It was a lacklustre week as far as major moves in financial asset prices, with a negative bias persisting most of the week. US equities took a hit Thursday afternoon as President Biden’s tax plans leaked out before the close, but all was good again on Friday as US equity markets rebounded sharply, turning in their best daily performance of the week. Economic data continues to trickle in and remains solid, confirming the ongoing recovery in most developed economies. In the US, jobless claims were better than consensus for the second week running, hitting a 13 month low (DOL press release here). This comes against a backdrop of 17.4 million Americans still collecting unemployment cheques. Existing home sales plummeted though in March, reflecting the dual-effects of higher prices and an acute (and growing) shortage of available inventory. New home sales were another matter, reaching the highest level of sales in March since 2006, boosting a market that was already heading higher on Friday morning.
Outside the US, the ECB released its Monetary Policy Decision on Thursday (here), with no change in either the short-term bank borrowing rate or the amount of its quantitative easing programme. ECB President Christine Lagarde was cautious as the central bank remains concerned with the economic recovery in the Eurozone but sounded slightly more positive as far as the second half of 2021 as Europe finally gets its vaccine programme on track. This slightly more constructive tone caused German bund yields to widen a couple of basis points, and the EUR to strengthen against the USD. President Biden headed a virtual climate summit on Thursday with most world leaders attending, followed by a Bloomberg-sponsored virtual conference on Friday featuring Treasury secretary Yellen and ECB President Lagarde focused largely on climate. However, as noble (and positive) as these causes are, they were overridden Thursday afternoon by the revelation that that Mr Biden is considering a significant increase in the capital gains tax in the US to help fund his infrastructure spending programme and other social initiatives. President Biden has not been shy about saying that he would raise taxes, but until now, the hope was that capital gains would be spared. It turns out that capital gains are very much on the table although it remains to be seen if an increase could find its way through Congress.
79 additional S&P 500 companies released their earnings this past week, with most delivering solid numbers and earnings beats. NFLX (-6.9% W-o-W) arguably raised the most concerns mid-week on its post-release press conference raising concerns regarding slowing subscriber growth, and KMB also disappointed on Friday as sales plummeted around 10% (organic) and earnings missed analysts’ consensus expectations, potentially signaling the end of pandemic-driven uplift in the sales of consumer products. The stock was down 5.1% W-o-W. Even though NFLX and KMB disappointed, most companies continue to report strong results, a prerequisite to justify the high valuations which currently characterise the market. Revenues and earnings are expected to increase 9.9% and 33.9%, respectively, in the 1Q21 vs 1Q20, according to Refinitiv. You can find Refinitiv’s weekly earnings update for the S&P 500 here.
This week there are an additional 180 S&P 500 companies reporting earnings, including the remaining FAANG+M stocks. Here’s a summary of some of the bigger names reporting:
Mon: TSLA
Tues: Pre: UPS, GE, HAS, LLY, BP, WM, SHW, FISV, JBLU. Post: MSFT, AMD, PINS, GOOGL, SBUX, V
Weds: SHOP, BA, SPOT, YUM. Post: AAPL, FB, F, TDOC, EBAY
Thurs: MCD, RCL, MA, CAT, KHC, MRK. Post: AMZN, NIO, TWTR
Fri: XOM, CLX, AZN, CVX, CL, GT
Equity markets in developed markets were generally down, ranging from -2.2% in Japan as another wave of COVID-19 sets in and the government reacts, to -0.1% in the US (S&P 500), saved by Friday’s rally. The Chinese equity market, the worst performer YtD (flat), was the best performer last week (+1.4% W-o-W).
In the US, the DJIA was the worst performer of the week (-0.5%), and the small/mid cap dominated Russell 2000 was the best performer (+0.4%), the only US stock index up on the week. It is difficult to read into this, but it might suggest that value is back on the table, as the NASDAQ continues to be burdened by valuation issues and the DJIA might be signalling diminishing returns on the reflation / cyclical theme. The VIX closed at 17.33, not much changed on the week as volatility ebbs out of the market.
Government bonds were largely stable around the world. The yield on the UST 10-year closed 1bps tighter (1.58%) to end the week, whilst the 2-10 year yield spread also fell 1bps. The 10-year has retreated from its late March highs (1.74% March 31st) and has been trading in a relatively narrow range (1.55%-1.60%) since mid-April, bringing some relief to the market as inflation concerns continue to diminish. As an aside, there has been a negative knock-on into US bank stocks, something I wrote about mid-week in an article you can find on my website here: “Banks – Now What?”
The US Dollar was weaker whilst Yen strengthened, both extending recent trends. Gold was down slightly. WTI crude closed the week at $62.14/bbl, down1.5% W-o-W. The action as far as alternative assets was in the crypto-currency space, with Bitcoin (at the time I am writing this) down 17.3% W-o-W, touching a low for the week on Friday morning of $47,815 before bouncing back. Recall that Bitcoin hit an intraday high of nearly $65,000 less than two weeks ago, a reminder of the volatility in this asset class.
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