Weekly Market Insight

Weekly Market Insight - 25th May 2021

24th May 2021

Irish hotel bookings improve with consumer sentiment, equity markets endure another choppy week and has the cryptocurrency bubble just popped? All these stories and more are covered in this week’s insights update from BlackBee.

Economy

Internationally the main focus last week was on the US Federal Reserve’s April meeting minutes with investors nervously looking for any signs that accelerating US inflation could cause the Fed to change its monetary policy. What they appeared to get was the status quo…….for now. The minutes acknowledged that loose monetary policy was still required for the time being but also that “it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.” Our take on this is that were the Fed’s guidance on monetary policy to change over the next few months, it would be gradual for fear of a repeat of the ‘taper tantrum’ episode in 2013 (see our Chart of the Week) which caused a doubling in bond yields.

Elsewhere we saw some other familiar themes – UK April inflation doubled to 1.5% showing that the big US inflation increase from the previous week wasn’t a once off. Assuming oil prices even stay at their current levels, it will probably be early 2022 before the oil ‘effect’ on inflation readings around the world begins to fade. The divergence in economic performance around the world was also visible last week in Japan with GDP contracting by 1.3%, not helped by a slow rollout of COVID vaccines thus far.

In Ireland the Ulster Bank Construction PMI for April showed a big jump to 49.3 from 30 in March, showing how quickly Irish construction activity rebounded following the reopening of the economy. We expect this PMI reading to move higher over the next few months as activity in the sector further ramps up. Irish consumer confidence also rose strongly in May to its highest level in nearly two years, again boosted by the reopening of the economy.

Equities

Equity markets endured a choppy period last week. On the plus side, Q1 earnings reports continued to support the market. The reporting season is now drawing to a close but as of mid May Q1 2021 US earnings had risen over 50% year on year, the strongest annual earnings growth rate since 2010. However bullish sentiment was hit by the gyrations in the crypto space which saw some cryptocurrencies experience losses of over 20% in the week, mainly prompted by a warning from the Peoples’ Bank of China about accepting digital coins as payment. The continued Israel-Palestine conflict also kept equity market bulls under wraps although this eased on foot of a ceasefire announcement late in the week.

Bonds

In the sovereign bond space we saw little change in yields last week. Although the Fed’s April minutes and further reports of rising inflation rates could be seen as a negative for bonds, sovereigns were slightly firmer on the week – likely helped by the geopolitical turbulence in the Middle East. Performances in the riskier parts of the bond market were mixed. Corporate and high yield bonds were slightly weaker, likely not helped by the increase in equity market volatility however emerging market bonds bucked this trend

Commodities

On the whole commodities were weaker last week with oil the main culprit dragging broad commodity indices lower. In the oil market it was a case of fundamentals trumping geopolitics. Crude weakened over the week primarily on speculation that the US could lift economic sanctions on Iran, thereby allowing Iranian crude to hit international markets again after a near three year absence. Elsewhere gold strengthened slightly, helped by the Israeli-Palestinian conflict and the gyrations in the crypto space which was a reminder to investors (if it was ever needed) just how secure bullion is as a store of wealth.

Sector News:

Hospitality – Improving consumer sentiment reflected in increase in hotel bookings. 

The improving trend in Irish consumer sentiment of late continued into May as KBC’s consumer confidence reached its highest level since June 2019. The jump in sentiment was again driven by an improving employment outlook as the economy reopens and by a stronger spending outlook as household finances improve. We saw evidence of the latter development come through in survey results published last week by the Irish Hotels Federation. The results showed that forward occupancy for July and August 2021 now stood at 31% and 27% respectively, up from 23% and 21% prior to the government’s recent easing of restrictions.

Commercial Property – Pent up demand and job creation bodes well for office market.

CBRE’s latest office market research update highlighted again that leasing activity in the office market has been subdued so far this year given COVID restrictions. Although the lockdown has boosted pent up demand for space and the report noted that enquiry levels have increased while recent job announcements also bode well for the return of the office in the near future. Lisney’s first quarter update, mirrored some similar trends in the CBRE report but also saw steady occupier demand in Cork with several potential occupiers from the public, health and technology sectors having active requirements for space. In Dublin, the technology sector is expected to remain the key source of demand, with the report noting that it accounted for 29% of takeup in the year to the end of March 2021. Occupier demand from the Foreign Direct Investment space is expected to remain hampered in the short term as a result of ongoing travel restrictions but could improve as staff gradually return to offices. We also saw some hard evidence of the demand for office property last week. The Irish Times reported that French property company Corum Asset Management, on behalf of its fund Corum XL, has agreed to buy the NSQ1 building at the Navigation Square Development in Cork City Docklands with the deal understood to be in the region of €60m.

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