The second quarter of the year started with robust economic data out of the United States – the unemployment rate dropped to 6%, and the economy added 1.7 million new jobs in Q1 2021. As a result, the markets celebrated by sending the S&P 500 to a new all-time high.
Vaccination efforts around the world start paying off. Over the last weekend, the U.S. inoculated eight million people, and Europe also increased its vaccine rollout efforts. Therefore, better economic data is expected in the second quarter – but with what effect on different financial assets?
Stock market indices are close to all-time highs in the developed economies. The Dow Jones trades comfortably above 33k points, finding support on every attempt to correct.
The success of the U.S. vaccination campaign is leading the stock market higher, and so does the fiscal stimulus. In the first quarter of the year, the United States government released $1.9 trillion as part of its stimulus program, and more is in the pipeline.
The so-called “American Jobs Plan” is a huge public investment that will further boost the economy. Hence, equities will remain well bid as the easy money keeps coming in.
Other stock markets around the world follow the U.S.’s lead. For example, the Dax in Germany is trading at record highs as well, and all European indices are well bid.
The fixed income market affects all other assets as central banks adjust the monetary policy. The recent rise in the long-term yields in the United States brought unwanted tightening, and the trend is set to continue.
Shorter duration (i.e., price sensitivity of a bond to a change in interest rates) suggests that the yields may continue to rise to 2.1% or even more. Higher yields mean lower bond prices as the economic recovery continues.
Oil and gold rallied strongly in the first quarter of the year. Oil, for instance, had the best start of a trading year in decades.
However, it met resistance above the $60, and the danger is that it will correct in the second quarter. Abundant capacity may lead to a moderation in the price of oil for the next few months.
Gold appears to have formed a double bottom below the $1,700, and the key question now is how big the bounce will be.
The U.S. dollar remains offered on average, despite rallying a bit in the last part of the first quarter. If the reflation theme gains traction in the second quarter, the dollar’s bearish trend will resume.