Market snapshot: IAG shares and bond yields both head higher

The British Airways owner has had a terrible year, but bargain hunters are betting on a recovery.

The tantrum in the bond market has inevitably spilled over into equities as the spectre of inflation increases.

Despite the soothing noises of the Federal Reserve, the repricing of inflation expectations is of concern. With excessive liquidity in the system and with the likelihood of a major release of pent-up demand as pandemic restrictions ease, inflation could soon spiral. In turn, this would put pressure on central banks to raise interest rates to quell the rise, affecting corporate lending and, importantly, the US mortgage market.

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At the same time, a higher interest rate environment is usually negative for stocks given the slowing of growth, and it is therefore of little surprise that the likes of big tech have been in the firing line if future growth is to be compromised. The Nasdaq, for example, separately hit by some earlier rotation as investors switched into recovery sectors such as materials and industrials, is now ahead by 1.8% for the year to date, as compared to over 8% just a week ago. 

The other major indices in the US have also pared their gains, with the Dow Jones now ahead by 2.6% and the S&P 500 1.9%. The next few market sessions are likely to be more volatile as the tantrum trade unwinds, while central banks may be tempted to provide further comments or, as in the case of the Reserve Bank of Australia, immediate action to limit the rise in yields.

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The FTSE 100 has unsurprisingly been caught in the crossfire of the latest developments and now stands ahead by 2% in the year to date, also giving up some of the stronger gains seen over the last couple of months. For the moment, prospects of an early economic recovery following an increasingly successful vaccination programme have succumbed to the wider economic concerns a little further out.

Meanwhile, British Airways parent International Consolidated Airlines (LSE:IAG) has reported full-year numbers underlining the extent of the challenges it is facing, both past and present.

The group has highlighted the actions it has taken to preserve cash, boost liquidity and reduce costs in a concerted effort to mitigate a largely unemployed fleet. An increase in Cargo turnover to 1.3 billion euros is of some solace, but uncertainty continues to loom large. 

Quite apart from the debate on whether business travel will return to previous levels, or whether the “Zoom” culture has largely superseded it, the timing of consumer travel remains unclear.

Indeed, there may be a conflict between the consumer’s ability to spend, given a potentially tougher economic environment and higher unemployment as easing unfolds, versus the propensity to travel. Whether consumers rally against higher airline ticket prices and more complicated airport delays given the likelihood of a travel certificate, or even the possibility of self-isolation on their return, remains to be seen.

IAG shares have dropped by 50% over the last year, as compared to a decline of 6% for the wider FTSE 100 index and despite the market consensus of the shares resolutely remaining at a buy on recovery prospects, for the airlines there are no guarantees that a return to normality can be relied upon any time soon.