Equity markets edged higher over the month. Growth stocks generally underperformed with the technology-heavy NASDAQ index posting a negative return. Investors remain focused on the threats of a vaccine-evading variant and the potential for tighter monetary policy to short-circuit the equity bull market. Both threats receded slightly during the month with vaccinations accelerating and bond yields stabilising.
The Bank of England became the second major central bank to announce it was going to slow the pace of its asset purchase program. Bank officials were at pains to emphasise that the targeted stock of purchased assets would remain the same and the stance of monetary policy was unaffected. Whether this constitutes tapering, or not, is a question of semantics. Either way, the decision represents the first stage in an eventual tightening of policy. In response, GBP rallied against both USD and the Euro. The ECB meanwhile has recently accelerated its rate of bond buying under its Pandemic Emergency Purchase Programme (PEPP). With the economy rapidly improving as the number of vaccinations steps up, it will likely come under pressure from the ‘hawks’ to slow purchases. The Federal Reserve reiterated its determination to keep policy accommodative and, despite the US economy growing 6.4% in 1Q21, is arguably the most dovish of the main central banks.
As economies recover, central banks face a delicate balancing act as they withdraw stimulus. The paradox of QE is that the more successful policymakers have been in encouraging investors to purchase riskier assets, the more difficult it is to ‘normalise’ policy without a significant dislocation in markets. As Gertjan Vlieghe, an external member of the Bank of England’s Monetary Policy Committee noted, ‘What will ultimately tell us to what extent inflation pressures need a monetary policy response is the passage of time.’ Despite ongoing tension between markets and policy we feel this is more likely to be a 2022 issue for equity investors.