Week Ended June 11th: Focus on ECB Decision and May CPI
It was a struggle to find anything terribly exciting this week. We started with a carryover focus on meme stocks from the week before, as investors tried to cast their nets wider to include “new” meme candidates like Wendy’s (five-day trading range $22.97 – $29.46) and SPAC Clover Health (five-day trading range $9.47 – $28.85). However, those headlines gave way to lacklustre mid-week performance, with all eyes turning instead on Thursday morning pre-open to the ECB monetary policy decision and the US May CPI figure. Both the ECB decision and US CPI were positive as far as supporting the on-going economic recovery in the Eurozone and US, respectively. Even with US CPI coming in above expectations for May, potentially raising fears of inflation, investors seemed to expect nothing less as both equities and Treasuries rallied off the back of this news on Thursday.
The ECB stuck to its guns thankfully, noting that the recovery in the Eurozone remains fragile albeit is trending in the right direction. I had feared a more sinister approach as far as signaling something about tapering, which would have made little sense coming from an economic bloc that has been closer to 0% inflation than 2% inflation since the Great Recession. The ongoing dovish stance of the ECB caused the German bund to rally (10-year down 8bps W-o-W), as did Gilts (10-year down 10bps W-o-W) and JGBs as global inflation fears faded. Here is how global bond yields have changed recently, and you can compare current yields to select historical levels.
You can read the ECB policy statement from Thursday here – it’s short and sweet.
As far as US CPI, the seasonally-adjusted figure for May was +0.6% (down from +0.8%), or a May-to-May figure of 5.0%, the highest since August 2008. You can find the release from the US Bureau of Labor Statistics here. The Federal Reserve is sticking to its guns, continuing to insist that inflation is transitory, an argument I support for the simple reason that the Fed has both the policy tools and the history (see my blog post here) to address inflation. However, I continue to harbour major concerns about how the Fed will lay the groundwork for tapering, as well as exactly how the tilt towards a more hawkish stance will be implemented without wrecking the US economy.
The week ended with a G7 meeting that started in Cornwall (U.K.) on Friday, expected to be mostly pageantry than resulting in anything market moving per se, at least as of the time I am writing this update.
Global equity markets were generally better this week, although it didn’t feel as good as it actually ended up being, perhaps because the first three days were sideways. The latter two days rescued the week, at least as far as US equities. The tilt globally as far as equities seemed to be back towards value, with the European and UK equity markets performing the best compared to other global indices, and the Russell 2000 outperforming the more cyclical, reflation-driven DJIA. With inflation concerns subsiding (again), the NASDAQ Composite also rallied at the end of the week turning in a solid return W-o-W.
Below is the update for US Treasuries, with the intermediate and longer maturity bonds rallying on the week as the 2-10 yield difference narrowed, signaling waning inflationary concerns for now.
As inflationary concerns faded and risk appetite returned towards the end of the week, gold weakened dropping 0.7% W-o-W. The price of WTI crude oil continued to increase, closing the week above $70/bbl as global demand continues to strengthen. The US Dollar followed suit albeit to a lesser extent. Bitcoin had a wild ride this week, with its behaviour far more mimicking a meme stock than fiat money. The cryptocurrency reached an intraday low on Tuesday of $31,114 before recovering to an intraday high of $38,334 on Thursday.
Although corporate credit arguably remains vulnerable, the fact is that slowly but surely corporate bond spreads continue to grind tighter, with the decrease in US Treasury yields providing a further boost to corporate bonds across the credit spectrum with yields lower.
We feel largely settled in for the summer as equity markets search for direction from here, struggling on the upper bound against valuation concerns and buffered on the lower bound by continued favourable news on the pandemic and global economic recovery. Against this backdrop, we will continue to get sideshows like meme stocks and cryptocurrency volatility, certainly more a reflection of boredom than fundamental valuation.
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