March saw further economic optimism as COVID-19 vaccination programs progressed well and the scale of fiscal stimulus support became apparent. Business surveys improved in March, with manufacturing expanding strongly in Europe, the US and UK. Surveys of the service sector also showed rising optimism. March ended with the standard US measure of expected growth in services at an all-time high, and almost 1 million new jobs added in the economy, well above market expectations. All these data have led to soaring growth expectations.

These emerging signs of pent-up demand reinforced concerns around rising inflation and the potential for central banks to tighten policy sooner than expected. In the US, the Federal Reserve reaffirmed its belief that any inflation spike will be transitory, and despite higher than target inflation this year, rates will stay low until at least 2023. This firm line eased some of the concerns in markets and helped the S&P 500 to a new all-time high. The UK also performed well as the Budget committed to more fiscal spending and the roadmap for reopening buoyed sentiment.

Conversely, Emerging market equities have had a difficult March, as the US dollar strengthened on economic data, and concerns around the increases in infection rates in the likes of Brazil and India held back key regions. Some of the relative winners of 2020, such as China, are now in a monetary tightening phase and don’t have the same short term bounce-back potential as western economies. As a result, markets have rotated away and held back performance.

March ended one of the worst quarters on record for long dated fixed income assets, as yields spiked and prices sank. While March saw some stabilising in yields, the creep higher and strong growth expectations continued to provide a difficult backdrop for bond investors.