The distractions of the tanker Ever Given blocking the Suez Canal and the forced liquidation of Archegos Capital Management (see my article in emorningcoffee.com here) faded early in the week, giving way to some fairly positive economic news that moved to the forefront of investors' minds. Improving investor sentiment was further stoked by President Biden’s infrastructure spending plan that he outlined on Wednesday, illustrating that mega-stimulus is far from over even as the pandemic ever so slowly starts to wind down, hopefully for good in the coming months. This combination of fading concerns and positive economic news was enough to push the S&P 500 to a record high close on Thursday to end the holiday-shortened week, as the index closed above 4,000 for the first time ever. In fact, it was one of the weeks where you really had to try hard to have not made money since everything - stocks (globally), corporate bonds, oil, the US Dollar, Bitcoin, etc. – was better bid. Even gold was almost positive although not quite, an achievement when a safe haven asset can hold its own with most market risk indicators pointing towards a “risk on” attitude. After gapping on Monday, US Treasuries settled down with yields trading in a narrow range most of the week albeit around recent highs, although US payrolls on Friday – which came in much better than expected – pushed yields on USTs a few bps higher. Unlike the US Treasury market, the US equity market was closed on Good Friday. Even so, the strong payrolls report for April (see BLS report here) seemed more favourable for risk assets than harmful for yields driven by inflationary expectations, as US equity futures displayed satisfaction with the recovery in the US as the economy continues to gain steam. As you can see from the table below, value was the star performer for equities in 1Q21, and the high volatility markets were the weakest performers. By “value”, I am referring to less expensive foreign markets, like the Japanese and European equity markets, and in the US to the Russell 2000. The laggards in 1Q21 were the Chinese equity market and the emerging markets, and – in the US – the once high-flying Nasdaq composite. Even so, all equity markets aside from the Shanghai Composite registered positive performance for 1Q2021.
In the corporate bond market, both credit spreads and yields were a few bps tighter in both investment grade and high yield, as credit markets surprisingly continue to hold their own even as US Treasury yields remain under pressure. Yields on government bonds widened early in the week, reclaimed some of the yield increases on Thursday as stocks rocketed forward, but increased again Friday following the payrolls report. Overall, we are seeing more of the same as US Treasuries slowly but surely sell-off as the US economic recovery takes shape. Government bond yields were also slightly wider in the U.K., the Eurozone and Japan, too, so the expectation of a post-pandemic recovery has roots in all developed markets.
Oil stabilised and recovered slightly last week, partially helped by OPEC+ agreeing to only slow increases in production over the next three months. It is hard to foresee anything other than upward pressure on oil as the global pandemic fades in due course, with the risk being that one or more of the world’s major oil producers (including OPEC+) starts to dump oil. It has been anything but a smooth ride for oil in 1Q21. The price of gold fell ever so slightly last week, even as risk sentiment improved towards the end of the week, as this safe haven asset continues its tug-of-war between inflationary pressures (bullish for gold) and improving risk appetite (bearish for gold). The US Dollar strengthened further as investors look favourably on both higher yields in the US and the momentum toward economic recovery. The Yen continues its slide, and Bitcoin rediscovered its mojo surging nearly 10%on the week, topping $60,000 again intraday on Friday.
The Week Ahead I see nothing particularly transformational in the week ahead that is not factored into markets. Sentiment might hit speed bumps from time to time but should continue to improve as the global economy creeks back open, led by China and the US. Treasury yields will remain under pressure as the IS economy strengthens. Recovery plays and value should lead the way. Companies benefiting from a recovering economy, higher interest rates and / or higher inflation should continue to be the relative outperformers.
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