Markets Weekly podcast - 29 March 2021

Henk Potts (HP): Hello, it's Monday the 29th of March and welcome to the Barclays Private Bank Markets Weekly podcast, the recording that will guide you through the turmoil of the global economy and financial markets. My name is Henk Potts, Market Strategist with Barclays Private Bank. Each week I'll be joined by guests to discuss both risks and opportunities for investors.

Firstly, I’ll analyse the events that moved the markets and grabbed the headlines over the course of the past week. I’ll then analyse the outlook for the UK property market. Finally, I’ll conclude by previewing the major events and data releases that are likely to shape the week ahead.

There were plenty of distractions for investors last week including developments at the Central Bank of Turkey, trouble in the Suez Canal and the debacle that is the vaccine programme in Europe. But actually it was a calmer week for bond markets as investors took a more considered approach to threat of inflation and possible impact on monetary policy.

Sentiment was helped by soothing words from Fed Chair Jerome Powell, Treasury Secretary Janet Yellen at the Senate Banking Committee. In testimony the pair reiterated that inflation will move up over the course of the year but stated that it would be neither particularly large nor persistent.

In terms of Treasury yields, ten-year finished the week at 1.68% down from the previous week’s year high level of 1.75%. The decline over the week was the biggest since December. In equities, investors brushed off concerns over extended lockdown measures across Europe and the prospect of prolonged travel restrictions. Instead they prefer to embrace the growing recovery hopes in the United States amid the accelerated vaccine rollout. This is as President Biden doubled the goal of vaccinations in his first 100 days in office to 200,000,000.

In terms of equity performance S&P 500 was up 1.6% over the week, its up 4.3% this month. US banks registered gains after the Federal Reserve said that institutions that pass stress tests could return additional capital.

In Europe, the Stoxx 600 rose 0.8% and is less than 2% away from the record reached in February 2020. It's up 5.4% in March and looks set for a fourth straight quarterly increase. We've seen strong outperformance from the small caps over the course of the past few months, for example the Russell 2000 is up 48% over the course of the past six months compared to the S&P 500 was up 19% over the same period.

Last week, after an aggressive sell off at the start of the week, small caps staged a recovery into week end. Small caps, to remind you, are a leveraged play on the economic recovery with greater focus on domestic activity. Indices like the Russell 2000 have more exposure to industrials and less to technology compared to large cap indices, therefore seen as a beneficiary of the rotation trade. It makes sense, I think, to have some exposure to small/mid-caps in the current context. Despite the recent outperformance, valuations are roughly in line with historical averages.

However, investors should expect much greater volatility in this space. The universe is much less covered by analysts: roughly 5 analysts for companies in the Russell 2000 versus 24 companies in the S&P 500. We think for investors looking for exposure in this space, active management is very much the key.

Equity markets may experience additional volatility in the coming days on reports that a large family office in the United States was forced to liquidate US$20bn worth of shares on Friday to meet a margin call. The block sales were centred around technology companies. Credit Suisse and Nomura have warned that they may face significant potential losses relating to the unwinding of trades by Archegos Capital Management.

Nomura, whose shares have closed down 16% on Monday, estimated that the amount of the claim against the US client could be US$2bn. Credit Suisse saying it's too early to quantify the exact size of the loss but it could be highly significant and material to first quarter results. Their shares were down 10% at the open. Systemic risk to the system still looks very low. Early signs are that it will focus on certain banks and individual funds. European equity markets were up at the open on Monday, US futures only mildly negative.

The positive news, of course, is that salvage experts have partially re-floated a container ship that measures 400 metres and weighs 200,000 metric tonnes, has been blocking the 120 mile Suez Canal that links the Mediterranean and the Red Sea. The blockage has been affecting 12% of global trade that travels through the canal providing further disruption to already strained global supply chains. Estimate it will take somewhere around two to three weeks to clear the backlog of 250 ships.

Of course there is an alternative to the canal but sending ships the long way round via the Cape is both time consuming and very costly. It takes an extra 15 days, US$300,000 worth of fuel.

Disruption in the canal lead to volatility in energy prices on fears that a prolonged blockage could squeeze supplies of crude and refined products, although the outlook for demand has been dented by fresh coronavirus lockdowns across Europe. In terms of market reaction, crude prices down around 1.4% on the news.

Attention will now turn to the OPEC+ alliance meeting taking place on Thursday. Members are expected to keep production levels unchanged for May but investment houses are predicting a large ramp up in supply come late summer.

So, that was the global economy and financial markets last week. Let's move on to consider the prospects for UK property market. I’m pleased to say that I'm joined by Stephen Moroukian, Head of Debt Advisory, Banking and Credit for Barclays Private Bank. Stephen, thanks for joining us today. To get us started, could you outline the impact the pandemic has had on particularly the London prime property market?

Stephen Moroukian (SM): Yeah, thank you and good morning Henk. Certainly no price shock like the global financial crisis. There's three big points that we need to remember at this particular moment. Firstly, is the insufficient quality of stock on the market, there's been a pause in new top spec residential development property being rolled out. In fact, only last week, one fund announced securing 100,000,000 for this exact purpose, to acquire tired prime properties in central London and renovate them to high spec seekers. Therefore, demand remaining relatively stable.

Secondly, prices have slowly come down from the highs of 2014. They’ve come off around 20% over that time. When you overlay a dollar/sterling conversion over that window, the relative discount is nearer 30-35%, so that is value in the market which on both sides looks like it's swinging back the other way and therefore many commentators believe that in 2021 those timing that opportunity will have to act.

Lastly, is the opening of international travel into London. That's being perceived as the starting whistle for a flock of interest coming into the UK and the Super-prime folk I speak to on a week on week basis, you know, that are selling properties at £10m plus, they're all seeing unprecedented levels of international prospect buyers all waiting for that to come through.

So overall, cautious optimism for sure, but watch for new high spec developments coming onto the market, keep an eye on cable and once the travel restrictions lift you’ll have an interesting combination of factors coming together.

HP: Okay let's pick up on some of those. What do you think the biggest risks are to the recovery in sentiment moving forward?

SM: Well look, the industry has built a really high degree of muscle memory now on how to execute complex purchases without the need of face to face interaction. We all know that that technological capability was latent and has now been thrust into the forefront and been firmly adopted. However, the question is, will buyers part with £10m, £20m, or even £30m pounds without actually physically seeing and feeling the asset. The answer is typically no. So crucial to having a big year in the transactions will be that commercial air flight piece.

The litmus test will be the number of sales, so on an annual basis the number of transactions that happened in the market above £10m is typically 100 sales at a total value of £2bn. What it will be in 2021 will be the key test as to how successful those threats or those opportunities have landed.

HP: We seem to be hearing a great deal about the town to country migration that’s been taking place. What's your view on this? Is it really a reality? If so, is it a trend that can continue?

SM: Well, fantastic question. Everyone has a slightly different perspective. The reality is property in coastal and picturesque locations that are served by good communications, and I mean by that both transport and technology, have seen high demand, have seen price increases over the last six months and that has driven the market.

It's not clear whether that will be sustainable but what it has cemented is the rise of what's now being called co-primary residences. So that's not second homes, that's a different type of property strategy and I think this is a trend that you're actually seeing globally and underlines the fact that everybody is feeling more and more the importance of having quality and wellness in the home as opposed to just straight line travel distance and convenience.

HP: Okay, so moving on from the residential property market, we know of course that COVID-19 has had a dramatic effect, particularly on the High Street. What's the outlook for cities and, in particular, what does it mean for retail?

SM: Well yeah, that's a different story. No doubt the generational shift in online sales adoption shows no sign of rolling back and that will have the obvious consequences to those retailers that rely on footfall to drive their businesses. We've seen two notable shifts. Firstly, a handful of first movers declaring their intention to scale back their physical retail presence and conversely the continued resilience of the logistics sector, with signature agreements being reached with household retailers.

Waitrose and John Lewis are good examples of those, underpinning new ways of doing remote business.  But one to watch out for at the moment is Marks and Spencer’s very deep retail strategy that they have across the UK. It will be very interesting to see how they start to pivot their strategy to the new normal.

HP: Well thank you Stephen for your insights today in the UK property market, certainly a topic that clients are always interested in and we will follow the developments very carefully indeed.

Moving onto the key events this week. In the US labour market, figures remain a focus. For the week ending March 20^th, weekly jobless claims fell to pandemic low of 684,000 down 97,000 on the previous week. First time below that 700,000 mark in a year, although still above the highest registered during the course of the Great Financial Crisis. The data shows the US labour market has been gaining momentum and will accelerate as the population is increasingly vaccinated and as economies reopen and service sector rehires workers.

This week the focus will be on the non-farm payroll report. We forecast the US economy created 900,000 jobs during the course of last month, that's ahead of consensus - consensus around 600,000. We expect the unemployment rate to decline to 5.9%, the market is at 6%. The US recovery has certainly been gaining momentum. Barclays has upgraded its growth forecast for the US economy this year to 6.7%, and believes the unemployment rate will be down to 4.4% at year-end.

Other figures to watch out for are the March final manufacturing purchasing managers’ indexes. The PMI in the eurozone, the US, and UK are likely to confirm the strength indicated by the flash readings, with the eurozone jumping to a record high of 62.4. China's manufacturing PMI expanded at a slower pace in February, falling to 50.9, that's the lowest reading we've seen since May 2020. However, this was affected by the Lunar New Year holiday, therefore we would expect see a rebound in the March reading.

Against a backdrop of suppressed economic activity, inflation rates remain generally subdued. Euro area harmonised index of consumer prices was unchanged at 0.9% year on year in February, cementing recovery from the negative levels that we saw at the end of 2020. We expect the inflation rate to strengthen in March with supportive base effects from the plunge in oil prices in March 2020 driving inflation higher. Therefore, we expect to see a print of 1.5% year on year in Wednesday's flash reading.

And with that, we’d like thank you once again for joining us. May I wish you every success for the trading week ahead.