US Treasuries rallied hard the first half of the holiday-shortened week off the back of mixed economic data that brought into question the robustness of economic growth in the US (and dampened inflation concerns). US equities ignored concerns of a less robust outlook most of the week until they wobbled on Thursday, delivering their biggest losses that day across the board for many weeks. However, this negative sentiment proved short-lived as US stocks recovered their losses, and more, on Friday, as three of the four major US indices closed the week at record highs. US Treasury yields followed suit Friday, finally increasing as the rally in US Treasuries that had been occurring since the beginning of the month ran out of steam. Corporate credit markets were whipped around with the Treasury market, with spreads widening across investment grade and high yield (not uncommon when underlying UST yields are decreasing). Average yields on BBB and BB bonds decreased. WTI oil lost a bit of steam, falling for the first time in several weeks albeit modestly, whilst gold posted a 1.1% gain. The US Dollar was slightly weaker, and Bitcoin was down 1.2% W-o-W as cryptocurrencies remain under pressure.
This coming week brings some economic data in several countries, including the US, China, UK, and Eurozone. Most interestingly we will see June inflation numbers and retail sales, amongst other data. Although it’s hard to believe, the major US banks kick-off 2Q21 earnings season on Tuesday. All six major US banks report earnings next week, as does Pepsi (PEP).
Globally, markets in the US, Europe and China were slightly positive W-o-W, whilst Japan and the emerging markets indices weakened sharply. The Japanese stock market has been feeling significant pressure since the start of the second quarter and the Yen has remained under pressure, too. I believe Japan is suffering from concerns about the upcoming summer Olympics. Once the summer Olympics are over and the “cost” to Japan in the form of higher COVID-19 cases is clear, Japanese equities should settle down.
In the US, three of the four indices (Russell 2000 being the exception) closed yesterday at record highs, shaking off a dismal session on Thursday. As themes have ebbed and flowed throughout the 1H2021, the various indices are neck-and-neck as far as returns, with the reflation trade (DJIA proxy), the value trade (Russell 2000) and the growth trade (NASDAQ Comp) all serving up returns of 14%-15% YtD. The VIX, a gauge of market risk, rose above 21 intraday on Thursday for the first time since mid-June, but clawed most of this back on Friday, ending the day at 16.18 as markets quickly shifted back into a “risk on” mode.
The sentiment in the equity markets was highly correlated with the US Treasury bond market, which had rallied seven days straight through Thursday. The 10-year US Treasury closed at its lowest yield (1.30%) on Thursday since mid-February, but the US Treasury market came under pressure once again on Friday as bonds sold off and yields increased. As higher bond prices (lower bond yields) and a flattening yield curve suggest, concerns about the global economic recovery moved front and centre mid-week. US economic data was mixed, and the direction of the pandemic is suggesting that most parts of the world are far from out of the woods. Yields on 10-year government bonds also decreased last week in the UK (Gilt closed 0.66%, –6bps W-o-W), the Eurozone (Bund closed –0.29%, –9bps W-o-W) and Japan (JGB closed .04%, –3bps W-o-W). Even with this yield behaviour, equity investors continue to view economic data as perfectly balanced – not too hot, and not too cold – as we remain in a “Goldilocks” environment.
Both the Federal Reserve and the European Central Bank were active last week. The Fed released minutes from its FOMC meeting on June 15-16, which you can find here. The minutes really said nothing new and simply reiterated the Fed’s focus on full employment and the reality that US economic data is mixed. Persistent inflation does not seem to be a concern. The ECB comments were perhaps more ground-breaking, in that the central bank announced on July 8th (press release here) that for the first time in 20 years, they would let inflation run above 2% temporarily in the Eurozone, following the Fed and BoE as central banks remain unusually accommodative. John Authers wrote an excellent opinion article in Bloomberg Opinion (here) on Thursday, providing context as to why the ECB allowing inflation to go above 2% even temporarily is unusual (referencing German hyperinflation in the 1920s). Like the US, inflation in the UK is also currently running significantly higher than the BoE’s 2% target but is thought to be temporary
There isn’t much to say about safe haven assets, which were mixed on the week. The US Dollar is closely watched and was slightly weaker W-o-W, not surprising given the rally in US Treasury bonds as yields fell through Thursday. WTI oil lost ground on the week, albeit not significantly, as the OPEC+ meeting was abandoned without reaching new production targets. Cryptocurrencies remain range bound and generally under pressure.
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