My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

Week Ended August 6th 2021: Strong US jobs report

This past week looked like a sleepy August week in global financial markets until Friday, when the US jobs report – which was strong – upended the US Treasury bond market. Following the jobs report, US Treasury bonds weakened across the board as yields soared, causing the US Dollar to strengthen with knock-on effects into dollar-linked assets like oil (-7.9% W-o-W) and gold (-2.9% W-o-W). Most of the damage in oil and gold occurred following the jobs report, which you can find here. The US added 943,000 jobs in July, and unemployment fell 0.5% to 5.4%, both better than economists had expected.


In the UK, the Bank of England released its policy statement on Thursday, which you can find here. In summary, the BoE left both its 0.1% overnight borrowing rate and purchases pursuant to its quantitative easing programme at £895 billion (which includes £20 billion of corporate bonds), even though growth and inflation have both been higher than expected. There is also a link in the most recent policy statement to the BoE’s economic forecasts, illustrating when it thinks it will begin raising interest rates (3Q22) and then tapering (3Q23).


All said, global equities didn’t flinch at all, with all of the indices I track delivering nice gains for the week. Both the S&P 500 and the STOXX 600 (Europe) closed at record highs on Friday. China also managed to shake off the regulatory concerns that had rattled markets there, delivering a solid 1.8% return W-o-W.

US equity indices were fairly balanced as far as grinding out gains most of the week. The US jobs report moved inflation concerns back (slightly) into the forefront as the more reflation sensitive DJIA gained ground Friday to close at a record high, whilst the inflation-sensitive NASDAQ lost ground, closing off its record high that it had reached the day before. Still yet, the tech-heavy NASDAQ served up the strongest gains for the week when nearly all strategies worked well. Banks were particularly strong last week, perhaps buoyed by strong earnings coming from European banks, too.

I suppose I would be remiss if I were not to mention that Robinhood (HOOD) staged a significant rally after its poor post-IPO performance for a few days, closing the week at $55.01/share (market cap $46 billion). This is well off its Tuesday intraday high of $85/share but well above its $38/share IPO price the week before. HOOD increasingly is behaving like a meme stock, at least if volatility is a measure. And speaking of volatility and risk, the VIX closed Friday at its lows for the week, suggesting that investors are firmly in a “risk on” mode at the moment.


From an earnings perspective, a broad slate of S&P 500 companies reported earnings this past week, with the trend of beating consensus analysts’ expectations continuing. According to #Refinitiv, 87.4% of companies have beat bottom-line expectations, compared to a long-term average of closer to 65%. The forward P/E for the S&P 500 remains around its high of 21.6x. You can read more about the weekly earnings in the Refinitiv report “The Week in Earnings”.

US Treasuries have been trading in a narrow albeit acceptable range since around mid-July. The yield of the10-year UST has been between 1.20% and 1.30% for weeks, and has been flirting at levels through the 1.20% area more recently. However, Friday’s jobs report caused USTs to sell off across the curve, as yields gapped up and the yield curve steepened, both reflecting a more upbeat view on the future.

Stronger-than-expected economic data from the UK and the Eurozone also pushed their government bond yields higher the latter half of the week. Even the JGB, which was nearing 0% at mid-week, weakened and sent the yield back out to 0.03% to close the week.

Corporate credit yields and spreads were little changed in investment grade (BBB), but widened slightly in USD-denominated high yield, with the most pronounced widening occurring in the weakest rated bonds (CCC). However, in EUR-denominated high yield, yields and spreads actually tightened a few basis points during the week, moving the opposite direction of dollar-denominated HY bonds.

As far as safe haven assets, the sell-off in US Treasuries on Friday caused investors to move back into US Dollars as higher yields were on offer in the secondary market. The stronger dollar was partially the culprit behind the sell-off in gold and oil – both dollar-linked – on Friday.

The risk-on attitude which characterised the market this past week not only meant that global equity markets were on a tear, but that safe havens like gold and the Yen lost ground and with US Treasuries. #Bitcoin was another matter altogether, stringing together its second solid week in a row as the benchmark cryptocurrency closed Friday at $42,817 (+6.6% W-oW), its highest level since mid-May. #BTC has delivered an amazing 44% gain in the last three or so weeks, having closed below $30,000 on July 20th. Whilst I discussed the catalyst for the surge in last week’s update, this week brought some collateral benefits from the Ethereum upgrade which occurred on Thursday. As cryptocurrencies aren’t my specialty, if you want to read more, I suggest that you check out this article from #Reuters. Although I couldn’t begin to tell you why cryptocurrencies move the way they do, the fact is that they can no longer be ignored as an alternative asset class so long as investors can live with the volatility and not dwell too much on why they behave the way they do. This week there are a handful of remaining S&P 500 companies (14) reporting earnings as earnings season begins to wind down. The release of economic data for July from many countries will increase this coming week. If last week is any indication, it seems that July data might just alleviate what had seemed to be growing concerns about the trajectory of many large economies, perhaps even resulting in inflationary concerns coming back to the forefront. Overlayed against this are wildcards regarding historically high valuations and the ebbs and flows of the pandemic, especially potential effects of deviant strands of COVID in many counties.


 

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