Weekly Market Wrap 15-March to 19-March 2021

Marius Paun | London, UK | Senior dealer | Friday 19th March 2021

The Fed Leaves Rates Unchanged Amid Dovish Tone

The US Federal Reserve left interest rates unchanged in a unanimous vote with no changes to quantitative easing. It will continue to buy $80 billion per month of Treasuries and $40 billion per month mortgage-backed securities. The Fed also reiterated the policy will stay accommodative until ‘substantial further progress is made. The good news was that economic activity and employment have increased recently but going forward the recovery speed will be dependent on vaccinations and covid infections. The stock markets were on the back foot going into the weekend despite the initial bullish reaction as US 10-year yields continued to go higher to 1.754% last seen in early 2020.

Regarding inflation, the Fed wants to see it get to 2% and even more ‘on track to moderately exceed 2% for some time. Fed Chair Jerome Powell expects inflation to tick up later in the year but considers it ‘transitory’ so interest rates are seen at the same level through 2023.

China’s industrial production figures were out this week showing a rise of 35% y/y vs anticipations +30%. At the same time, retail sales increased by 33.8% y/y vs forecast +32%. The Chinese officials said the economy ‘has the conditions for continued recovery’ but the economy is still not yet at full speed.

Elsewhere, the European Central Bank chief economist Philip Lane said in an interview with Financial Times the markets doubt they’re going to raise rates in 2-3 years. He went even further saying the deposit rates could be lower if needed. Europe is behind the UK and the US in terms of vaccinations and a resurgence in infections poses the possibility of a third lockdown.

Meanwhile, ECB’s President Christine Lagarde confirmed they are not focused on ‘blips of inflation’. A reminder that ECB will step up PEPP purchases seems to be doing the trick in Europe for now. Plus, the reopening timing is not very near, so talks of pent-up demand in Europe would be rather premature. Encouragingly EU drug agency concluded that AstraZeneca vaccine outweighs the risks after earlier concerns of links to blood clots albeit very rare.

Back in the UK, Bank of England Governor Bailey said they will continue the bond purchases in 2021. He sees a 12% fall in GDP compared to 2019 and a 4% drop compared to 2020. Inflation is forecast to stay below 2% but will flare up initially due to support measures.

The US Oil posted a sharp selloff this week from a high of $66.42 to as low as $58.3 on the back of stronger US dollar and yet another spike in bond yields. Gold prices continued to rebound albeit at an anaemic pace on worries that inflation is now only going one way. After reaching a low of $1719 the precious metal traded at $1741 on Friday afternoon.

Bitcoin made a fresh all-time high at $61,700 last Saturday but could not keep the gains too long as a swift profit-taking followed. It dropped below $54,000 mid-week but seems to be getting closer to cross above $60,000 once more.