Overview

1. COVID-19 cases reach new highs in the US and Europe

2. Joe Biden wins US presidential election

3. US central bank lending programs set to expire

4. Global equities rally on vaccine hopes

5. US dollar and gold weaken while Bitcoin surges

6. Market sentiment turns bullish

Policy & Geopolitics

Consumer sentiment starts to fade

Central banks keep policy frameworks unchanged

On February 23, Jerome Powell, Chairman of the Federal Reserve (the “Fed”), delivered the semiannual monetary policy report to the Senate Banking Committee and the House Financial Services Committee the following day, confirming the commitment of the Fed to maintain easy monetary policy until the economy recovers from the pandemic. The Fed will maintain interest rates near zero and continue large asset purchases until substantial progress is made towards its employment and inflation goals. Powell asserted that the Fed has the tools to deal with unwanted inflation, but did not comment on market concerns over the recent rise in US Treasury yields.

Powell stated that the economic outlook has improved since economic activity slowed down towards the end of 2020 following the recent decline in COVID-19 cases and deaths and the continued efforts to accelerate vaccine distribution.

In February, the House of Representatives advanced several portions of President Joe Biden’s $1.9 trillion COVID-19 relief bill, in hopes of passing the full aid package by the month end. On February 12, House Democrats advanced the section of the bill that includes $1,400 direct payments and an extension of unemployment programs and payments. Tension continued between Democratic lawmakers who favor massive, extensive plans and Republican lawmakers who prefer less expensive, more targeted proposals. During his speech in January, President Biden proposed two relief packages, implying a more expansive aid package that he will describe during a joint session to Congress scheduled for March.

As government bond yields rise in the US and Europe, European Central Bank (“ECB”) President Christine Lagarde indicated that the ECB will act if rising yields hinder economic recovery from the pandemic. The rising Treasury yields following massive US government spending and vaccine progress undermine the U.S. dollar and strengthening the euro. The ECB kept interest rates at -0.5% and will continue the expanded stimulus program unveiled in late December, buying up to €1.85 trillion of eurozone bonds through March 2022. Despite concerns that a global rise in yields may impede economic recovery, ECB bond purchases slowed in the last week of February, settling at €12 billion of net purchases compared to €17.2 billion in the previous week. Meanwhile, former ECB president Mario Draghi became Italy’s prime minister on February 13.

President Joe Biden's first 30 days

During his first full month in office, President Biden made efforts to establish his political agenda after former president Donald Trump was acquitted by the Senate of his second impeachment charge. The top priorities for the Biden Administration in February were passing the $1.9 trillion COVID-19 aid package and accelerating vaccine distribution as 50 million vaccine were administered since Biden took office. Meanwhile,, only 10 of the 23 of Biden’s nominees for Cabinet and sub-Cabinet posts have been confirmed, while the rest await Senate confirmation.

February 5: The Senate passed a budget resolution to approve President Biden's stimulus package but rejected the minimum wage package.

February 11: President Biden announces that his administration has secured deals for 200 million more COVID-19 vaccine doses as the US approached 500,000 deaths from COVID-19 (surpassed on February 23).

February 13: Former President Trump was acquitted by the Senate of his impeachment charge for instigating the insurrection at the US Capitol in January.

February 24: President Biden reversed former President Trump’s freeze on several types of visas during the pandemic, including green cards for new immigrants and temporary work visas.

February 27: The House passes President Biden’s $1.9 trillion COVID-19 relief package, including a $15 hourly federal minimum wage that the Senate is unlikely to approve.

February 28: The director of the Center for Disease Control and Prevention (“CDC”) approved Johnson & Johnson’s (“J&J”) one-shot COVID-19 vaccine. The US government approved to begin shipping vaccine doses across the country.

Macro Indicators

Labor market shows small signs of recovery

The US labor-market resumed recovery in January 2021 following a one-month halt in December, but COVID-19 continued to slow the recovery. Unemployment fell to 6.3% in January from 6.7% in December. Non-farm payroll rose by 49,000 in January after a steep fall in December, the first monthly drop since the first pandemic-related shutdowns in April. In the week ending February 20, initial unemployment benefit claims fell by 111,000 from the previous week to 730,000, the lowest weekly claims since November. Applications for unemployment benefits climbed at the beginning of February, despite other readings, such as retail sales, signaling a rise in economic activity. The latest report of declining weekly claims came as severe winter storms struck parts of the country and some states adjusted for attempted pandemic-related fraud filings. Eurostat reported 8.3% December 2020 unemployment in the euro area, unchanged from November, but above the 7.4% in December 2019. Strict measures following the resurgence of COVID-19 cases and the rapid spread of variants is kept the euro area economic recovery behind those of the US and China.

Vaccine progress and economy re-openings boost growth forecasts

US economic activity is gained momentum after slowing down in Q4 2020 and contracting 3.5% last year. The Congressional Budget Office (the “CBO”) forecasted real US GDP growth of 3.7% in 2021 and a return to pre-pandemic levels by the middle of the year as the US passed a $900 billion aid bill and vaccine production and distribution accelerated, which are both likely to increase business activity. The CBO boosted estimates compared to the summer of 2020 “because the downturn was not as severe as expected” and recovery was faster and stronger than expected.

US retail sales in January marked the largest increase in seven months, increasing 5.3% from the previous month after three consecutive months of decline, as millions received their $600 stimulus checks a month after the $900 billion stimulus package was approved. The increase in spending was across all major categories, even those hardest hit by COVID-19 restrictions such, as restaurants and bars.

The European Commission forecast that the euro area economy will grow by 3.8% in 2021 and 2022. The outlook for Europe continues to be gloomy amid sluggish vaccine rollout and a rapid spread of COVID-19 variants, but economic recovery is expected to gain momentum as containment measures ease and the vaccine rollout progresses in the spring,.

Existing home sales in the US rose 0.6% in January from December and 23.7% year on year (YoY) to a seasonally adjusted annual rate of 6.69 million. Record-low supply and strong demand for housing continued to push prices to near all-time highs.

The Core Consumer Price Index (CPI) increased 1.4% YoY in January and a seasonally adjusted 0.3% from the previous month, after growing 0.2% in December. Concerns over rising inflation following increased spending from another large aid package and vaccine progress were dismissed by Fed Chair Powell, saying that the impact of expected price rises later this year will be short-lived as inflation has been subdued for years. CPI in the euro area increased 0.9% YoY in January, following a 0.3% decline in December, the highest YoY increase since February 2020 ending five months of deflation.

The IHS Markit US Manufacturing Purchasing Managers’ Index (PMI) fell to 58.6 in February from 59.2, staying in line with expectations. The rise in the IHS Markit Euro Area Manufacturing PMI to 57.9 in February from 54.8 in January exceeded forecasts of 54.3, indicating the strongest factory activity growth in three years.

Sovereign bonds yields anticipate higher inflation

The 10-year US Treasury yield rose nearly 0.4% in February, and about 0.5% since the start of 2021. Yields climbed as high as 1.55% on February 25, the highest since February 2020, before closing at about 1.42%. The rise in yields sparked concerns over higher inflation amid an improving economic outlook in the US due to the large aid package, vaccine distribution, and increased consumer spending. 10-year inflation expectations, measured by Treasury Inflation Protected Securities (“TIPS”), jumped as high as 2.21% in February, consistent with the Fed’s target and the highest since 2014. Germany’s 10-year bund yields closed at -0.26% on February 26, its least negative yield since June 2020.

Financial Markets

Equity market momentum halted by rising rates

February was a volatile month for US equity markets, ending higher month-on-month following mixed performance in January after the strong rally in November and December. The 2.6% rise in the S&P 500 was mostly during the first two weeks, as fears of rising interest rates reversed some gains in the second half of February. The Nasdaq rose 0.9% despite an even steeper decline during the second half of the month as many technology shares faltered following investors rotating into other sectors.

European equity markets rebounded modestly in February after declining in January for the first time in three months. The STOXX Europe 600 and the UK FTSE100 rose 2.3% and 1.2%, respectively, as vaccine distribution became more widespread, and sentiment improved in Europe. The Hong Kong Hang Seng index, the Chinese SSE Composite Index, and the Japanese Nikkei 225 Index rose 2.5%, 0.7% and 4.7%, respectively. The outperformance of the Nikkei, which hit a 30-year high in mid-February before reversing some of its gains, was driven by strong corporate earnings and news that the Japanese economy grew nearly 13% in Q4 2020 (annualized), marking a second quarter of growth.

Credit spreads continue tightening

Investment grade (IG) spreads tightened to 0.95% while high-yield (HY) spreads tightened to 3.57% from 3.84% since peaking at 11.13% almost a year ago. First-lien spreads to maturity contracted to LIBOR+3.70% from L+3.79% while second-lien spreads widened to L+7.46% from L+7.42%. The yield-to-maturity of first-lien and second-lien debt remain below year end 2019 levels due to near-zero interest rates and unprecedented Fed support for the fixed income market.

Oil rallies to pre-pandemic levels

Spot WTI and Brent crude oil prices rose to their highest levels since January 2020 amid optimism over economic growth following expectations of another large relief bill and vaccine rollout progress. Spot WTI rose above $60 per barrel for the first time in a year on February 15, rising 18% to $61.50 per barrel at the end of the month. Brent c

Oil prices jumped as a winter storm in Texas boosted demand while impeding production. President Biden’s large relief bill and recent vaccine distribution progress offer hope for oil demand recovery depending on the pandemic situation. Major risks to oil demand recovery continue with the spread of COVID-19 infections, extended lockdowns in some areas, and slower-than-expected vaccine rollout. Bullish demand can create shortages due to reductions in OPEC Plus output, and the suspension of operations and CAPEX in global oil fields. Goldman’s revised Brent forecast of $75 by Q3 2021, compared to its earlier forecast of $65, is the most optimistic among large banks.

US dollar gains strength, gold falls further, and Bitcoin surges

The US dollar continued its slow rise in February after dropping in early January to its weakest level since 2018 as government bond yields rose to their highest in a year. The ICE US Dollar Index increased 0.6% to 90.7 against a basket of currencies on February 26 closing at 90.9 at month end. Gold prices declined 7% from January to $1,729 per ounce at month end as government bond yields rose, which put pressure on stocks and precious metals. However, gold prices should stabilize as the rise in bond yields is unlikely to last. President Biden’s new relief package also strengthened the US dollar, which further weighed on the price of gold. Meanwhile, on February 19, the market value of Bitcoins surpassed $1 trillion as investors seeking inflation hedges and safe havens drove Bitcoin prices 60% higher since the start of the month to an all-time-high of $58,332 on February 21. A week later, Bitcoin ended the month at $46,316. Increased adoption by major institutions drove the cryptocurrency but its recent volatility may hinder widespread use. The Citigroup global perspectives and solutions team wrote in a note that “Bitcoin’s future is thus still uncertain, but developments in the near-term are likely to prove decisive as the currency balances at the tipping point of mainstream acceptance or a speculative implosion.”

Sentiment

Consumer sentiment drops as market fear subdued

The Consumer Sentiment Index of the University of Michigan dropped to 76.8 in February from 79.0 in January, revised upwards from 76.2 earlier in the month as the labor market stalled at the start of the year and weekly claims for unemployment benefits jumped. The decline reflects consumer skepticism over a robust economic recovery and a full restoration of the labor market, despite recent optimism.

The VIX dropped to 19.97 on February 12, closing below 20 for the first time since the onset of the pandemic in February 2020. The recent decline following months of elevation amid additional fiscal aid and continued effort to accelerate vaccine rollout.

The month-end Fear and Greed Index (which uses seven factors including market momentum, safe-haven demand, and junk bond demand) was “neutral” at 48. Safe-haven demand shows “extreme greed” in the weakest period for stocks relative to bonds in the past two years, indicating that investors favor safer bonds over risky stocks.

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COVID-19

As of February 24, 2021, global COVID-19 confirmed cases and deaths reached 111,762,965 and 2,479,678, respectively. Almost a year after the first COVID-19 cases were confirmed in countries across the globe, the pandemic shows little sign of easing. As countries struggle with the limited supply of vaccines, new variants of the coronavirus have been detected. The highly contagious UK variant detected in December has been detected in China and the US, while another variant identified in South Africa and Brazil has also been detected in the US. The US remains the worst-affected country in case numbers, followed by India and Brazil.

On February 23, 2021, the US death toll from COVID-19 surpassed 500,000, grim reminder that the pandemic is far from over. The number of new cases and hospitalizations have been declining but remains above previous periods. Moreover, new concerns have arisen that the new variants from the UK, Brazil, and South Africa may be more contagious, more deadly, and vaccine-resistant. Cases and deaths may spiral unless the highly contagious UK variant spreading rapidly in the US is contained and vaccinations accelerated. Meanwhile, President Biden announced an increase in weekly vaccine from 8.6 million doses to 14.5 million. So far, around 82 million vaccines have been delivered and about 65 million have been administered. An estimated 68% of the US population should be vaccinated by the end of July. After the approval of the J&J one-shot vaccine on February 28, 4 million doses are being prepared for shipment and 20 million doses should be provided by the end of March.

Many countries in Europe started the year with lockdowns and curfews to fight accelerating COVID-19 infections. The highly contagious variants are spreading rapidly while the vaccine rollout remains sluggish, which may force governments to extend restrictions to contain the virus. As of February 16, only 4.8% of Europeans have been vaccinated. France, the second worst-affected country in Europe after the UK, remains under a nation-wide 6PM to 6AM curfew. Bars, restaurants, and cinemas remain closed. Germany’s nationwide lockdown has been extended to March 7. Vaccine rollouts in the offer hope of easing restrictions soon as over a quarter of the population has been vaccinated.

The Month Ahead

1.The remainder of President Biden’s first 100 Days

2.Vaccine rollout

3.Fiscal stimulus in the US and Europe

4.Central bank reactions to rising yields

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