Performance, May 2021


Inflation was the focus of attention over May
The re-opening of the developed economies of the world – led by the US – is proceeding well as the number of people having received Covid-19 vaccination increases and infection figures decline. The recovery of the econo-mies was surprisingly visible in May – not least from the inflation numbers. Although rising inflation is a healthy sign, it contributes to investor concern because it may potentially lead to tightening measures from global central banks. For instance, US consumer prices of the month showed an increase of 0.9% relative to last month, which was the steepest increase since 1981. The high figures are, however, primarily due to temporary effects after the lockdown – for instance bottlenecks within the car industry and rising hotel and air travel pric-es from a very low level.

Inflation numbers sent investor attention to the Fed
When investors are concerned about inflation, all information from the Federal Reserve (Fed) is considered care-fully. This was to a large extent the case in the wake of surprising inflation news in the course of May. Investors scrutinised the recently published minutes from the Fed meeting – and some market participants interpreted the minutes to the effect that the Fed could be about to react. Several members of the Federal Open Market Committee subsequently commented on the situation. They concurrently talked about the temporary effects visible in the inflation numbers just now and that a normalisation is awaited. Subsequently, this put a damper on the fear of fast intervention.

Focus on geopolitical tensions – in e.g. Israel, Russia, China and Iran
Following a calm period in the wake of the change of US presidents, several geopolitical hot spots emerged in May. The most dramatic hot spot was the situation in Israel as Israel’s government and the Palestinian self-government came close to war-like conditions in the form of mutual bombings. Apart from the terrible human consequences it also affected investors as a result of the risk of further escalation. Moreover, the situation had threads into the negotiations between the US and Iran concerning Iran’s atomic programme. Russia was indi-rectly the focus of attention following Putin’s back-up to the Belarusian president after Belarus had forced a scheduled Ryanair flight to land in order to arrest a Belarus dissident. Subsequent EU sanctions gave rise to higher political tensions.

Market performance
Global equity markets were dominated by sector rotation in the course of May when new inflation numbers and news from the Fed hit most headlines. Signs of inflation provided tailwinds to raw material extraction sectors which are especially dominating in Eastern Europe and Latin America. Consequently, these regions were the top performers with increases of 6%-9%. On the other hand, inflation discussions gave rise to profit-taking in the US which had otherwise in previous months been in the driving seat. The decline was, however, limited at around 1%. Europe was slightly better with an increase of around 2.5% - due, among other things, to an optimistic sen-timent indicator from Germany.

In the Danish bond market, the yield level was moderately increasing. As was the case previously, long-term bond yields were increasing whereas bonds with more than five years to maturity were practically unchanged. In May, the focus of attention was again on the callable segment. The segment had a difficult time in May. The background is the continuously large issue due to solid property turnover. In addition, investors have difficulty absorbing the many long-term bonds. Owner statistics now also indicate that foreign investors have grown in-creasingly reluctant buying Danish callable bonds. Foreigners’ share of Danish callable bonds has been slightly decreasing, which can, however, primarily be attributed to redemptions that were not reinvested. Bond returns were generally negative in May. The poorest-performing segment was callable bonds as long-term bonds yield-ed negative returns of around 1.5%. ‘Flex loan’ bonds yielded returns between 0% and – 0.25%. Some of the higher-yielding callable bonds yielded positive returns. This was the case because these bonds have become less likely to be re-financed due to the falling prices of bond issues.

Stability around US monetary policy and hence US yields is often a stabilising factor in the emerging bond mar-kets. This was also the case in May and contributed to a narrowing of the credit spread by a further 0.10 per-centage point to 3.3%. The continuing rise of commodity prices supported the commodity-intensive countries as especially South Africa, despite continued many challenges, benefited from a considerable improvement of the external balance. Brazil and Peru also experienced an excellent month as Peru has, however, primarily recov-ered following a period of political uncertainty. Otherwise, we have seen a comeback to a number of strained credits as Zambia entered into an agreement with the IMF and as risk appetite was on the rise. The focus of attention is still on the economic effects from Covid-19 as vaccinations in the emerging bond markets have lagged considerably behind the developed countries.  

Credit spreads widened marginally over May - both in investment grade and among high-yielding corporate bonds. It is still expectations of the ECB’s asset purchase programme that is the primary driving force for the general direction of the credit spreads. The new issue market was relatively active in May. The valuation of most investment grade bonds was very aggressive with a new issue premium close to zero or in some instances even negative. Among the high-yielding corporate bonds the picture is more mixed as some issuers must still pay an attractive new issue premium to enter the market.