LONDON (Reuters) –
1 / PERFORMANCE SHOCKS
Rising US Treasury yields have so far done little more than drop stock markets to record highs. That will change if “real” – inflation-adjusted – returns take off.
It was the fall in real yields of the last year that sent liquidity into equities; although expensive, they seemed like a steal compared to actual returns of minus 1%.
But big government spending plans and prospects for an economic reopening have pushed real 30-year Treasury yields to eight-month highs, just 11 basis points below 0%. Ten-year real yields are at five-week highs.
There is little consensus on when returns will become an issue for stocks. But some assets are already seeing an impact – gold, for example, struggles to compete with income-producing investments when yields rise and are down 6% this year.
Graphic: it’s getting real –
2 / KIWI CONICAL
The Reserve Bank of New Zealand meeting on Wednesday could tell us whether the first country to reduce COVID-19 cases almost completely will also be the first to consider reducing monetary policy support.
Much has changed since the RBNZ’s policy statement in November. The kiwi economy is beating expectations and the markets are no longer taking negative rates into account.
Governor Adrian Orr will revise his growth and inflation forecasts, but he faces a communications challenge: recognizing the improvement without scaring the markets.
A rate hike could be years away, but the prospect of a slower stimulus is on investors’ minds – 10-year sovereign bond yields are up 50bp this year.
Chart: New Zealand economy rebounds –
3 / DEBT, DEFECTS, DEBATES
Debt relief for low-income economies will be high on the agenda of G20 finance officials when they meet on February 26-27.
They will discuss the idea of expanding IMF financing and the initiative to allow the poorest countries a six-month suspension on certain debt payments, as well as more comprehensive relief. There are also calls for the G20 to lead a global COVID-19 vaccination plan.
This will be the first G20 meeting since Joe Biden took over the presidency of the United States, so the tone may be very different from the Trump years which saw many global alliances broken. This could be a positive change at a time when countries struggle to ensure that the economic recovery is sustained.
Chart: Debt / GDP ratios of DSSI countries with sovereign bonds –
4 / TURNING 140
The British pound has become an unexpected currency market poster for the theme of the COVID-19 recovery.
It marked a milestone by hitting $ 1.40, a nearly three-year high. But just two months ago, he was mired in the risks of Brexit and the worst economic outcome of any major industrialized country.
Since mid-December, the pound sterling has strengthened by around 5.5% against the dollar and 6.5% against the euro, as Britain’s vaccination program got off to a flying start. Hopes of an early end to lockdowns lifted it 2% against the dollar in February.
Some consider the pound to be expensive. A Reuters poll predicted the U.S. economy would return to pre-pandemic levels within a year, but saw Britain take twice that time.
There is also the question of whether the Bank of England might consider interest rates negative. Money markets expect this to be the case, but not until the second half of 2022.
Chart: Best performing GBP on the forex market –
5 / SPAC-TACULAIRE SPAC-TION, SPAC-KMAN.
Journalists dig through their puns for ways to describe the deluge of Special Purpose Acquisition Companies (PSPCs) that have hit markets over the past year.
SPACs are essentially blank check companies that collect funds during an initial public offering in order to buy a private company and go public.
Already this year, 144 PSPCs have raised $ 45.7 billion, according to data from SPAC Research, often backed by prominent investors and celebrities.
The trend is not without bad press. Investment banks that handle transactions earn commissions for finding a business in PSPC to acquire – within two years. This raises concerns about a lack of due diligence.
Although this is primarily an American phenomenon, PSPCs are also growing in Europe. Former UniCredit CEO Jean-Pierre Mustier and German tycoons Christian Angermayer and Klaus Hommels have announced PSPCs.
SPAC launches are plentiful, but how actual acquisitions – or “deSPACing” – develop will show whether the trend continues.
Graphic: arrow SPAC –
Reporting by Saqib Iqbal Ahmed in New York and Tom Westbrook in Singapore; Karin Strohecker, Saikat Chatterjee and Abhinav Ramranayan in London; compiled by Sujata Rao; edited by Susan Fenton