Week Ended March 26th and the Week Ahead
This past week was a choppy week in the global financial markets with fluctuations in sentiment and sharp moves one way and then the other occurring throughout. The overriding themes seemed to centre around the timing and strength of the post-pandemic recovery and interruptions in supply chains that might be caused by the container ship blocking the Suez Canal. As far as US equities, US indices were largely spared what could have been a much worse week by an unexpected sharp and broad rally in the last hour of trading on Friday. The S&P 500 and DJIA managed to end the week in positive territory, and the NASDAQ Composite and Russell 2000 cut their losses for the week. Oil was also in freefall during the first part of the week because of growth concerns but clawed back some lost ground and found stability towards the end of the week. Bitcoin was down, gold eked out a modest gain, and the US Dollar continued to strengthen ever so slowly. US Treasury yields stabilised and managed to tighten a few basis points this week, with discussions about inflation moving to the background. Perhaps this temporary pause in inflationary concerns can be attributed to the Congressional grilling of Fed Chairman Powell and Treasury Secretary Yellen earlier in the week, which seemed to soothe nerves and address inflation concerns, at least for the time being. The headline economic theme this past week seemed to revolve around COVID-19, bringing into question the timing and robustness of the post-pandemic recovery. Vaccination rollouts are continuing at impressive speed in the US and UK, but the EU remains well behind and seems to be making limited progress on closing the gap. With summer just around the corner, the more people vaccinated, the quicker confidence will return. Economic data was mixed, with some data (like Eurozone manufacturing PMI and services PMI, and US continuing and first time jobless claims) coming in better than expected, and other data (US durable goods) coming in weaker than expected, contributing to the uncertainty about the veracity and timing of the pending economic recovery.
The Markets last week
The pain last week was principally felt in the emerging markets, in Japan, and in the Russell 2000 and NASDAQ Composite in the US equity markets. The Nikkei 225 and the Russell 2000 – the two best performing indices over the last three months – were both negative last week as the slant towards value moderated. Technology names, and specifically many of the higher volatility and more expensive “new tech” names, continued to get hammered. Pundits point towards increasing UST yields as the culprit, but the reality is that the valuations of many of these company’s shares were simply getting ridiculously high and they were due corrections. If you are invested in some of the high flying tech names, their continued weakness makes it easy to lose sight of the fact that broader market indices like the S&P 500 have in fact had solid gains YtD. Emerging markets were the worst performing index last week, hurt by a combination of yield concerns and the stronger US Dollar. Perhaps surprising given their poor vaccine rollout, the STOXX 600 actually is the best performing index YtD.
Government bond yields moderated this past week, and inflationary concerns faded slightly at least for the time being. Moderating yields can be attributable, as least partially, to a resurgence in concerns over the global economic “reopening” as inoculations continue at different paces in different countries, with Europe being the laggard as fears of a third wave in France and Germany increase. The benchmark 10-year UST yield fell 7bps, to close the week at 1.67%, whilst yields on government bonds in the UK, Eurozone and Japan also eased.
It looked like for much of the week that oil was going to fall sharply, but the price managed to stabilise mid-week. WTI crude closed the week at $60.83/bbl, down only 1.1% on the week. This was a solid recovery off the intraday low on Wednesday of $57.25/bbl. Similar to US Treasury yields, oil weakened on concerns about the veracity of the post-pandemic economic recovery as growing concerns about COVID-19 increased. Safe haven assets gold and the Yen were lower W-o-W, whilst the US Dollar continued to slowly strengthen. BTC was down significantly on the week. Why? I have no idea!
Corporate bond yields were modestly better on the week, with spreads narrowing in high yield but a couple of basis points wider in investment grade. Overall, stability in the US Treasury market brought more stability to the corporate credit markets across the credit spectrum.
The Week Ahead Friday's session ended on a high note in the US equity markets, perhaps setting the stage for a better tone in the coming week. Good Friday is a holiday in some countries, and markets in these countries will have a limited session or will be closed entirely that day. I stand by the themes I mentioned last week, although my conviction on both the bank and energy sectors hit wobbles this past week. We are moving towards a market where you need to do work to find the winners, because the broader equity market is likely to trade sideways in a range for the time being.
Should you have missed my mid-week article about the debate on increasing the federal US minimum wage, please check it out here: “Minimum Wage: Should it be Increased”.
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