A pause for breath
- Container ship, the Ever Given, became stranded in the Suez canal on Wednesday causing a huge backlog of ships waiting to transit the canal. The Suez canal plays a vital role in world trade, transporting 13% of all goods carried by ship. The delicate balance in global supply chains was underscored by a 6% rise for the Brent crude index following reports that ten crude tankers, carrying 13 million barrels of oil, may be rerouted, adding 15 days to their voyage.
- After rising to their highest point since record lows in 2020 last week, the upward momentum in US treasury yields paused. Despite this pause, Jerome Powell stated that Federal Reserve officials have been monitoring the rise in yields since January but rejected claims that it warranted concerns. The pause in the rise of yields represents markets adjusting to a brighter economic outlook in an “orderly” manner.
- Following accusations of “vaccine nationalism” by an EU policymaker, both the EU and Great Britain committed to work together on Wednesday. Downing Street had offered to “give up” some of the millions of AstraZeneca vaccine doses reserved for Britain amid fears that Brussels would block vaccine exports to Britain.
It is no mystery that a global recovery from the pandemic hinges on a successful vaccine roll out. However the past months have demonstrated that the road to a vaccinated population is long, winding and dotted with obstructions that encompass the prejudices, fears and misconceptions of an entire populace. This is reflected in markets that are going through a process of normalisation that will ultimately be healthy for investors although it might sting in the short term.
After a week of mixed news on the global vaccine front, yields took a moment to gasp for air following their steady rise in 2021. Financial markets have focused intently on US bond yields recently, and equity prices have oscillated as investors fear that too much tightening too soon may hamper the recovery. However the moves so far have been fully in line with historical precedent where once investors are confident that the recovery is in sight, yields rise by between 1.5% and 2%. This would put US bond yields at around 2%, just enough to compensate for the central banks targeted inflation.
Britain and the US are still leading the charge on vaccinations and we remain bullish on the long term for our portfolios despite the immediate short term hurdles of volatility in markets. We view normalisation of bond yields as a positive and necessary step on the road to recovery.
Equity markets have started to price assets on a more sensible long term basis with the rising yields chasing away the more speculative money and leaving investors to once more appraise businesses based on the likely long term cash flows they can generate. Since 15 February, when the latest surge in US Treasury yields began, higher priced growth indices have underperformed cheaper value indices significantly, resulting in a normalisation of not just bond markets but equity markets as well. In an environment where sentiment chaotically charges between styles and geographies, our focus on cutting through the noise to identify top class businesses remains prudent. Our holdings are great businesses with proven track records and strong balance sheets that weathered the worst of the pandemic induced storm and will continue to thrive as the recovery takes hold.
Quote of the Week
We’ve all had bad days at work. Sleeping through alarms, forgetting to shine shoes or putting fish in the office microwave happens to the best of us, we’re human. Spare a moment for whoever was at the wheel of the Ever Given, who had the mother of all bad days this week. Little indiscretions can be forgiven as an embarrassment and we move on, but not when you manage to royally tick off most of the world’s seafaring nations, costing them millions of dollars every hour. Those of you who remember the scrum for ticket gates on the tube and the vicious indignation directed at anyone whose Oyster card has failed can only imagine what one helmsman is feeling today.