Page 6 - April ISQ 2021

INVESTMENT STRATEGY QUARTERLY

THE
DOG THAT

BARKED IN THE NIGHT?

Jeremy Batstone-Carr, Raymond James European Strategy Team

Financial markets have spent much of 2021 to date and yields higher, is now over and “normal service” is resuming.
obsessing about building inflationary pressures, the con- So, what is going on? On a global level, away from purely the US
sequence of a slow emergence from lockdown across and the UK, the war against COVID-19 is nowhere near over.
developed Western economies. A “perceived” infla-
tionary threat has driven sovereign bond market
On a global level, away from purely
break-even rates higher and nominal bond yields, espe- “
cially longer-dated government bond yields, have risen the US and the UK, the war against
from 2020 lows. All fine, except that there is no inflation! COVID-19 is nowhere near over. ”
Critical to the debate is the difference between, on the
one hand, one-off price adjustments and the impact of
On Wednesday 24 March the message from Germany really
supply chain disruption and on the other hand, a steady
drove that message home. The daily count of new COVID-19
and persistent increase in wages and costs (that which cases in that country is rising rapidly again and, if the current
economic textbooks describe as true inflation). rate is sustained, will double over the next three weeks. The
under-pressure Chancellor, Mrs Angela Merkel, has been forced
Yet for all the talk, what do our own eyes reveal to us? The crude into an abrupt “U-turn” having earlier emerged from a highly
oil price is falling back from recent high levels. Barring a tempo- fractious 11-hour meeting with regional leaders to announce
rary blip higher caused by a crashed tanker in the Suez Canal, an ultra-hard five-day lockdown of the entire country over the
forcing oil-related traffic to make the more circuitous journey Easter weekend. With national elections scheduled for the end
around the African Cape, Brent crude has dropped well below of September, what the electorate think counts for a lot. Public
$70 per barrel and the lighter grade, West Texas Intermediate, pressure dissuaded the Chancellor from following through with
below $60 per barrel. The International Energy Agency is implementation, although all plans to reopen the German
reporting a steady supply build-up as production exceeds economy remain on hold, at least until the next high-level
demand. Meanwhile, across developed economies, longer meeting on 12 April. Add to that the fact that Italy is now locked
dated government bond yields have dropped back too. The down completely again and that restrictions have been reim-
repatriation by Japanese pension and life assurance compa- posed in France and the clear conclusion is that Europe’s
nies of substantial funds parked in US Treasuries, to “window economic recovery has been postponed again.
dress” domestic performance ahead of that country’s fiscal
year-end on 31 March, thus driving US Treasury prices lower Away from Europe the picture is no better. It is worth noting

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