Economics & Markets

Market Update 26 March 2021

By Diana Mousina
Economist - Investment Strategy & Dynamic Markets Sydney, Australia
Source: Bloomberg, FXStreet, AMP Capital
Source: Bloomberg, FXStreet, AMP Capital

Investment markets and key developments over the past week

Market sentiment was more cautious to start the week on concern about the economic reopening from rising COVID-19 cases and vaccine delays. US shares on the S&P500 still managed the close the week 1.6% higher, with a rally towards the end of the week while the heavier tech NASDAQ index was down by 0.6%. NASDAQ shares are now down by nearly 7% since a peak in mid-February. Euro shares rose by 0.8%, Japanese equities fell by a solid 2.1% (on the Nikkei) after the Bank of Japan said last week that it would end its Nikkei ETF buying program, instead favouring the Topix index (although Topix shares were also down by 1.4% this week). Chinese shares rose by 0.6% after having fallen by 13% since a peak in February because of concerns around earnings and tighter liquidity conditions from the People’s Bank of China. Australian shares rose by 1.7% over the week, with all sectors rising except for information technology.

US 10-year bond yields have retreated slightly to 1.67% after last week’s peak at around 1.75%. The US$ also continues to track higher and was up by 0.9% over the week. After the US$ fell to a two year low early in 2021, it has rallied by around 4% on better US economic news and higher yields. We still expect the US$ to weaken over 2021 on stronger global growth but in the short-term it could appreciate further. The A$ has been weakening as the US$ has been rising with the A$ trading at 0.7637USD at the end of the week, down from nearly 0.80USD in late February.

A 400metre container ship stuck in the Suez Canal has caused havoc to trade routes in the area. Around 9% of global seaborne oil passes through the canal. Oil prices are getting supported by the supply disruptions created by the ship but are also under pressure from concerns around demand from a slower economic re opening. The oil price ended the week relatively unchanged at $64.57/barrel. Iron ore prices have also been weakening and are now at US$155/tonne, down from ~US$170 a few weeks ago, from faltering Chinese demand.

Global COVID-19 cases are trending higher again (see chart below) after some stabilisation in recent weeks.

Source:, AMP Capital
Source:, AMP Capital

Cases in developed countries cases are still declining. Although Europe cases have started to pick up again particularly in Italy, Germany and France because of variant strains. Emerging countries cases are rising swiftly (see the chart below), getting close to their prior highs with elevated numbers in Brazil, India, Turkey, Pakistan and Bangladesh.

Source:, AMP Capital
Source:, AMP Capital

European vaccine rollout continues to be slow moving with the EU this week making comments that it could potentially block shipments of the AstraZeneca vaccine to countries outside of Europe (mainly targeting the UK) if the delivery targets for Europe were not first met. Strict mobility restrictions and the slow vaccine rollout continues to weigh on our European Activity Tracker which has stepped down marginally again (see chart below) as some European countries have gone into another short lockdown. The US Activity Tracker picked up significantly this week on better confidence, mobility, restaurant bookings, hotel bookings and retail traffic. This is consistent with slowing US virus cases. The Australian Activity Tracker flat-lined this week but is still positive and showing that activity has recovered to pre-COVID levels.

Source:, AMP Capital
Source:, AMP Capital

In Australia, those of us in NSW are grateful for the better weather after a week of horrific rain which also spread to some parts of Victoria and southern parts of Queensland and caused tens of thousands to be evacuated. The economic impact will show up in lower mobility data, some weakness in retail sales but is unlikely to be long lasting. Coal prices have been increasing from the supply disruptions in Newcastle.

US President Joe Biden gave his first press conference this week. While there was speculation that there would be some announcement on the next spending package, there was no mention of this. The next spending bill is likely to be around the US$3trillion mark focussed on infrastructure and investment. There may end up being multiple bills passed, depending on the support that is received from the Republicans. Republicans are not likely to agree to significantly higher taxes to pay for infrastructure or green energy plans. But multiple bills also have complications because the reconciliation process doesn’t allow for unlimited bills. Biden did mention that his initial target of vaccinating 100 million people in his first 100 days in office has now been doubled to 200mn. So far, the US has vaccinated 130.4mn people (or around 26% of the population). There was no other major news to the vaccine rollout this week.

Source:, AMP Capital
Source:, AMP Capital

Powell and Yellen testified before the House Financial Services Committee. Comments around the risks to inflation continue to be downplayed - Powell and Yellen expect that inflation will move higher in 2021 from supply-chain bottlenecks and base effects but that this effect will not be large or persistent.

In Turkey, President Erdogan replaced the central bank governor unexpectedly because the central bank hiked interest rates more than was deemed necessary (875 basis points worth of hikes in four months). This move questions the independence of the central bank and further downside is likely in the Turkish Lira and other Turkish assets. We have seen some emerging markets start to hike interest rates recently (see chart below) to prevent capital outflows as global growth picks up and global bond yields lift which moves capital away from emerging markets and puts downward pressure on currencies which leads to inflationary pressures and higher debt burdens (because a large chunk of emerging market debt is in US$). Higher interest rates should limit these falls in emerging market currencies.  

Source: BIS, AMP Capital
Source: BIS, AMP Capital

The New Zealand Labour Government implemented some big changes to housing policy this week to cool medium-term house price growth and avoid risks around elevated investor lending. Changes include: removing interest deductions (or negative gearing) for investors (except for new builds), increasing the time that you need to hold onto a property to avoid paying tax when you sell to ten years from five years (which reduces churn in the housing market), giving more people access to the First Home Grants and Loans scheme with increased income and house price caps and plans to boost housing supply. The government wants to tilt the balance in the housing market away from investors and towards first home buyers. The New Zealand housing market has been running very hot since the pandemic with house prices up by 22.8% over the year to February. While Australia has also seen a very fast turnaround in the housing market, home prices are up by 2.6% across the eight capital cities (see the chart below) which is much smaller compared to New Zealand. Following this news, the NZ$ has fallen by around 7%. In the long-run, these changes are likely to mean lower home price growth, lower housing debt, less interest rate hikes required by the Reserve Bank of New Zealand and potentially some upward pressure on rents (although new builds still qualify for negative gearing concessions). Australia is unlikely to follow suit with changes to negative gearing or capital gains tax (remember these policies were not looked upon favourably at the last federal election) but macroprudential policy is likely to become implemented over 2021 to slow down the frenzy in the housing market.

Source: Bloomberg, CoreLogic, AMP Capital
Source: Bloomberg, CoreLogic, AMP Capital

Major global economic events and implications

US flash PMI’s (indicators of business conditions) showed that the manufacturing PMI rose to 59, slightly below market expectations while services was stronger, lifting to 60. Both manufacturing and services indices are at historical highs which reflects the strong underlying momentum in the US economy. US durable goods orders fell by 1.1% in February, weaker than consensus estimates of a 0.5% lift. February new home sales were down by 18.2%. The bad weather played a role in weaker home sales but this is also some pay-back after a few months of very strong data. Initial jobless claims fell more than expected to 684K last week, a good sign of labour market progress. Consumer personal income fell by 7.1% in February and consumption expenditure fell by 1%. The savings rate fell from 19.8% to 13.6%, which is still very high, around double its pre-COVID levels. The decrease in personal income is due to the fall in government assistance as the December/January stimulus payments wane. Expect personal income and expenditure to rise again over coming months as the latest stimulus package reaches households.

Source: BEA, AMP Capital
Source: BEA, AMP Capital

In Europe, the flash PMI’s showed a big rebound in conditions, moving back into “expansion”, with the manufacturing PMI rising to 62.4, while consensus was looking for a fall because of the lockdowns in Europe. The services PMI also had a big recovery to 48.8, above consensus estimates but is still in “contraction” as it is tracking below the “neutral” level of 50. Germany’s manufacturing PMI reading is at the strongest level ever recorded. The rebound in European PMI’s is positive for the outlook for our Europe Activity Tracker.

Source: Bloomberg, AMP Capital
Source: Bloomberg, AMP Capital

China published its 14th Five-Year Plan and has set 20 quantitative targets for the next five years (2021-2025). No long-term GDP growth target was set and instead the government will target a specific level of GDP growth each year. The budget deficit will be lowered to 3.2% of GDP, from 3.6% set for 2020 when COVID-19 hit. This was better than market expectations of a deficit below 3%.

Australian economic events and implications

Australian preliminary merchandise trade data for February showed a 2% increase in goods exports and a 2% lift in goods imports. This means that the trade balance remained around record highs at $10bn for the month. The flash PMI’s for March were upbeat with services up to 56.2 and manufacturing virtually unchanged at 57, both still in line with expanding activity.

The Australian quarterly labour force data which breaks down jobs growth by industry showed that over the three months to February, the very high pace of jobs growth (+164.5K) was driven by manufacturing, transport & warehousing, professional and technical services, healthcare and other services. The largest job losses were in mining, construction, admin & support, and education. However, it is worthwhile to look at industry jobs data on an annual basis because the data can be volatile by industry on a short-term basis and is also not seasonally adjusted. Over the past year to February 2021 the largest job gains have been in retail, professional services and transport and warehousing. While job losses have been concentrated in accomodation and food (unsurpising), admin and support services and education and training. Better mobility in Australia and very low levels of COVID-19 cases should lead to an improvement in accomodation and food jobs from current levels.

Source: ABS, AMP Capital
Source: ABS, AMP Capital

Australia’s monthly government finance accounts were released, which showed that the budget for 2020-21 looks better than expected at the end of 2020 in the Mid-Year Ecnomic and Financial Outlook (MYEFO) from the strong jobs recovery and higher iron ore prices. The FY21 budget deficit was expected to be $197.7bn but is now likely to be closer to a deficit of $150bn or 7.5% of GDP. We expect a further improvement in the FY22 budget deficit to 60bn or -3% of GDP.

Source: AFR, AMP Capital
Source: AFR, AMP Capital

What to watch over the next week?

In the US, the most important release next week is the March payrolls. A gain of 600K is expected which would take the unemployment rate down to 6%. Other data released next week includes consumer sentiment readings from the University of Michigan and the Conference Board, both of which are likely to lift. The March manufacturing ISM is expected to increase even further to 61 which is extremely strong.

In Australia there is plenty of data out with February credit data likely to show a pick-up in credit growth, rising by 0.3% over the month driven by further gains in housing credit. Personal credit growth remains weak. March CoreLogic home prices are likely to show very strong growth of 2.5% over the month. February building approvals are also likely to rebound after a large fall in the prior month and are still being boosted by the HomeBuilder payment which expires in March. Job vacancies over the February quarter should show a decent rise based on weekly job vacancies that we use in our activity tracker, final February retail sales are likely to show a fall by ~1% over the month and the March AiG manufacturing PMI is likely to remain high, at close to an index reading of 60.

In China, the March manufacturing PMI should increase further to 51.2 and the non-manufacturing PMI even stronger at 52.3. The Caixin manufacturing PMI which surveys smaller firms should also remain at high levels, lifting to 51.3 in March.

Outlook for markets

Shares remain at risk of further volatility from rising bond yields. But looking through the inevitable short-term noise, the combination of improving global growth helped by more stimulus, vaccines, negative real yields and still low interest rates augurs well for growth assets generally in 2021.

We are likely to see a continuing shift in performance away from investments that benefitted from the pandemic and lockdowns - like technology and health care stocks and bonds - to investments that will benefit from recovery - like resources, industrials, tourism stocks and financials.

Global shares are expected to return around 8% this year but expect a rotation away from growth heavy US shares to more cyclical markets in Europe, Japan and emerging countries.

Australian shares are likely to be relative outperformers helped by: relative underperformance over 2020/21, better virus control enabling a stronger recovery in the near term; stronger stimulus; sectors like resources, industrials and financials benefitting from the rebound in growth; and as investors continue to drive a search for yield benefitting the share market as dividends are increased resulting in a 4.5% grossed up dividend yield. Expect the ASX 200 to end 2021 at a record high of around 7200.

Still ultra-low yields and a capital loss from rising bond yields are likely to result in negative returns from bonds this year.

Unlisted commercial property and infrastructure are ultimately likely to benefit from a resumption of the search for yield but the hit to space demand and hence rents from the virus will continue to weigh on near term returns. Higher bond yields will also weigh on these asset classes in the medium-term.

Australian home prices are likely to rise another 5% to 10% this year and next being boosted by record low mortgage rates, government home buyer incentives and the recovery in the jobs market but the stop to immigration and weak rental markets will likely weigh on inner city areas and units in Melbourne and Sydney. Outer suburbs, houses, smaller cities and regional areas will see relatively stronger gains in 2021.

Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%.

Although the A$ is vulnerable to bouts of uncertainty and RBA bond buying will keep it lower than otherwise, a rising trend is likely to remain over the next 12 months helped by rising commodity prices and a cyclical decline in the US dollar, probably taking the A$ up to around US$0.85 by year end.

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Diana Mousina, Economist - Investment Strategy & Dynamic Markets
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While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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