Olga Karpova

Monthly Pulse #3 21

1. March 2021
Economic Outlook

New infections and deaths from COVID-19 have been steadily falling in the world for several consecutive weeks. Vaccination programs are being expanded and extended to the countries in need. A huge new stimulus bill in the US is right on the doorstep. And yet, the markets are uneasy. An overheating economy brings as much uncertainty and fear to investors as a lagging one.


Liquidity Neutral
Bonds Underweight
Equities Neutral
Alternative Investments Overweight


Preliminary February PMI data showed that the Eurozone is experiencing a strong expansion in manufacturing activity (flash PMI is 57.7) and a contraction in services activity (44.7). The US meanwhile is experiencing an expansion both in services (58.9) and in manufacturing (58.5). However, manufacturing input prices rose significantly due to the shortage of some components like semiconductors. This gives a cause for concern about an increase in CPI and thus a possibility of premature tapering signals by the central banks.

The ECB has indicated that, on the contrary, it is willing to increase bond purchases, if the rates curve steepens too much. The Fed’s Jay Powell, in his speech in the end of February, insisted that the US economy is still weakened and needs a large support. He emphasized that for now, too much stimulus carries smaller risks than too little. This push for the stimulus also contributed to the rise in inflation expectations.


Fixed Income

Anticipation of a rise in inflation due to economic recovery gave a push to 10-year US Treasury note yields, which briefly exceeded 1.55% before retreating and finishing February at 1.42%. We believe that there is still room for bond yields to grow further in the next 2-3 months. There have been no signs of the Fed’s readiness to control of the long-term rates, so it is likely that 10-year US Treasury notes will rise to 1.60%-1.70% in the upcoming months.

Emerging markets and high-yield-rated companies are particularly vulnerable to rising interest rates, especially now, when credit spreads are around their lowest levels in a year.



Rising bond yields are currently a concern for investors since they lead to rising borrowing costs amid the still weak global economy. Besides, rising bond yields - or falling bond prices - make stocks less cheap relative to bonds, undermining the mantra that investors have been repeating over the course of the past-year rally. Thus, the downside risk for equities is increasing, as they are growing relatively more expensive.

Notably, stocks that flourished throughout the worst of the pandemic, are now lagging, while the more cyclical companies tend show more resilience. So, Nasdaq composite ended February in red, and S&P 500 ended the month only marginally positive, while S&P 600, Euro Stoxx 50, and MSCI Europe Small Cap all showed a more solid performance.


Valuation Neutral
Momentum Neutral
Seasonality Neutral
Macro-Economics Positive

Alternative Investments

In February, gold once again exhibited an atypical positive correlation with equity markets and ended the month at $1735. Fundamentally, gold prices might receive an upward pressure from the new American stimulus bill, similarly to what happened in 2020. However, technical analysis suggests that in March gold price will at best move sideways, likely between $1650 and $1800.

Having gained almost 20% in February, oil price stopped at $63.18 for WTI Crude and $66.68 for Brent Crude. The unusually low temperatures in Texas forced oil supply normalization to speed up. So, when US oil producers reacted weaker than expected, Barclays revised its 2021 oil price forecast $7 higher: $62 for Brent and $58 for WTI.

USD appreciated driven by increased US Treasury rates and inflation expectations, and EUR/USD finished the month at 1.21, only briefly breaking above 1.22. March is expected to be quite volatile for the currency pair. The interest rate differential for now is working against the EUR, but the expansive monetary and fiscal policy in the US should provide a strong upside potential.

Olga Karpova, Junior Portfolio Manager

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