced Texas to reduce refining capacity while OPEC nations continue to show good discipline in supply management.
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