Quarter in Review Q1 2021

Key quarterly themes

Biden takes office and goes big on stimulus

Covid-19 vaccines rolled out at pace

Government bond yields rise on inflation concerns

Markets snapshot

The MSCI AC World equity benchmark rose 6.0% (9.0% in euro terms).

Emerging markets rose 4.0% (6.5% in euro terms), as the stronger US dollar, fears around a Covid-19 resurgence in some emerging markets and rising yields caused concern in some regions.

Pacific Basin equities rose 5.8% (8.9% in euro terms), supported by strong commodity prices.

Europe outperformed, rising 8.4% (7.9% in euro terms) as it benefited from reassuring language from the ECB, a weaker euro (which is positive for exporters) and Europe’s tilt to ‘value’ stocks, which fared well over the quarter.

The UK performed well too, rising 5.2% (10.6% in euro terms), reflecting the success of the vaccine rollout and the removal of the Brexit uncertainty that hung over markets since 2016.

The ICE BofA Merrill Lynch Eurozone > 5-year sovereign bond benchmark fell -3.3%.

German 10-year yields (which move inversely to prices) rose to -0.29% in sympathy with US Treasuries.

Peripheral spreads narrowed across Italy and Portugal, with spreads widening marginally in Spain. Italian spreads narrowed as political tensions abated following the formation of a new government led by former ECB chief Mario Draghi.

European investment-grade corporate bonds fell -0.7% with high-yield credit performing better; it fell by -0.3%. Volatility in credit spreads has been low recently, despite large moves in government markets. Ongoing monetary policy support and the reach for yield has supported credit markets in recent months.

The euro fell against the US dollar to 1.1750, due to the ongoing rise in US yields and an indication by the ECB that it will increase bond purchases over the next three months in an effort to limit the tightening of financial conditions evident through higher yields.

Commodities rose 13.5% due to their sensitivity to global growth expectations. Oil performed well in the first quarter, but gains were pared in March.

Brent crude started the year just above USD50/bbl and rallied through January and February to a high of around USD71/bbl. This move higher was supported by signs of cohesion in OPEC+ and optimism around demand, given the successful rollout of many Covid-19 vaccination programmes. However, the second half of March was more challenging, as concerns around demand meant that oil pulled back from its highs.

Gold fell -10.0%, negatively impacted by the ongoing rise in US real interest rates and the stronger US dollar.

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