Markets Weekly podcast - 04 May 2021

Henk Potts (HP) Hello it's Monday the 4th of May and welcome to Barclays Private Bank weekly Markets Podcast recording that will guide you through the turmoil of the global economy and financial markets my name is Henk Potts, Markets Strategist for Barclays Private Bank.

Each week I'll be joined by guests, discuss both risks and opportunities for investors and analyse the events that move the markets and grab the headlines over the course of the past week.

I’ll then analyse the outlook for sustainable finance and what we can expect from the UN climate change conference later this year. Finally, I'll conclude by previewing the major events and data releases that are likely to shape the week ahead.

At the headline level, extreme markets struggled for direction last week, maintaining their holding pattern at elevated levels after a solid month of gains.

Investors digested positive heavyweight data releases, particularly from the US where we saw strong consumer confidence first quarter GDP figures, supportive outlook statements from central bankers and yet another stimulus announcement from the Biden administration.

Although the tragic pictures and the scale of the devastation caused by the coronavirus in India is a reminder that the pandemic is far from being solved at a global level and likely to lead to growth downgrades in regions that are still struggling to contain the pandemic.

In terms of equity performance, the S&P 500 was little changed over the course of the week. It was up 5.2% in April, the biggest monthly performance since November last year and has rallied more than 10% in the first four months of this year.

In Europe concerns around virus restrictions is resulting in equity market underperformance. The STOXX 600 fell 0.4% last week and up just 1.8% over the course of the month.

In terms of bond markets, Treasury yields edged higher over the course of the week and investors bet that price pressures will be more pronounced in the medium term than economists and central bankers have been projecting.

10-year Treasury yields were up 6.6 basis points, that's the biggest weekly increase since mid-March but slid 11.7 basis points during the course of April.

Commodity markets continue to surge if you look at the Bloomberg Commodity Index, it is up around about 15% year to date and is up 48% over the course of the past year, driven by optimism around the magnitude of the economic recovery, particularly in commodity-intensive economies such as China and the aggressive stimulus measures that have been outlined, they include, of course, infrastructure investment and the shift to electrification and decarbonisation.

On the supply side, COVID restrictions and technical and regulatory pressures are exacerbating the supply and demand gap.

So if you look at copper it topped the $10,000 a metric tonne level at the end of last week for the first time. Palladium, which is used to reduce emissions and exhaust systems, pushed through the $3000 an ounce mark for the first time.

Gold was up 3.7% in April, but was actually under pressure during the course of last week from rising bond yields, the firmer dollar and expectations of reduced demand for jewellery at least in the short term for jewellery from Indian consumers.

One of the most common questions we get from clients is around the performance of the UK residential property market.

UK house prices surged at their strongest pace since 2004 in April, this according to data from the Nationwide with show prices jumped 2.1% last month, they are up 7.1% from a year ago.

Prices, as we know, have been supported by the extension to the stamp duty tax holiday and the new mortgage guarantee scheme.

Changes in work patterns are seeing people moving from cities to urban areas to take advantage of larger houses. It’s also got historically low interest rates. We also know that there are higher savings levels which have been helping with deposits.

Longer term, the UK housing market should be supported by the ongoing supply and demand imbalances although, of course, could be vulnerable to higher unemployment levels and eventually higher interest rates, though that is some time off.

On the data front, GDP figures highlight the importance of arresting the coronavirus on economic performance, in Europe elevated coronavirus cases and sluggish vaccination programme is resulting in European governments being forced to maintain restrictions which has continued to weigh on household consumption and created bottlenecks in supply chains which have been disrupting the manufacturing sector.

The eurozone fell into a double dip recession in the first quarter, output shrank by 0.6% in Q1 from the contraction of 0.7% at the end of last year.

In the US it's a very different story. Progress on vaccinations are strong and policy support has led to a strengthening of economic activity and employment. The US economy has expanded for three straight quarters. Growth came in a robust 6.4% for the first quarter, primarily driven by personal consumption where expenditure grew at an annualised rate of 10.7%, the second strongest reading we've seen since the 1960s.

We expect the US economy to continue to outperform during the course of this year. We expect European growth to really gather momentum in Q3 this year, but full-year growth is forecast to come in at a relatively lacklustre rate of 4.1%. Compare that with the US growth which is now projected at 7.1% for the full year.

Despite that stronger growth profile, the Fed is likely to remain on hold this year. Turning to the policy outlook, the Fed keeps repeating it will continue to increase its holding of Treasury and mortgage-backed securities at their current monthly rate until substantial further progress has been made towards the dual mandate.

If you look at the labour markets, our forecast for employment growth over the remainder of 2021 is 5.5m, which underlines our assumption that tapering will begin next January.

If you look at inflation, chair Powell took time to make extensive remarks to look through near-term inflationary pressures and not view them as pointing to inflation sustainably above the 2% mark. These include base effects from low inflation readings a year ago and supply chain bottlenecks in many industries.

If you look at Barclays core PCE (Personal Consumption Expenditures) inflation forecasts, we have it at 2.4% in the second quarter then easing back towards the 2% level in the second half of this year, then averaging 1.9% in 2022. So what does that mean? Well the Fed is far from signalling a move to exit its accommodative stance, we expect rates to remain on hold through 2023.

Then the speed of the recovery allowing the anticipated tapering of asset purchases at the beginning of next year.

So that is the global economy and financial markets last week.

Let's move on to consider the prospects for sustainable finance for today's podcast. It's a pleasure to be joined by Ben Caldecott, who is a leading figure in the sustainable finance industry.

In fact, he’s probably one of the most active members working at the intersection between finance public policy, in academia. Amongst various roles, he's the founding director of the Oxford Sustainable Finance Programme at the University of Oxford Smith School of Enterprise and Environment.

He's also been seconded to the UK Cabinet Office, is the COP 26 strategy advisor for finance. Ben, great to have you with us today. To start us off, could you explain what COP 26, the UN climate change conference, is and the role it plays in providing investment opportunities?

Ben Caldecott (BC): Wonderful to join you, thank-you. Sure. Just in terms of COP 101, since the Paris Agreement was negotiated, and that finished in 2015 in Paris, that was ratified in the following year. Every five years since Paris the idea is that there is a moment for parties to the agreement countries to ratchet what are called national determined contributions, their respective promises, to try and realise the aims of the Paris Agreement, which is basically 1.5 degrees of warming above pre-industrial levels.

Now with COVID, COP 26 was postponed by a year, so it’s not five years, it’s six years. And in terms of geopolitics, that's made a tonne of difference. Because if COP had gone ahead as planned last year, it would have happened during the transition of the Trump administration and the UK/EU context would not have been clarified and so on and so forth.

There are all sorts of issues. You now have a much clearer runway to progress and success. Last year we also saw really, really importantly China, Japan and South Korea announcing different commitments to reduce emissions along with the US and UK ones and others.

Now what does it all mean for investors? Well it means it's all about the translation of these commitments into, in the case of governments, policy frameworks that can drive investment.

One of the things that is different from this COP versus other COPs is the real exponential growth of involvement from what are called local non-state actors which are companies, financial institutions, cities, regions.

So, not countries basically. Companies that sign up to commitments and there are more and more companies signing up to these commitments, huge number. That implies significant changes to their business models.

And that implies investments in their businesses and in the assets they have and in the IP that they have and in the people that they have to achieve those transitions.

You have trillions of dollars of assets under management committed to net zero. So the financial industry, including Barclays of course, make net zero commitments. Those need to be credible, but assuming their credible that will help to drive demand and shift capital flows in a particular direction.

So you’ve got a lot for the policy changes that are driven in part by the geopolitics, the high politics of COP, as well as these commitments from individual institutions that when aggregated together add up to colossal amounts of cash and potentially real change.

Now, converting the commitments companies or financial institutions make into real change is, of course, difficult and we know that companies can make all sorts of promises and not live up to them.

So that’s one of the reasons why with this COP, there are efforts under way to create an enduring architecture to monitor, track, hold to account those that are making these promises.

And also to rapture those commitments. Countries every five years need to improve their commitments regularly. Not saying actors, companies, financial institutions also need to up their game. It is about creating a mutually, reinforcing virtuous circle, right.

One of the challenges if you speak to companies or financial institutions about commitments is that they often go why would I make this commitment if my government hasn’t made this commitment.

And the governments go, well if my industry, my companies, are gonna be really opposed to me making these commitment, I'm not gonna make a commitment.

A lot of what COP is trying to do in this process is trying to unlock that dynamic so that governments go actually I'm a bit behind, companies and financial institutions in my country want me to go further and faster.

So I will. And that has a positive feedback on companies in those countries as well. OK, the government has set this direction of travel we gotta get on board.

HP: Well you sort of touched on it already Ben. For COP 26, tell us what the indicators are in terms of success and what is proving a little more difficult.

BC:  Well on success, we need those commitments from countries to get to add up to 1.5 degrees or as close as possible to 1.5 degrees. And we also need the commitments from corporates and financial institutions also to add up to something really meaningful.

And in terms of, well I’m going to focus on the positives, so those are the success metrics rather than the failure ones. So I think those are two success metrics.

HP: Ben thank you for joining us. We look forward to following the developments from the conference, which, of course, takes place in November.

Moving on to the key events this week, April’s final purchasing managers’ indexes in the UK, US and eurozone lights confirming the growth indicated by the flash reading, the composite for all regions printed in expansionary territory with the UK seeing particularly strong bounce.

We also saw exceptionally strong manufacturing strength in all three regions, particularly actually in the eurozone, which printed at an all-time high last month.

China services PMI picked up to a three-month high in March, coming from the low of the previous month as the country continues its strong recovery. We expect to see continued strength in the April reading.

Thursday we get the Bank of England’s monetary policy committee meeting which is likely to grab investors’ attention. In our view it looks like the MPC will maintain its accommodative stance and keep interest rates on hold.

Watch out for the big number of the week on Friday with nonfarm payroll figure, where we expect the US economy to have created 950,000 jobs last month, the unemployment rate to tick down to 5.9%.

And with that, I’d like to thank you once again for joining us.

We will be back next week with our latest instalment. But, for now, may I wish you every success in the trading week ahead.