Finally a dose of reality seems to have set in with last week providing a stark reminder to investors that asset prices aren’t always one-directional, and certainly don’t always up. The reality for US equity investors over the last six months or so is that it has been too one-dimensional and too easy. Every now and then, a dose of reality is probably good medicine to ground investors. For bond investors, it has been another story altogether, with higher yields (again) adding misery on top of misery.
US Data: CPI, PPI, consumer confidence
The first two days of the trading week were rather uneventful for US equities, but the arrival of “hot” CPI data on Wednesday morning before the open (here) led to heightened volatility the remainder of the week. After clawing back some of Wednesday’s 1% decline in US stocks on Thursday following the release of better-than-expected PPI data (here), stocks resumed their declines on Friday, with the S&P 500 closing down 75.65 (1.46%) on the day, capping off a decline of 1.6% for the week. Bonds also tanked on the CPI data mid-week, with yields spiking across the curve. PPI and other data released on Thursday and Friday, including a decline in consumer confidence in March (here), seemed to soothe bond investors and yields settled as bonds managed to claw back some of their losses during the final half of the week. The expectation of an Iranian or proxy attack on Israel also contributed to a recovery in bond prices as investors sought safe havens. Lastly, the VIX – which was below 13 in late March – has steadily risen the last two weeks, peaking intraday Friday above 19 before coming back down to close the week at 17.3, yet another indication of heightened market risk as investors remain jittery.
Currencies and ECB decision
With CPI data hot on Wednesday, the expected number of rate cuts by the Fed this year has now dwindled to two. Meanwhile, ECB President Christine Lagarde more or less confirmed following Thursday’s ECB rate decision (here) that the ECB would likely start lowering rates at the next monetary policy meeting in early June (6th). Together, this information sent the US Dollar higher and the EURO (and most other currencies) lower. This is exactly as I have predicted in that growth in the Eurozone is much weaker than in the US, and this would almost ensure that the ECB would – and should – act first. Attention will turn now to the Bank of England, which is facing a growth outlook worse than the Eurozone. I stick by my original order for monetary policy easing: ECB first, then the BoE and lastly the Fed. The order is reflected in the currency markets more acutely than in other markets, and the signals are clear. The Yen also continues to weaken, and the ramifications for the Bank of Japan are becoming more of a focus point, as the government will likely intervene to try to stop the Yen from weakening even more.
Gold
Normally, higher yields and gold prices are inversely related (since gold offers no current yield to investors). However, bond yields have been increasing now almost since the beginning of the year, and the price of gold has been increasing, too. What does this signal? It is hard to say for sure, but I would go with the two most mentioned reasons by pundits: heightened geopolitical risk (two wars, Middle East on the verge of potentially expanding) and technical factors (central banks perhaps replacing USD assets with gold). Gold briefly surged to above $2,400/oz during Friday’s session, but backed off to close at $2,356/oz, up 1.3% on the week and 14.2% YtD.
FTSE 100
The FTSE 100 briefly pierced the 8,000 level intraday on Friday, reaching a record high of 8,044.98 before falling back to end the session at 7,995.98 (+1.1% WoW). The FTSE 100 was nearly the best performing index EMC tracks last week but was pipped at the end of the week by the Nikkei 225 which was up 1.4%. Although it doesn’t happen often, the FTSE 100 in currently the best performing index tracked by EMC so far in April. Investors are gravitating to the mining / energy-rich index as commodities and oil prices increase.
Earnings
Investors were focused last week on earnings from four companies: Delta (DAL), which provided strong guidance on the coming quarter but got caught in Wednesday’s downdraft; and three large US banks: JP Morgan, Citigroup and Wells Fargo. All three banks beat top- and bottom-line consensus estimates, but all closed down on the day as US stocks fell sharply during the session. JPM suffered the most because it stood by its forecast for net interest margin for the full year which investors did not like since they had apparently been expecting an upward revision. The tally for the week was JPM down 7.4%, C down 3.1% and WFC down 1.6%. (Might be a nice entry point for JPM, although not investment advice etc.)
Next week, we will see three more of the big six US banks report (MS, GS and BAC), along with some non-financial companies including JNJ, UAL, ASML, NFLX (Thurs) and PG. In total, 44 S&P 500 companies report earnings this coming week. Earnings Insight from FactSet provides a nice summary of S&P 500 companies through the end of last week.
MY TRADES LAST WEEK
I sold some shares across several names early in the week for US tax reasons, which turned out to be good timing although admittedly coincidentally so. I also added some scraps on weakness to a few existing positions on both Wednesday and Friday. In fixed income, I bought UST bills with 3- to 6-month maturities to lock in yields above 5%. I continue to shy away from duration – it’s not my thing. Lastly, I added some more downside protection in the form of SPY puts (expire in August and September), costly but a better alternative than cutting my core positions.
THE TABLES
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.
Global equities
US equities
US Treasuries
Corporate bonds (credit)
Safe haven and other assets
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