The economic data released this past week in the world’s two largest economies – the U.S. and China – was solid, illustrating what lies ahead for the global economy in the post-pandemic world. Global equities rallied into this strong data. Bucking recent concerns over the robust recovery being inflationary, US Treasuries also rallied most of the week as yields fell and then stabilised. Of course, keep in mind that there would ordinarily be a positive correlation amongst strong economic data and UST yields. However, in the current environment with the Federal Reserve buying government bonds with impunity, the signaling effect of government bond yields as far as future inflation is poor. Since UST yields are influenced by Fed purchases, economists will likely focus on component data like PPI, CPI, retail sales and other monthly economic indicators to get a better feel for inflationary forces as they increase in the economy. That’s one explanation of why yields did not increase, with the other being that the UST market simply was oversold the past few weeks. In any event, the knock-on effect in the equity markets of stable UST yields was that technology and other higher volatility equities, which were under severe pressure in February and March, joined in the week’s rally.
A number of US banks released earnings during the latter half of this past week, and the earnings were generally very strong. Even so, bank stocks were under pressure because of some underlying sub-trends, the most bothersome to me being tepid loan demand. I intend to write more about bank earnings / trends in the coming days in emorningcoffee.com. The direct listing of Coinbase mid-week stole a lot of investor and media attention the first half of the week. I wrote about this very interesting company in emorningcoffee.com in an article you can fine here. The question I keep asking myself is how Coinbase can be worth the value that investors are ascribing to it? I suppose this isn’t any different than valuing cryptocurrencies (impossible) or some of the money-losing high flyer technology stocks, which seem to go up in value the more money they lose. Many of these companies have never made a profit, and at least Coinbase doesn’t fall into this category because the company is minting money with the current prices of cryptocurrencies and related trading flows. I keep coming back to the fact that the incredible amount of monetary and fiscal stimulus flowing from the Federal Reserve and the US government, respectively, is creating asset price appreciation which could turn into a series of bubbles, including equities. When will we know this? Probably not until it is too late and the bubble has burst. Exactly when this might happen is likely further out than we care to think about at the moment. The difficult task of the Fed having to navigate the gradual withdraw of liquidity from the economy in a very careful manner is an obvious inflection point, although Chairman Powell certainly seems very relaxed about this now.
Let’s turn to the markets. Stocks rallied most of the week, with the DJIA and the S&P500 hitting new all-time highs day after day.
The NASDAQ Composite has now clawed back much of its mid-February to mid-March losses, finally climbing again above 14,000 (close 14,185) for the first time since February 16th. In fact, all of the US indices did well last week with no real rotation plays occurring. The Asian markets were the worst performers globally last week. The Chinese equity market remains in the red for the year in spite of very strong GDP, as the economy delivered 18.3% 1Q21 GDP growth (Y-o-Y), more or less in line with expectations, with retail sales being a keep contributor to the strong growth (although keep in mind that this growth calculation is vis-à-vis the pandemic-effected 1Q20). To perhaps better put this in perspective, 1Q21 GDP vs 4Q20 GDP (Q-o-Q) in China was only 0.6%. I would be remiss not to mention the European equity markets. The FTSE 100 climbed above 7,000 for the first time since February 2020 (pre-pandemic period), whilst serving up the best performance of the week with a return of +1.5%. The European equity markets also continued their slow and steady improvement in performance, delivering a nice 1.2% return for the week. One thing that looks evident is that the value trade outside of the US into cheaper foreign markets remains decidedly on.
As with equities, corporate credit has also benefitted from a stronger UST market. Spreads on investment grade and high yield bonds held steady this week although yields fell because US Treasury yields decreased. Both IG and NIG bond yields improved 7-8 bps this week, whilst European high yield bond yields held steady. Interestingly, due to the difference in yields between US Treasuries and German Bunds, the yield on BBB-rated US$-denominated bonds (investment grade) and Euro-denominated high yield (non-investment grade) bonds is almost the same, with yields on both hovering around 2.38% at the end of the week.
As mentioned already, US Treasuries brushed aside strong economic data and were stable much of the week, although Friday saw a slight sell-off. Still, the yield on the UST 10-year improved 8bps W-o-W, and the yield curve flattened slightly. It is hard to say if this trend will continue. The tug-of-war between pressure on yields related to strong economic data (potentially inflationary) and the Federal Reserve gobbling up US Treasury bonds, artificially suppressing yields, will inevitably continue. Government bond yields were mixed elsewhere, with the German 10-year bund yield increasing 2bps, whilst yields on both Gilts (UK) and JGBs (Japan) were slightly lower on the week.
Gold and the Yen both strengthened on the week, whilst the US Dollar continued to trade in a narrow range with a bias towards weakness. WTI crude recovered nicely after several weeks of being under intense pressure, ending the week at $63.07/bbl, +6.3% W-o-W.
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