(Bloomberg) -- A world-leading vaccine campaign is bringing U.K. markets back to life.With one in three adults receiving at least one shot, Prime Minister Boris Johnson has just set out a roadmap for lifting lockdown -- giving cross-asset bulls fresh ammo.Among the biggest moves of late: The pound has rallied faster than any other major currency this year. U.K. stocks have been generating outsized gains in dollar terms. Companies have been enjoying a borrowing bonanza that’s looking historic.For many investors who fled in the aftermath of the 2016 Brexit vote, buying Britain looks like a safer bet today.“We refrained from being overweight U.K. equities for many years as it has significantly lagged other regions ever since the Brexit referendum,” said Michael Herzum, head of macro strategies at Union Investment in Frankfurt. He’s now buying the FTSE 250 while selling the Eurostoxx Index.Here’s how the catch-up trade is playing out.Currency SupremacyAs the country delivers one of the fastest immunization programs in the world, the pound is one of the hottest trades in currency markets -- gaining around 2.5% against the dollar this year.Just last week, it breached the $1.40 threshold for the first time since 2018, while surging to the strongest versus the euro since the depths of the pandemic panic last March.The sterling rally may now have fresh legs, as the U.K.-euro area monetary path diverges.“Rates markets are starting to price in a future decoupling between the ECB and the BOE policy outlook, helped by the BOE effectively killing market speculation on negative rates,” said Valentin Marinov, head of G-10 currency research at Credit Agricole.The yield on benchmark U.K. bonds has also risen faster than European peers and U.S. Treasuries in 2021, as markets price in a strong economic rebound and rising inflation expectations.Another gauge of the business cycle signals more good news. The nation’s yield curve -- as measured by the difference between the rates on five and 30-year debt -- is the steepest since 2018 led by moves in longer maturities.FTSE FansEven U.K. stocks are finding more love these days. For years billions have fled the Brexit-lashed market -- dubbed the least-loved region in the world.Now, negative bets are on the wane, according to this month’s Bank of America Corp. survey. A net 10% of respondents have bearish positioning compared with 34% three months ago.Sentiment is following price. While the FTSE 100 is lagging the Stoxx Europe 600 Index this year, on a dollar basis the index is besting a slew of companion gauges in the region.The rise in the British currency has been driving the outperformance of the more domestically exposed FTSE 250 against the exporters-geared FTSE 100 since the market bottom in March 2020.And there may be more juice left in the rally yet with valuations that are cheaper and dividend yields higher than global peers.Borrowing BonanzaAll this is helping U.K borrowers. At 3.8%, the average yield on sterling junk bonds, an indication of borrowing costs, is hovering near all-time lows.That’s pushing sales of corporate bonds in sterling to the fastest annual start in five years. Supermarket chain Asda Group Ltd. showed market hospitality for U.K. risk this month, pricing the largest-ever corporate bond in the British currency at 2.25 billion pounds ($3.15 billion), as part of its buyout financing.Sterling junk debt offers a yield pick-up of almost 180 basis points after currency-hedging costs are taken into account and have outperformed peers in Europe -- a selling point for investors outside the country.“A Brexit deal and the vaccine success means a lot of investors are starting to revisit,” the U.K. market, said Nicolas Trindade, a portfolio manager at Axa Investment Managers, which manages 758 billion pounds ($1.1 trillion).It’s a different story for investment-grade securities that are more prone to rate risk than their euro counterparts. The longer average duration on sterling corporate debt means it suffers as gilt yields rise -- for investors that’s inflicted the biggest year-to-date loss since 2008.(Updates with U.K. plan for economic reopening in second paragraph)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
(Bloomberg) -- A vaccine-fueled economic recovery and investors’ surging appetite for risk mean that the European equity rally can keep going in 2021, according to strategists.After strong gains since the start of the year, the bull case for Europe has now partially played out. Still, on average, the 21 strategists surveyed by Bloomberg are positive on European equities, seeing about 2% upside for the Stoxx Europe 600 Index this year, and nearly 3% for the Euro Stoxx 50, compared with Tuesday’s close. The biggest bear in the poll sees the Stoxx 600 falling less than 5%.European equities have been enjoying a rally in February as a combination of vaccine progress and generous stimulus measures push the Stoxx 600 near the record high set just before the Covid-19 selloff a year ago. Value and cyclical sectors, such as banks, commodities producers and travel companies, have been leading the reflation trade-driven advance, with the likes of JPMorgan Chase & Co. predicting that the market has more firepower for the rest of this year.European stocks are highly correlated with the economic rebound, and “we are about to enter the period of growth acceleration,” JPMorgan strategist Mislav Matejka, who sees the Stoxx 600 gaining about 7% by the end of 2021, said in emailed comments. Moreover, “policymakers are unlikely to start withdrawing excess liquidity any time soon,” he added.‘Roaring Twenties’If the broader European stock market could see limited upside, most strategists predict a leadership switch from shares of companies with the fastest growth to those that are cheap relative to earnings or book value. Financial and energy shares, which together account for about 20% of the Stoxx 600, are tipped to be the main beneficiaries.“Expect dispersion of performances to keep growing,” said Stephane Barbier de la Serre of Makor Capital Markets SA, the most bullish strategist in the survey. Financial, oil and gas and basic resources equities will lead returns, he said. The strategist sees an analogy to the “Roaring Twenties” a century ago, when the world came out of the Spanish flu pandemic with a strong economic rebound. He expects double-digit gains for European equity indexes from here through the end of the year.The Stoxx 600 and the Euro Stoxx 50 are both up almost 5% in 2021, a pace that would lift the benchmarks by about 41% for the full year. This performance is similar to that of the S&P 500, with strategists on average forecasting that the U.S. gauge can rise 3.6% by the end of the year. In comparison, the MSCI Asia Pacific Index has beaten both European and U.S. benchmarks, jumping 9.4% in 2021 on management of the Covid-19 crisis and as China’s economy recovers.European stock prices have been rising much faster than earnings expectations, which have yet to recover from the pandemic hit, taking valuations to record levels.But for those worried about lofty multiples in the European equity market, JPMorgan’s Matejka has a clear answer.“Valuation multiples are elevated, but they are unlikely to derate during the phase of strong growth and earnings momentum, and the flow will continue to favor rebalancing towards reflation trades,” he said. One risk to watch is the scaling back of accommodative policy, Matejka added, but for that policymakers will need to see some “full-blown overheating in the real economy,” which is still far away, he added.The range of the survey’s forecasts shows a positive risk-to-reward dynamic, with the most bullish strategist, Makor Capital’s Barbier de la Serre, seeing the index ending the year 13% higher, while the most bearish Stoxx 600 prediction, from TFS Derivatives’ Stephane Ekolo, implies only 4.6% downside.“I’m not bearish but I’m cautious,” Ekolo said by phone, seeing a decoupling between fundamentals and performance. “Market participants are being too complacent and buying into the global economic recovery narrative, even though loads of bankruptcies and rising unemployment rate should be expected,” he said, adding fast-rising yields will have a detrimental impact on indebted companies and on the overall market.Among professional investors, the overall bullishness shows no sign of abating, with fund managers taking more risk than ever, according to a Bank of America Corp. survey. European portfolio managers are even more bullish than strategists on the region’s stocks, with 9.5% upside seen in European equities by the end of the year on average.For tables on the Euro Stoxx 50 and Stoxx 600 polls click here; for a table on the DAX poll click here, for a table on the FTSE 100 poll click here.(Updates with global indexes’ performance in seventh paragraph)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
(Bloomberg) -- U.S. Treasury yields rose to the highest since February 2020 and are at risk of climbing further, as investors start to factor in the full economic impact of a stimulus plan totaling as much as $1.9 trillion.Rates on 10-year notes, a benchmark for global borrowing, eclipsed their peak from the March market pandemonium, reaching 1.31%. The selloff extended across developed-economy debt markets, gaining momentum as the U.S. House leadership laid out a plan to vote by month-end on President Joe Biden’s aid proposal.The fixed-income losses are generating the worst start to a year since 2013 for a gauge of global bond performance. Investors are buying into signs the world’s economy is moving toward a recovery from pandemic-induced shutdowns, prompting asset managers to ditch bonds for stocks. The tumble in Treasuries could be about to accelerate, with strategists saying mortgage-related hedging may kick in if yields rise much higher.“The move up in nominal yields, driven by real rates, suggests that upside risks to growth and supply -- given greater chances of a package as large as $1.9 trillion -- are getting priced in,” said TD Securities strategist Priya Misra. Moreover, “the move can continue for now because real rates are still near historic lows.”The 10-year real yield -- which strips out inflation and is seen as a pure read on growth prospects -- climbed to minus 0.93%, the highest in about a month.Tantrum RiskFor Misra, the selloff could get unruly, resulting in “a tantrum without the taper,” unless Federal Reserve Chairman Jerome Powell leans against the move in an appearance scheduled for next week. She was referring to the 2013 taper tantrum episode, in which former Chairman Ben Benanke’s hint of an early paring of bond purchases jolted yields sharply higher.Investors also had rising energy prices on their radar. A key market proxy for 10-year inflation expectations reached the highest since 2014.Amid the action in the U.S. session, the climb in 10-year yields was met by widening swap spreads -- as volatility hedging and hedging of mortgage-related positions appeared to be magnifying the Treasuries selloff. Hedging of mortgage bonds, often known as convexity hedging, could materialize if 10-year Treasury yields continue to rise past 1.30%, according to TD.Read more: Taper Tantrum to VAR Shock: When the Next Bond Rout Is ComingNone of this is welcome news for those who bought into U.S. auctions last week. Investors snapped up a combined $68 billion of 10- and 30-year debt at yields more than 10 basis points lower than current levels. This week brings a $27 billion 20-year bond auction on Wednesday.In the U.K., 30-year yields hit the highest level since March after the country hit a milestone in its vaccination program, supporting calls for easing of social restrictions. Germany’s benchmark yield climbed to levels last seen in June.“There’s a great deal of optimism in the air and that’s one of the biggest reasons we’ve seen this rise in interest rates in the U.S. and globally,” said Tom di Galoma, managing director of government trading and strategy at Seaport Global Holdings. “We’re trading the likelihood that a large stimulus package is coming, the vaccination trend seems to be working in the U.S., and Europe is seeing a lot of positive signs on vaccinations and reopenings.”Over the next two to three weeks, the 10-year yield should climb to around 1.36%, its 2016 closing low, he said. That’s one of the few meaningful technical levels left on the way to a 1.56% mid-year target, according to di Galoma. Meanwhile, he sees the 30-year yield rising to 2.15% during the same period, with a mid-year target of about 2.4%, a level last seen on a closing basis in 2019.(Updates yields.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.