Financial Bulletin – February 2021


January highlighted the competing forces now at play as the UK’s vaccination rollout continued apace but at the same time tighter restrictions weakened the economic outlook.

By the end of the month the UK had vaccinated (with at least one dose) more than 12% of the population, which is one of the best vaccination rates in the world.

With several more vaccines from around the world also showing effectiveness against the virus the medical news is giving investors cause for cheer.

In contrast, however, tighter economic restrictions in response to rising infections across the US and Europe inevitably lead to a weaker economic outlook.

Both the UK and Eurozone economies are flirting with a ‘double-dip’ recession and the labour market weakened.

Also during the month a Senate “run-off” in the US lead to a slim majority for the Deomcrats.

This could have far-reaching consequences if, as expected, it allows President Biden to enact a much larger program of infrastructure spending.

Most stock markets have produced solid returns over the last 6 months, despite faltering towards the end of January on concerns that stock prices may have got ahead of themselves.

Over the last 6 months the FTSE 100 returned 7.72%, whilst the Euro Stoxx 50 returned 7.64% and the US S&P 500 returned 13.38% (total return).

The Japanese Nikkei 225 gained around 24.64% over the same period.

The broad emerging markets index rose by 24.18% in US Dollar terms.

Key US government bond yields continued to rise during the month, with the 10 year bond yield now back above 1%.

US Economic News

Surprisingly the US economy accelerated during January despite continued Coronavirus restrictions and supply chain disruption.

This was almost entirely down to the manufacturing sector whose output, according to preliminary surveys, grew at the sharpest rate for more than 6 years.

However, because of global supply chain disruptions, inflationary pressures increased at the fastest rate since at least 2009, indicating that manufacturers will struggle to sustain such a rate of growth.

Moreover the news was less positive when it came to the labour market as the economy lost 140,000 jobs; the first decline since May.    

This was in keeping with the Federal Reserve’s latest assessment of the economy in which they claimed that the recovery in employment had moderated.

Despite the fact that vaccines are being rolled out across the US at a relatively swift pace, the Fed continues to expect that interest rates will stay historically low for several years.

Also during the month, the Democrats gained a slim majority in the Senate after a “run-off”. This could potentially be significant for the economy as it means President Biden’s large infrastructure spending plans may come to fruition.

UK Economic News

The UK continued with its vaccination program at a swift pace and is broadly on target to meet its aim of vaccinating the top four priority groups by the middle of February.

However, the government and scientific advisers struck a cautious tone on when restrictions could begin to ease, with some suggestions that it may not be until April.

This will not come as positive news for the services sector which is already deteriorating quite sharply and potentially pushing the UK economy towards a ‘double-dip’ recession.

With most of the final months of last year spent under tight restrictions and now a full lockdown at the start of 2021, many fear it is inevitable that the UK economy will fall back into recession.

Business surveys suggest that the services sector is contracting at the fastest pace for 8 months and, despite the extension of the furlough scheme, is beginning to see a rise in job losses.

Whereas previously a buoyant manufacturing sector was able to cancel out the faltering services sector, this was not the case during January.

This was most likely due to ‘Brexit’ related disruption as new custom rules came into force, as well as general restrictions on international trade because of the pandemic.

Also during the month, the colossal fiscal cost of the pandemic was once again made clear as government borrowing during December was the highest on record.

Eurozone Economic News

Whilst the Eurozone economy remained fragile during January it surprised some forecasters by holding up better than expected.

Although the services sector contracted, it did so at a slower rate than some had feared and was also less pronounced than in November.

There was also some tentatively positive news from the manufacturing sector, which grew at a slower pace than in December but not quite as slow as some had feared.

Surprisingly, one measure of industry confidence actually rose during the month, although the more closely followed consumer sentiment index fell.

As in the case of the UK economy the Eurozone is expected to fall into a second recession in the first quarter of this year.

The initial estimate of growth in the final quarter of last year was -0.7%, meaning if growth is negative in the first quarter of this year then the Eurozone will be in an official recession.

Wider Economic News

The Chinese manufacturing sector continued to improve during January but at the slowest pace since June of last year and the outlook for employment weakened.

After a strong recovery the economy, which is export led, is being undermined by global weakness.

Elsewhere the Japanese manufacturing sector had stabilised in December after almost two years of weakness. Unfortunately, it slipped back into negative territory during January as a new state of emergency was applied in response to more Coronavirus cases.

The news was better from India where the manufacturing sector continued to improve at a solid rate.

Businesses became more optimistic as the country’s huge vaccination program, with an aim of reaching 300 million people by July, got underway.  

Financial Markets and Corporate News

Most of the major stock markets were either flat or lower at the start of the year as the extraordinary recovery from the March lows paused for breath.

Nevertheless, returns over a 6 month period have still been sizeable whilst the UK and European indices have started to narrow the gap with their US counterparts.

Over the last 6 months the FTSE 100 returned 7.72%, whilst the Euro Stoxx 50 returned 7.64% and the US S&P 500 returned 13.38% (total return).

The Japanese Nikkei 225 gained around 24.64% over the same period.

The broad emerging markets index rose by 24.18% in US Dollar terms.

The Investment Association (IA) UK Gilts sector returned -2.83% over 6 months, whilst the IA Sterling Corporate Bond sector returned 2.46% and the IA Sterling High Yield sector returned 7.01%.

 Summary of Key News:

  • The UK’s vaccination program continued at a fast rate.
  • However, tighter economic restrictions could lead to another recession.
  • UK borrowing in December was the highest on record.
  • The Democrats won control of the Senate.
  • The Eurozone held up better than thought but is still heading for recession.
  • The Chinese economy is beginning to slow down.   

Financial Markets:

  • Over 6 months the FTSE 100 returned 7.72%, the Euro Stoxx 50 returned 7.64%, and the S&P 500 returned 13.38% (total return).
  • The Japanese Nikkei 225 gained around 24.64% (total return).
  • The broad emerging markets index rose by approximately 24.18% (in US$ terms).
  • The   IA  UK  Gilts    sector    returned -2.83% over 6 months, whilst the IA Sterling Corporate Bond sector returned 2.46%, and the IA Sterling High Yield sector returned 7.01%.


Despite the likelihood of the UK and Eurozone entering another recession financial markets are focused on the second quarter of the year when, it is hoped, vaccinations and treatments will allow businesses to return to normal.  

However, it is unlikely that all restrictions will fall away at a single moment but rather it will be a gradual process.

The key unknown, amongst many, is what form the recovery will take. It is still highly uncertain what the long term impact of the pandemic on the economy will be. It may be that some consumer habits have now permanently changed and unemployment will remain higher for longer.

A further consideration for financial markets is the prospect for inflation. A period of higher inflation could come either through governments and Central Banks leaving stimulus in place for too long, or through broken supply chains unable to keep up with demand.

In terms of the former, the expectation that President Biden will now be able to instigate a huge program of investment will only add to the amount of stimulus in the system.

In terms of the latter, it did not go unnoticed that during January several business surveys suggested that there had been a sharp rise in production costs.

Broadly there remains two scenarios for the recovery; we could see a sharp rebound followed by consistent ‘catch-up’ towards the pre-pandemic trend, or we could see a sharp rebound followed by weaker than expected growth and higher unemployment than before.