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 Feb 12th 2021 and the Week Ahead

What Happened Last Week


This past week was more lacklustre than the two weeks before, although the outcome was a slightly more subdued version of the same – unambiguous “risk on”, with asset prices better nearly across the board. We certainly have had some interesting sideshows the past few weeks. Two weeks ago, it was a few retail-driven (also heavily shorted) stocks that fuelled very unusual price volatility. This gave way to a retail-driven run-up in silver the following week, which in turn gave way to a run up (and down) in cannabis stocks this past week (see recently updated article on cannabis in this blog if you want to know more). There’s never a dull moment in this market!


As far as economic news, CPI came out mid-week in the US and was slightly below consensus, coming in at 0.3% M-o-M and 1.4% Y-o-Y, vs 1.5% consensus (see BLS release here).


This benign below-target figure seemed to soothe inflation concerns, at least for the time being, and took some selling pressure off intermediate and longer-term US Treasuries. Further pressure perhaps came off later the same day when Fed chairman Powell, speaking at the New York Economic Club, stressed once again that the Fed would remain accommodative until the employment returned to pre-pandemic levels. Mr Powell also presented the Fed’s belief that the employment situation in the US is much worse than headline numbers suggest, mainly because of workers dropping out of the labour force. If you want to hear the entire 50+ minute discussion, it is available on YouTube.


In the UK, December and full-year 2020 GDP results were released today (BBC article here), and the economy shrank at a record rate of 9.9% for the year, significantly worst than during the Great Recession, and apparently the worst in 300 years.


The table below illustrates equity markets’ performance for the global indices and for the four major US equity indices that I track.


YtD, the star performers have been the emerging markets index and the Nikkei 225 (Japan). The S&P 500 index underperformed the other international indices last week, even though all of the equity market indices ended the week in positive territory. In the US, the Russell 2000 continues to outperform, indicating the on-going appeal of better-value mid and small market cap stocks. The NASDAQ has also done well as the broad rally in tech stocks continues. All four major US indices closed at record highs during the week. Monday is a holiday in the US, and China remains closed through next Wednesday for Chinese New Year.


A number of companies released earnings this past week, with the on-going theme continuing of much higher-than-normal revenue and earnings beats – you can find the weekly Refinitiv update on S&P 500 earnings here.


In credit, there was some discussion on #Bloomberg this week about yields on the high yield index slipping below 4%. I don’t quite see that level from my data, but still yet, the USD high yield according to ICE BofA (via FRED Economic Data) ended Thursday yielding 4.09%, the lowest that I ever recall. Perhaps even more astonishing to me is that the ICE BofA EURO HY index ended the week yielding a mere 2.52%! Given the level of underlying benchmark government yields, this means the US HY spread is 3.50%, and the European HY spread is 3.21%. There is some modest room for further spread tightening, too, although it’s difficult to imagine much movement from these levels. Default data – also important in high yield – remains well inside of normal ranges, so at the moment, any lingering concerns about HY defaults seem to have been pushed aside. If you want current return, then be selective on credits in the B (index yield 4.42%) or CCC (index yield 7.20%) rating areas for the brave at heart, but I still consider the index yields “placeholder only” should you be playing the indices as opposed to specific credits. As I have mentioned in the past, the most vulnerable price action remains in the investment grade (BBB) arena, because these will be the first ones to see negative price action if and when US Treasuries come under selling pressure…..and they eventually will.


As far as other asset classes, gold was slightly better on the week even as inflationary concerns slipped into the background. Both the US Dollar and Yen were weaker. WTI crude oil continued to strengthen, reflecting optimism about the economy in the future as demand improves.


However, the mother-of-all-asset returns continues to be with Bitcoin, which showed a whopping 27% W-o-W and has now returned 363% over the last 12 months. BTC is not for me (certainly at this level), but its one-directional ascent with conviction might make it an asset class that deserves a small allocation in an investor’s portfolio. The FT has a good (albeit long) article about Bitcoin: “’Digital tulip’ or new asset class: Bitcoin’s bid to go mainstream.” US Treasuries were better most of the week, but sold off in Friday’s session, with the 10-year year yield backing up to 1.20% as the yield curve remained steep compared to recent history.


The Week Ahead


There are plenty more earnings releases this coming week, and some economic data that might matter. I read that a record $58 bln of cash flowed into global equity funds last week, and trading volumes have increased to record levels. As nearly all asset classes inflate, there is the on-going question hanging over the markets about whether or not we are in a bubble (or series of bubbles). Perhaps most concerning, the catalyst which will ultimately deflate one or more of these bubbles is far from apparent, making this the most dangerous of times. It all comes back to the old adage that “you can’t fight the Fed”, so until the ever-flowing stimulus begins to abate, it is probably all systems go. For now, earnings are backing up the appreciation in equity prices, and the combination of better default data and simply “nowhere else to go” is driving corporate bond yields to record-low levels. Away from markets, the impeachment trial of former President Trump continues Stateside with an almost certain outcome that matters little to financial markets – it is political theatre at its best. What matters much more is the fate, composition and timing of the next round of fiscal stimulus, which should be decided latest by early March. The risk markets, especially equities, remain priced to perfection, so any earnings surprises will be poorly received.


COVID-19 Progression Table


The Johns Hopkins COVID-19 website is here. New cases and deaths from COVID-19 continued to decline last week, as a combination of vaccines being administered and stay-at-home order being invoked in higher-risk locations having a positive effect.

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