Performance, March 2021


The coronavirus was still making its impact in Europe but economic indicators shook it off
Europe seems to have difficulty shaking off the coronavirus – and it has for instance been necessary to introduce new restrictions in France and Italy. But other countries performed better – Denmark is for instance doing well. European growth indicators have not been hit as hard as feared seen in the light of the development in case numbers. In particular, data from recent sentiment indicators of European production were dominated by con-tinued positive momentum. Momentum in the sentiment indicator for the service sector was, however, still flat.

The US and China were in better progress than Europe
Although Europe has performed better relative to the development in case numbers, it is next to nothing com-pared with the US and China where economists have been queuing up to upgrade growth expectations to levels considerably above the level in Europe. In the US, this has been supported by new rescue packages and an-nouncements from the Fed that interest rates will presumably not be raised until 2022-23. In addition, US pres-ident Joe Biden has pressed for sufficient vaccines to ensure that all grown-up Americans can have received their vaccines in May. This has inspired optimism – which has also pushed up long-term interest rates and oil prices.

Giant fiscal policy stimulus package in Joe Biden’s pipeline
US president Biden has made every effort to win acceptance for a giant fiscal-policy package of USD 3,000 bn – financed partly by tax increases. Among the most important headlines of the package is improvement of the ailing US infrastructure, a lift to the education level and employees in general and the battle against climate changes. The package will presumably not be adopted by both chambers of the US congress in its present form, but there is every indicator that Joe Biden will win acceptance for a version hereof.

Market performance
The equity markets benefited from the positive growth signals in especially the US in the course of March – strongly supported by the prospects of an accelerated vaccination programme, back-up to growth from the Fed and Joe Biden’s plans of a giant fiscal policy rescue package. Following a period of time when interest-rate sen-sitive company types have been under pressure from rising interest rates, utility and consumer staples, among others, staged a comeback in March. Global emerging equity markets could not quite follow suit which was due, among other things, to a stronger dollar. This hit the Asian markets whereas the more commodity-heavy regions such as Latin America etc. performed considerably better.

The Danish bond market was dominated by a tight cash flow situation. Relatively large volumes of 30-year mortgage bonds were still issued, which can primarily be attributed to the high activity in the housing market and to a lower extent refinancing. 30-year bond issues have for periods had a difficult time. This is due, among other things, to the fact that investors have difficulty absorbing the rising interest-rate risk as a result of the increasing interest-rate level. In addition, fluctuations have been on the increase, which affected callable bonds. Returns have been somewhat mixed. 30-year bond issues yielded slightly positive returns whereas the trend of high-yield bonds is somewhat mixed. Returns on adjustable-rate mortgages were typically positive with the highest returns on long-term bonds. For full 2021, it is still callable bonds with the longest time to maturity that yield the lowest returns. This is due to the negative development in February.

US yields continued to increase which is seldom the right cure for the emerging bond markets. This was the case although the reason behind the yield increases was a comeback to the US economy and hence also support to the emerging markets. The rising USD put pressure on local emerging market currencies which any be challeng-ing for many of the weak economies. Once again, Turkish president Erdogan surprised negatively by laying off the country’s central bank governor who had otherwise for a period of time built up some credibility. The Turkish currency has weakened by 13% since then and interest rates have been on the increase. Turkey is definitely this month’s loser with respect to both local debt and external debt. Many countries with long-term bonds have been affected by rising US yields. Data showing infection numbers (Covid-19) and the slow roll-out of vaccines in most emerging markets have been the focus of attention since it has reduced the risk of a delayed comeback to the affected economies which are still dominated by lockdowns.
Basically, the yield spreads between corporate bonds and government bonds will narrow in a scenario with ris-ing expectations of economic growth, but firming interest rates and equity prices have had a moderate positive spill-over effect this time around. The explanation is probably the European Central Bank’s previous purchases of corporate bonds which have forced the spreads into levels that have anticipated the positive expectations. The demand is still high in the primary market especially for investment grade as the new issue premium is close to 0 or in few instances even negative.