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 July 2nd 2021: It's The Best of Times

Global equity markets traded within a narrow range most of the week aside from a sharp selloff in the Chinese equity market as investors took profits on Friday, following the Chinese Communist party centenary celebrations. Most other asset markets were generally range-bound although US and European indices continue to gently drift higher. Equity markets in the US certainly remain sufficiently constructive to absorb an avalanche of new IPOs. Debut listings from Chinese ride-hailing company Dixi Chuxing and Krispy Kreme Doughnuts were amongst 18 IPOs pricing this past week, the most IPOs in one week since December 2004 (source: New York Times). Beleaguered rental-car company Hertz, which filed for bankruptcy in May 2020 as its business fell to near-nil because of the pandemic, emerged from bankruptcy on Wednesday. The company’s shares – having reached a low of $2 – are now trading around $9/share. Perhaps the most anticipated IPO which is in the starting blocks is for Robinhood, which is reportedly seeking a $40 billion valuation in its initial public offering. The company had around $1.4 billion of revenues for LFQ ended 3/31/2021 and has never made a profit but gained significant traction during the pandemic as retail trading activity skyrocketed. According to the prospectus, Robinhood now has 17.7 million monthly active users and $81 billion in assets under custody. You can find the preliminary prospectus for this pending IPO here.


In other news relevant to markets, the US Bureau of Labor Statistics released the June jobs report on Friday (here) with data that was largely mixed, fine for both the bond and equity markets. Nonfarm payrolls rose by 850,000 in June, and the unemployment rate edged slightly higher to 5.9%. Investors viewed the economic data as being “right down the middle”, good as far as indicating that the US economic recovery remains on track, but not so strong as to bring forward the tilt of the Fed toward a more hawkish stance. Similarly, ECB President Christine Lagarde made it clear that the European central bank would not even consider tapering its bond purchases until the worst of the pandemic is behind Europe, and not before March 2022. In the last bit of economic news, OPEC+ has so far failed to agree to modest production supply increases to assuage growing global demand, with the UAE holding out, causing a definitive agreement to be delayed. Talks will continue Monday.


The first half of 2021 ended with solid returns in nearly all financial asset prices aside from gold and the Japanese Yen. In the global equity markets, US and European equities led the way. The FTSE 100 also delivered a solid return for the 1H21. The Japanese market faltered in the second quarter but remains positive for the year, continuing its recovery from pandemic-lows. Emerging markets delivered a positive 1H21 return although considerably less than most developed market indices, having been dragged down by underperformance in China, its largest country component.



US equities had a solid first half, with value leading the way as the Russell 2000 was the star performer. However, in the second quarter, growth / momentum reclaimed the crown as the NASDAQ delivered a solid 9.5% return, double that of the DJIA (reflation proxy) and Russell 2000 (value proxy). This trend continued last week, at least as far as growth / momentum being the favoured strategy over value, as you can see in the table below.


The S&P 500 ended the first half, and the week, both at record highs. The index was up 13 trading days

in June and down in only seven. Risk has also continued to decrease, with the risk-proxy VIX index hovering around 15, near its lowest levels since the pandemic, as you can see in the graph to the right..


In the government bond market, yields are continuing to trend down in most developed countries, as concerns about the winding down (i.e. tapering) of central bank bond purchases and near-

term increases in short-term borrowing rates drift further and further into the background (at the moment anyhow).

In the US Treasury market, yields fell mainly in intermediate and longer-dated maturities, as Treasuries continue to bounce back with inflationary concerns ebbing. The June jobs report was sufficiently mixed, as I mentioned earlier, that investors interpreted as worst-case neutral.

Since the Federal Reserve remains supportive, corporate bond yields and credit spreads continue to grind ever-so-slightly tighter. Although we are at record lows, the dearth of places to invest for yield is supporting both the investment grade and high yield bond markets. If concerns exist about pricing not adequately reflecting a future increase in rates (at some point) and / or an increase in defaults, these concerns are being overwhelmed by the quest by investors for financial assets paying some sort of current return. The tables below show the change in both yields and spreads over several periods for investment grade (BBB) and high yield bonds.


As far as safe haven assets, both gold and the Japanese Yen had a poor first half of 2021, perhaps not surprising as risk remains firmly full on aside from occasional interruptions from time to time that right themselves rather quickly. The US Dollar on the other hand, having been expected to weaken as investors shift assets to more under-valued markets (like Europe) or take on more risk (emerging markets), has instead defied gravity and remained well-bid, perhaps reflecting the expectation that the Fed is more likely to move first to unwind its monetary stimulus, lifting interest rates. I suspect also that the rotation, whilst looking attractive in theory, has not occurred as expected because the US ­­– in spite of its uneven pandemic performance and richly-valued asset markets – has served up the best returns consistently for many years.

Oil has been solid, with price increases week after week buoyed by improving global demand. WTI oil closed the week above $75/bbl. BTC continues its volatile ride but seems anchored in the $30,000-$35,000 range. The cryptocurrency has delivered a solid YtD performance, but also had the worst performance of all assets I track in the second quarter, down over 40%.


We are clearly in the summer, and it feels like it. Although trading volumes are down, it is difficult to conclude anything other than investors have the best possible environment – so long as current yield isn’t your focus – to make money. However, it is this sort of complacency that can mask a turning point as pressures build. What could go wrong? Of course, it’s the things we don’t think about that are most likely, but concerns include a misstep by the Federal Reserve or investors getting concerned about historically high valuations and taking profits. Neither seems particularly bothersome at the moment as we slip into a summer lull.


For American readers, enjoy the long weekend and happy Independence Day.

 

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