Week Ended Feb 5th 2021 and the Week Ahead
What Happened Last Week
Let me start by saying that things can certainly change quickly in the course of a week. The drama around GameStop (and peers), Robinhood and the Reddit WallStreetBeats crowd more or less played itself out this week, not ending well for retail investors, many shorts (like Melvin Capital) or Robinhood. Perhaps the final chapter has yet to be written on this strange sequence of events, but at least this topic moves off the headlines for now so investors can focus on things that matter more in the long term.
Equity markets were one directional last week, with only a brief hiatus mid-week, as they roared forward with conviction. Better-than-consensus earnings in many cases added fuel to the fire (see Refinitiv update regarding last week’s earnings here), stoked further by positive news on the trajectory of COVID-19 / rollout of vaccines and concurrent economic data that is – for the most part – beginning to back up the expected recovery that should occur alongside the pandemic easing. In the US, the S&P 500, NASDAQ Composite and Russell 2000 all closed at record levels on Friday. Small / mid-caps continue to outperform reflecting an ongoing tilt towards value. The Russell 2000 has outperformed the other US indices, including the NASDAQ Composite, by a fairly substantial margin over the last six months. Globally, the FTSE 100 again finds itself in familiar territory as the laggard as its recent momentum begins to fade – I’m not sure I can explain why.
The economic news was generally positive this past week, aside from a disappointing US jobs report for January which did little to dent investor optimism on Friday after its release. Perhaps this was because Democrats used their Senate majority to pass a budget blueprint the night before backing a Biden-sponsored $1.9 trillion stimulus plan, setting the stage for a large stimulus package to become law in a matter of weeks. Having said this, renowned economist and current Harvard professor Larry Summers wrote an insightful opinion piece in The Washington Post on Friday (here) arguing that the proposed Biden stimulus plan was too large and not appropriately targeted. The article also discusses the risk of higher-than-expected future inflation, a topic I presented in my blog earlier this week (see “Inflation”). Mr Summers’ article is an excellent read and is from an accomplished economist with decades of experience.
In the UK, the Bank of England became the last of the four major central banks to provide an update on its policies and outlook, reiterating that it would not take short-term overnight borrowing rates negative. This, alongside a more optimistic economic outlook for the UK, caused a relief rally in Sterling (which had been weakening beforehand). You can find the BoE Monetary Policy Summary from Feb 3rd here.
As optimism grows on the vaccine rollout and concurrent economic recovery, risk assets and other recovery asset classes are rallying. Oil is continuing to increase in price (+9.2% w-o-w, $56.98/bbl), as OPEC holds the line and future demand is projected to increase. The yield on the 10-year US Treasury continues to creep up, closing at 1.19% on Friday, and the UST yield curve continued to steepen (2-10 year USTs at 110bps, 10bps wider on the week), signalling expectations of an economic recovery ahead. In the corporate bond market, spreads were tighter and yields lower (i.e. prices higher) in high yield, with lower-rated bonds (CCC) – the least sensitive to increasing UST yields – showing the most improvement. However, investment grade rated (i.e. BBB) corporate bonds had slightly tighter spreads but higher yields (lower prices), reminding investors that credit spreads on investment grade bonds are so tight that they will inevitably be vulnerable to increasing US Treasury yields. Gold weakened (-2% w-o-w), and even fell briefly below $1,800/ounce, influenced more by the combination of higher UST yields and risk-on sentiment than future inflationary concerns. Both the US Dollar and the Yen strengthened.
The Week Ahead
There are a number of companies worth watching that release earnings in the coming week, including Disney, Coca-Cola, Pepsi, Softbank, AstraZeneca, TOTAL, Uber, GM and many others (see here). With all of the world’s major central banks having now released policy statements that they intend to stand firm on their accommodative policies, all eyes are likely to be on the evolution of the mega-US fiscal stimulus plan as it works its way through the various channels of requisite approval. My assessment is that the equity markets globally will be supported by improving economic news, as well as positive news on the pandemic as vaccines continue to roll out and winter turns into spring. This is likely to be accompanied by another dose of mega-fiscal stimulus in the US. Reflation and value trades will therefore remain in vogue, although a number of larger companies – tech and non-tech alike – have delivered solid numbers and will continue to be well-supported, too. Inflationary concerns will undoubtedly become more relevant, and as a result, US Treasuries are not where you want to be invested at the moment. Although I can’t imagine high yield prices going much higher (meaning yields tighter), this asset category remains a decent placeholder as we see how things unfold in the coming weeks. I would include high yield (floating-rate) leveraged loans in this category, too, because unlike (fixed-rate) high yield, they also offer inflation protection by virtue of their rate basis.
COVID-19 Progression Table
The Johns Hopkins COVID-19 website is here. New cases and deaths from COVID-19 continued their slow decline last week, with 3.2 million new cases reported (vs nearly 4 million new cases the week before) and 92,627 new deaths (vs 98,383 deaths the week before).
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