- The Russell 2K was the only index to buck broader selling pressures on the week as the Dow, SPX and NASDAQ all ended lower.
- Some of the most crowded shorts are up 10-20% already on the year, and a quick look at the Goldman Sachs most crowded short index shows the index is already +18.1% in the first 10 trading days of the year.
- Earnings season officially kicked off on Friday, however the announcements from banks did little to excite investors after lackluster numbers and commentary.
- Fiscal stimulus remained in focus as President-elect Joe Biden revealed his $1.9B Coronavirus relief package. The economic aid proposal came in line with what had been previewed in the press.
- Treasury Secretary Nominee Janet Yellen said with interest rates at historic lows, smartest thing is to “act big” on Coronavirus relief to shore up the recovery and prevent economic scarring, spurring the rally on Monday, January 20th.
- In Germany, Chancellor Angela Merkel plans to extend the partial lockdown to February 15th. The DAX index dropped 1.8% last week.
- In China, the economy grew 6.5% in the fourth quarter, lifting the annual GDP to 2.3%. The Shanghai Composite Index declined 0.1% last week.
- In Brazil, the Central Bank warned that a rate hike is likely if the current inflation trend persists. Brazilian stocks dropped 3.7% last week.
- In South Korea, the government has extended COVID-19 restrictions by two weeks to contain the virus.
- The KOSPI index was down 2.1% last week.
U.S. equities finished lower this week, however small caps were able to buck broader selling pressure and was the only index to close higher. The NASDAQ was the worst performer on the week, falling 1.54%, followed by the S&P 500 and Dow. Small caps, which have been on a very impressive rally since late September are now trading at their highest levels versus the S&P 500 since March of 2019. Growth underperformed yet again with the Technology and Communication sectors each falling more than 2.5%.
Large Tech names such as Facebook, Apple, Amazon, Google, and Microsoft all came under pressure with the pro-cyclical rotation continuing. Some of last year’s largest laggards continued to be in favor to start the year with the reflation trade picking up steam. Energy, REITS, Utilities and Financials were the only sectors to end higher over the five days while Healthcare and Industrials outperformed but closed in the red.
Treasuries were stronger for the week despite the 10-year yield remaining above 1%. The spread between the 2-year and 10-year notes has risen back above 100bps for the first time since 2017 as investors continue to bet on additional U.S. fiscal stimulus spurring more bond issuance. Moves in FX and commodity markets were fairly muted with the dollar gaining 0.7%, Crude gaining just 0.2%, and gold closing slightly lower at -0.3%.
In the tail end of the week, we saw an old cliché “Buy the rumor, Sell the News” after the unveiling of Biden’s economic plan. Investors took risk off the table heading into the long weekend as some of the most shorted names continued their moves higher. There has been some chatter around that Hedge Funds are dealing with real pain to start the year after a rally in many cyclical sectors, and have been forced to unwind short exposure after their abysmal performance to kick off 2021. Some of the most crowded shorts are up 10-20% already on the year, and a quick look at the Goldman Sachs most crowded short index shows the index is already +18.1% in the first 10 trading days of the year.
EARNINGS SEASON KICKS OFF
Despite markets ending lower, there were no major developments in the longstanding bullish narrative. In fact, although all banks who reported on Friday beat earnings estimates, investors did not seem to like how the earnings beats came to be. The bank index pulled back 3% on Friday and it appeared that some downside risk emerged that growth and earnings expectations may continue to underwhelm in the near term. Below you will find an overview of the disappointing announcements from Friday, which did little to excite investors as earnings season kicked off.
• JPMorgan -3%: Reported FICC sales & trading revenues were in line
• Citigroup -8%: Reported that bond trading missed estimates, which helped prop up the bank’s earnings through much of the pandemic
• Wells Fargo -10%: Said they expect 2021 net interest income to be flat to down 4%, had higher than anticipated expenses and announced charges of more than $1B for restructuring and old scandals
• PNC Financial Services -7%: Believes 1Q net interest income will be down about 1%, despite beating 4Q earnings expectations
UNVEILING OF BIDEN’S ECONOMIC PLAN
Fiscal stimulus remained in focus as President-elect Joe Biden revealed his $1.9B Coronavirus relief package. The economic aid proposal came in line with what had been previewed in the press (CNN released an article on Wednesday telling congressional allies to expect a package with roughly a $2T price tag), and ahead of what sell side economists expected. The announcement did little to excite investors who seemingly wanted an even higher headline number as markets declined 0.38% on Thursday, followed by a 0.72% decline on Friday. Some of the underwhelming response may have come from the fact that Biden mentioned raising corporate taxes which will ultimately help pay for all of the stimulus.
While the Biden administration would like to pass the package with bipartisan support, it may be difficult to do so given the large price tag and lack of liability protections many Republican representatives sought.
FED OUSHES BACK AGAINST TAPERING PREMATURELY
Throughout the week, investors received some commentary from Fed officials who pushed back against the recent notion that the Central Bank may taper their asset purchase program in the coming months. Despite all previous indications that the Federal Reserve would not edit their program, some investors have recently seemed convinced that the group may look to no longer offer policy support due to the stronger economic data. Fed commentary included:
- American Economist Lael Brainard said she does not think it will be appropriate to taper for “quite some time”.
- Fed Vice Chair Richard Clarida reiterated that he does not expect the Central Bank to begin tapering this year and would need to see their 2% inflation targets being met before raising rates.
- Fed Chair Powell said the economy is far from the Fed’s employment and inflation goals, and that now is not the time to be talking about an exit.
Domestic equities rallied to start the week, rebounding from Friday’s selloff after a weekend that yielded little macro news. Stocks were led by gains in Energy, Technology & Small Caps while defensive sectors retreated as Wall Street analyzed the latest earnings announcements ahead of a flurry of reports later this week. There was nothing specific behind the move to the upside today, although the best summary appears to be the focus on the Biden administration’s plan for a more aggressive fiscal stimulus. This came after Treasury Secretary Nominee Janet Yellen said with interest rates at historic lows, the smartest thing is to “act big” on Coronavirus relief to shore up the recovery and prevent economic scarring.
Tuesday market moves showed that investors are coming back to the reflation trade, betting that the incoming U.S. administration will use its legislative power to propel economic growth despite Janet Yellen encountering Republican resistance to President-elect Joe Biden’s $1.9 trillion COVID-19 relief plan in her confirmation hearing. The Biden stimulus package has been met with fierce opposition from Republicans as it includes measures like:
- A minimum wage hike to $15
- Substantial expansion in family and medical leave
THIS WEEK INTERNATIONAL
Last week, global equities declined 1.1%, led by energy, up 1.4%. Growth stocks dropped 2.4%, while value stocks limited the weekly drawdown to 0.3%. As investors crowd into electrification bets, the copper rally continues, pushing prices close to a nine-year high. Meanwhile, oil prices are trading well above breakeven levels, reflecting strengthening demand amid global recovery. Central Banks are expected to leave their policy unchanged to avoid a market shock. This ongoing support will be crucial to encourage investors to look past disappointing short-term economic data and see the bigger picture.Last week, global equities declined 1.1%, led by energy, up 1.4%. Growth stocks dropped 2.4%, while value stocks limited the weekly drawdown to 0.3%. As investors crowd into electrification bets, the copper rally continues, pushing prices close to a nine-year high. Meanwhile, oil prices are trading well above breakeven levels, reflecting strengthening demand amid global recovery. Central Banks are expected to leave their policy unchanged to avoid a market shock. This ongoing support will be crucial to encourage investors to look past disappointing short-term economic data and see the bigger picture.
The European Central Bank (ECB) lifted its de facto bank dividend ban while limiting the payout or share buyback program at 15% of profit. The limit surprised many European banks as some of them expected a higher payout ratio. Prominent banks voiced their concerns regarding the dividend ban, claiming that returning cash to shareholders contributed largely to the attractiveness of the industry. The Euro STOXX Banks index dropped 2.4% last week on the news.
In Germany, Chancellor Angela Merkel plans to extend the partial lockdown to February 15th according to Bild. Berlin Mayor urged companies to be more flexible regarding remote work and warned about the mutation of the virus. Germany now totals over two million COVID-19 cases. The health ministry said that the government is currently in talks with BioNTech SE for 30 million additional vaccine doses. Consumer confidence is slowly recovering but remains below average according to European Commission’s latest data. The DAX index dropped 1.8% last week.
In Italy, Prime Minister Giuseppe Conte faces a vote of confidence in the Senate after a small win in the lower House on Monday. He said, “we ask all political and parliamentary forces which have heart at the destiny of Italy to help us start again as quickly as possible”. The government is under pressure after part of its coalition decided to leave the majority following a clash over European Union recovery funds. Giuseppe Conte needs at least 155 votes out 321 to win support. Italian stocks dropped 1.8% last week.
In China, the economy grew 6.5% in the fourth quarter, lifting the annual Gross Domestic Product to 2.3%. Industrial output expanded to meet global demand for medical equipment. From March through December, China shipped over 224 billion masks. However, annual retail sales dropped 3.9%, led by a 17% decline in catering and restaurants. Overall, the annual economic performance exceeded expectations and fueled hope for a faster recovery in the region. During a December meeting regarding 2021 economic goals, the ruling party warned that monetary and fiscal stimulus will be gradually scaled back. The Shanghai Composite Index pulled back 0.1% last week.
In Japan, Tokyo Governor Yuriko Koike is considering expanding the business cooperation stimulus package to major companies complying with hours restrictions to accommodate for lost revenues. The package was initially aimed exclusively at small and mid-sized restaurants, but the fairness of the program was questioned by major restaurant chain operators equally hit by the restrictions. Inflation dipped below 0% in October 2020 with no imminent sign of reversal. The NIKKEI 225 gained 1.355 last week.
In Brazil, the Central Bank warned that a rate hike is likely if the current inflation trend persists. The comment came after consumer prices rose 4.5% year-over-year in December, recording the highest monthly inflation since 2003. Among the causes cited to explain the surge, weak currency, rising oil prices and increased government spending top the list. This week, policymakers are expected to leave interest rates unchanged at 2% during their first meeting of the year. Economists expect Brazilian inflation to rise 3.75% in 2021. Brazilian stocks dropped 3.7% last week.
In South Korea, the government has extended COVID-19 restrictions by two weeks to contain the virus. As consumer confidence declined in December, the government launched a cash reward program to support restaurants and encourage consumption. Indeed, consumers spending more than $18.30 on designated delivery apps with a credit card will receive cash rewards or discounts. The Korean Food Ministry said, “to encourage those who comply with social distancing rules, we will resume the campaign only to non-face-to-face dining services this time, but we will also quickly bring back discount support for eating out when conditions improve for COVID-19”. The KOSPI index was down 2.1% last week.
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