10-year US Treasury yields have risen to levels last seen in February 2020 – before the pandemic spread to the US. 10-year yields are currently hovering around 1.35% – a significant increase from as low as 0.5% in August last year. Curve steepening is a symptom of rising inflation expectations driven by a combination of the following: vaccine optimism and the notion of pent-up demand fuelling economic activity; ongoing monetary accommodation from the Fed; and further fiscal stimulus from the US government.

The NASDAQ Composite Index is up around 9% year to date (source: Bloomberg, as of 17 February) as bullish sentiment has prevailed in US equity markets in February. Markets are pinning their hopes on vaccine success globally and additional fiscal stimulus from the US government to help induce economic growth this year. Among the key beneficiaries of an improving economic outlook are banks. Within the NASDAQ Composite Index, banks are the top-performing sector year to date.

Nickel is continuing to build on its positive momentum from recent months. The rapidly growing interest in electric vehicles (EV) has put the spotlight on nickel. EV manufacturers are increasingly seeking higher loadings of nickel in batteries. Batteries, which account for a relatively small share of refined nickel demand currently, are expected to drive the metal’s future demand growth. According to Roskill, European Union’s nickel demand from the automotive sector is forecast to total 560 kilotons (kt) by 2040, an increase of 543kt from 17kt in 2020.

Oil prices have rebounded strongly since their April 2020 lows. Brent and West Texas Intermediate (WTI) oil prices are trading above the levels they were a year ago, i.e., before the COVID-19 pandemic reached Europe. This is somewhat surprising given that demand has not recovered to pre-pandemic levels. According to the International Energy Agency (IEA) forecasts, oil demand in 2021 will recover by 5.4 million barrels per day (mb/d), after having fallen 8.8 mb/d in 2020. So, we are likely to fall short of 2019 demand by quite some margin. The Organisation of the Petroleum Exporting Countries (OPEC) and its partner countries (together OPEC+) have maintained production restraint. The group has collectively cut production by close to 10 mb/d compared to a year ago. According to IEA forecasts, if OPEC+ can maintain a hundred per cent compliance, we could see stock withdrawals of 1.1 mb/d or hundred million barrels in Q1 2021. As demand picks up later in the year, if OPEC maintains restraint, we could see even higher stock withdrawals.

US Treasury yield curve has steepened further in the last month as long-dated Treasury yields have risen on account of rising inflation expectations. 10-year Treasury yields have now risen to their highest level since February last year and are hovering just shy of 1.3% (as of 17 February) compared to just under 1.1% a month ago. This is primarily due to rising inflation expectations as long-term real yields have not moved in the same way over the same period. 

Since the start of December, agricultural commodities have made strong gains with the Bloomberg Commodities Subindex up around 13.5% over the period (as of 10 February). A combination of higher consumption and lower stocks has helped lift prices of the sector. Corn prices are trading at multi-year highs. While wheat, soybean and cotton were also at multi-year highs in January, they have given up some gains in recent weeks. Reduced stock projections for all these agricultural commodities bode well for prices.

After a relatively flat month for developed market equities in January, February has started on a brighter note. However, emerging market equities are leading the way outpacing their developed market counterparts meaningfully year to date (YTD). As of 10 February, the MSCI Emerging Markets Index is up around 9% YTD overshadowing the gain of 4% made by the S&P 500 Index over the same period. Chinese equities continue to be a strong driver of emerging markets performance. The S&P China 500 Index, which is diversified across various Chinese share classes, is up almost 14% YTD. (Source: Bloomberg. All returns in USD).

Breakeven inflation rates – which reflect inflation expectations and are calculated as the difference between nominal and real rates – have risen sharply in recent weeks for US Treasuries. Inflation expectations have risen across the entire curve, but the change is even more vivid at the front end. The 1-year breakeven rate has risen from around 2% at the start of this year to over 3.5% as of 10 February. This indicates two things: 1. Markets are expecting a sharp rise in inflation within the next 12 months and 2. Nominal Treasuries which do not provide protection from inflation are coming under pressure. 

Following its short and sharp spike at the end of January driven primarily by speculative trading activity, the CBOE Volatility Index has dropped to around 21 as of 10 February. In February, equity markets have been buoyant due to rising hopes of a pandemic recovery in the coming months as vaccine data continues to lift sentiment. The large US fiscal stimulus introduced by President Biden and currently being debated by the Congress is also raising the expectation of a robust economic recovery in the year ahead.

As of 03 February, the Bloomberg Commodity Index (BCOM) is up around 4.1% for the year. The ongoing recovery in oil prices has put the energy subsector in the lead so far with agricultural commodities in second place. Industrial metals have been relatively flat so far following substantial gains in the second half of last year. Precious metals have been the notable detractors with gold prices falling by around 2.7% in January.