RISING US LONG-TERM YIELDS SPOOK INVESTORS
Last week ended on a mixed note as the various asset classes performed differently. The Nasdaq has given up 10% since its high at the beginning of the year and is almost back to breakeven year to date. Yet despite this correction, the flagship tech index is still up 45% since the beginning of 2020.
The other news that remains front and centre of investor attention is the rising long-term yields on US bonds. On the 10-year note, the yield is now quoting upwards of the 1.5% mark. The current level is not particularly high by past standards. What is worrying investors, in fact, is the sheer speed of the upswing. The eagerly awaited speech by Jerome Powell last week failed to reassure markets, which remain concerned about a possible surge in inflation, even though there are no signs of this yet. Although growth prospects are improving to some degree as vaccines help chart a course out of the pandemic, the Fed chair does not anticipate an unwanted surge in inflation at this stage.
Neither is the US jobs picture suggestive of inflation at the moment. Even though the figures out last Friday were slightly better than expected, the participation rate in the labour market remains low, while unemployment is still in the 6.2-6.3% range. In developed (i.e. service-oriented) economies, wages are the main cost factor. At this juncture, as the economic environment remains fragile, upward pressure on wages is not even a consideration.
The Senate finally approved the USD 1.9 trillion stimulus package, leaving only the passage before the House of Representatives, which should be a formality since that is controlled by the Democrats.
Over in China, the Communist Party opened its keenly watched annual national congress, coinciding with the five-year plan covering the period from 2021 to 2025. The main thrust is clear. China is aiming to boost research into microchips and artificial intelligence as it hopes to compete with the US in terms of global influence. It is also increasing military spending to 6.8% of GDP and wants to improve the well-being of the population through programmes aimed at renovating housing, bettering public services and the healthcare system, and reforming hospitals. There is no longer any doubt today that China is becoming more and more important – so would say dominant – in certain key future-facing sectors, for which it has adopted a reliable long-term strategy.
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