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 19th 2021 and the Week Ahead

The Week Ahead

  • The US (Thurs) and China (Fri) will release 4Q2020 GDP figures late in the week

  • Plenty more earnings releases are coming – see YahooFinance calendar here

  • Expect sideways to improving bias in risk assets this coming week based on reversal of sentiment early-session on Friday and a slow but effective tilt towards good economic news outweighing bad. I call this an “orderly acceptance of inflation”

What Happened Last Week

  • Aside from employment data in the US, most preliminary economic data (manufacturing and in some cases services) for February in the US, UK, Germany, and the Eurozone) – pandemic-aside – came in stronger than expected, including higher-than-anticipated consumer and producer price increases for January.

  • Better-than-expected economic data + confidence Stateside that the Biden stimulus plan (or a material portion of it) will happen in March, are fuelling price increases of recovery assets / equities (a “reflation trade”) and an increase in government bond yields in the US, the UK, Germany and Japan.

  • Equity market performance last week was mixed but generally flattish on the week. Japan was the outperformed internationally. Amongst the US indices, the DJIA was the only index that was positive for the week, and the star performers YtD – the Russell 2000 and the Nasdaq Composite – were both slightly negative on the week.

  • Earnings continue to come in better-than-expected in the US and Europe, surprising on the upside and providing a foundation for equity price increases.

  • The 10-year US Treasury closed the week to yield 1.34% (+14 bps W-o-W), while the 2-10 year curve steepened further, ending the week at 1.23% (closed 2020 at 0.80%), levels last seen in 1Q2017. Government yields in the UK, Japan and Germany are also trending higher, up 0.50%, 0.08% and 0.28% YtD, respectively.

  • Corporate credit is feeling the effects of higher US Treasury yields, at least in the BBB area. High yield has more spread insulation for the time being against the slow march up in US Treasury yields, whilst investment grade (BBB) credit remains vulnerable. This is illustrated in the table below. Spreads are narrower but yields are wider in BBB, pushing the prices of these bonds lower. In high yield, spreads are also narrower but yields are also lower, so the prices of high yield bond have not yet felt the brunt of increasing US Treasury yields. You will note that the yield compression has been most pronounced throughout this recovery (typical in a recovery cycle) in the weakest rating category, CCC.

  • Gold was weaker for the week, continuing its recent trend. The US Dollar was slightly weaker, and the Yen was stronger. WTI oil prices were slightly weaker on the week, in spite of strong economic data and supply disruptions in Texas. BTC hit new all-time highs, surging above $55,000/BTC1.00. The price has nearly doubled since the end of 2020.

  • Speaking of #BTC, one of the most interesting interviews I listened too last week was NYU professor Nouriel Roubini discussing his views on Bitcoin on Bloomberg Surveillance, and this 10 minute clip is absolutely worth watching (YouTube link here).

 

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