Financial Bulletin – March 2021


Investors became increasingly confident in the economic recovery during February as vaccines continued to be administered at pace in both the US and UK.

By the end of the month more than 20 million people had received at least one dose of the vaccine in the UK, and an improvement in infection numbers allowed the government to set out a provisional timetable for ending restrictions.

Confidence that a global recovery will take place this year was further bolstered by President Biden’s huge $1.9 trillion stimulus plan taking a step closer to reality.

However, for the time being, the UK and Eurozone economies remain in a fragile state with widespread economic restrictions still in place.

The Eurozone in particular is likely to have entered a technical recession in the first quarter of this year.

As investors focused on the speed of recovery, and the potential for inflation, government bond yields rose sharply.

In fact the US 10 year government bond yield touched the highest level since before the pandemic took hold, and is now higher than the yield on the S&P 500.  

The speed with which bond yields rose unnerved stock markets, most of which fell towards the end of the month.

The well-known, large technology companies were amongst the hardest hit by this move.

Over the last 6 months the FTSE 100 returned 11.91%, whilst the Euro Stoxx 50 returned 11.43% and the US S&P 500 returned 8.66% (total return).

The Japanese Nikkei 225 gained around 25.19% over the same period.

The broad emerging markets index rose by 20.29% in US Dollar terms.

US Economic News

During February the House of Representatives passed President Biden’s huge $1.9 trillion stimulus plan, which includes direct payments to individuals and businesses.

The plan must now pass the Senate, where several amendments designed to reduce the overall price tag are expected to be made.  

Nevertheless, the stimulus is likely to be very large and will be a significant boost to the economy, which is already recovering sharply.

The latest industry surveys suggest that output is growing at the fastest pace for 6 years, with the services sector improving rapidly.

The manufacturing sector weakened slightly but is still expanding at an historically strong rate.    

The slight blot on an otherwise positive outlook is the fact that so far businesses remain reluctant to create new jobs.

At the same time inflationary pressure continues to build as firms struggle to keep up with demand; input prices are estimated to be rising at the fastest pace since at least 2009.

This puts the Federal Reserve in a difficult position as they attempt to tread a fine line between allowing the economy to “catch up” the lost output without allowing inflation to become self-fulfilling.

UK Economic News

With the vaccination program making swift progress and infection numbers consistently falling at the national level, the government was able to publish a possible timeline for removing restrictions.

This timeline would see the bulk of economic restrictions being lifted by mid-May.

However, whilst a strong recovery can be expected in the second quarter of the year, the first quarter is expected to have witnessed sharply negative growth.

After deteriorating sharply in January the services sector, by far the most important part of the UK economy, was essentially flat in February.

That said, surveys suggested that UK companies are more optimistic about the year ahead than at any point in the last seven years.

As in the case of the US, companies reported rising input prices as a result of stretched supply chains.

It was notable that during the month the Bank of England’s Chief Economist referred to the risk that inflation may prove “more difficult to tame.”

Whilst the Chancellor is focused on providing more stimulus measures “in the remaining phase of this crisis” for households and businesses, he has already intimated that tax rises and/or spending cuts are in the pipeline.

Eurozone Economic News

Whilst the Eurozone manufacturing sector continued to improve at a solid rate, it was not enough to overcome a faltering services sector.

As a consequence the Eurozone economy as a whole is thought to have contracted for a fourth month in a row.

Given that the Eurozone’s GDP fell in the final quarter of last year it is very likely that it has entered a ‘double-dip’ recession.

In contrast to the situation in the US and UK, the vaccine rollout across much of the EU has been fairly sluggish. This raises the prospect of continued economic weakness through the second quarter of the year, as well as the first.

Nevertheless, despite a fragile outlook, business optimism regarding the future continued to improve.

Wider Economic News

The Chinese economy continued to improve and the manufacturing sector grew for the tenth month in a row.

However, there was a noticeable slow down in growth as exporters continued to blame weak demand from overseas markets.

In Japan the services sector weakened once again as the government continued to impose Coronavirus restrictions.

However, case numbers are relatively low compared to other developed countries, and business optimism is now at one of the highest levels for two years.

Finally, the Indian economy continued to expand at a very healthy rate as the country’s huge vaccination program gets under way.  

Financial Markets and Corporate News

For most of the past year investors’ focus has been on stock markets. However, this changed during February as bond markets witnessed substantial moves.

With the positive news on vaccines and the hoped-for reopening of economies financial markets began to question whether inflation could be higher than expected.

This led to a rapid rise in the yields on developed market government bond yields, with the US 10 year government bond yield now back to where it was before the pandemic.

In response most stock markets became jittery and fell towards the end of the month, particularly the technology-heavy US indices.

Over the last 6 months the FTSE 100 returned 11.91%, whilst the Euro Stoxx 50 returned 11.43% and the US S&P 500 returned 8.66% (total return).

The Japanese Nikkei 225 gained around 25.19% over the same period.

The broad emerging markets index rose by 20.29% in US Dollar terms.

The Investment Association (IA) UK Gilts sector returned -5.49% over 6 months, whilst the IA Sterling Corporate Bond sector returned 0.57% and the IA Sterling High Yield sector returned 6.28%.

The price of oil continued to climb as a ‘reflationary’ global economy is usually positive for commodities.

 Summary of Key News:

  • Both the US and UK are vaccinating people at a fast rate.
  • President Biden’s $1.9 trillion stimulus plan passed the House of Representatives.
  • Inflationary pressures are beginning to increase in many economies.
  • The UK government outlined a timetable for opening up the economy again.
  • The Eurozone is likely entering a ‘double-dip’ recession.
  • The Chinese economy has slowed slightly whilst the Indian economy forges ahead.   

Financial Markets:

  • Expectations of economic recovery caused bond yields to rise quickly.
  • Over 6 months the FTSE 100 returned 11.91%, the Euro Stoxx 50 returned 11.43%, and the S&P 500 returned 8.66% (total return).
  • The Japanese Nikkei 225 gained around 25.19% (total return).
  • The broad emerging markets index rose by approximately 20.29% (in US$ terms).
  • The   IA  UK  Gilts    sector    returned -5.49% over 6 months, whilst the IA Sterling Corporate Bond sector returned 0.57%, and the IA Sterling High Yield sector returned 6.28%.


The consensus within financial markets has been to expect Central Banks to keep interest rates near zero for several years, allowing their respective economies to regain all the lost ground.

Such low interest rates are part of the reason why some areas of the stock market have continued to power forward, despite on the surface looking expensive.     

February was the first real test of this consensus and the next few months may be critical in determining the course for years to come.

If we see a sharp rebound in growth followed by consistent ‘catch-up’ towards the pre-pandemic trend then we could see interest rates moving higher sooner, and higher inflation, than expected.

In this scenario the current scale of support from both Central Banks and governments may be overdone.

On the other hand if we see a rebound in growth followed by weak demand and consistently higher unemployment then the consensus may well be right; we can expect to return to the pre-pandemic world of low interest rates and low inflation.

The challenge for investors, therefore, is in navigating these two opposing possibilities. The rapid move in bond yields is the first sign that a period of volatility and uncertainty may be replacing the serene rise in stock markets we have witnessed since late Spring last year.