- Broader U.S. benchmarks dropped with the continued backup in rates and rotation to value names.
- There was not anything specific behind the big backup in bond yields this week, which saw the 10-year note jump 15bps to 1.34%, and the 30-year rise to 2.13%, its highest level in more than a year.
- The S&P 500 Information Technology sector underperformed the S&P 500 for the first time in five weeks, falling 1.21% on a relative basis.
- Financials rallied with leadership in Banks (BKX Index +4.9%), while Energy rallied over 3% after supply disruptions due to winter storms throughout Texas.
- U.S. COVID-19 cases continued their trend lower and were down about 80% over the last six weeks and health officials believe that herd immunity could be achieved as soon as April, according to the Wall Street Journal.
- Technology names continued their recent bout of underperformance, with weakness in Semiconductor names. The NASDAQ fell 2.46% in Monday’s session compared to a decline in the S&P 500, which fell 0.77%.
- Retail sales, perhaps the most talked about surprise on the week, increased 5.3% month-over-month, coming in ahead of consensus estimates, which called for a 1.1% gain.
- In Germany, the government plans to spend an additional $61 billion for Coronavirus relief. The DAX index dropped 0.4% last week
- In the UK, most non-essential businesses will be able to reopen starting April 12th. The FTSE 100 index gained 0.52% last week.
- In Brazil, stocks dropped over 4% on Monday after President Jair Bolsonaro replaced the CEO of the state-controlled oil company Petrobras following a disagreement over fuel prices.
Equity indexes closed lower on the week with the exception of the Dow Jones Industrial, which was able to buck wider selling pressures. Broader U.S. benchmarks dropped with the continued backup in rates and rotation to value names. The move lower in equity and fixed income markets appeared to be a function of the most recent driver behind price action, which lead to concerns of stretched valuations in certain pockets of the market.
While the backup in interest rates has received a lot of attention and poses a threat to equity valuations, there has been some commentary suggesting that rates and stocks can move higher in tandem. However, there seems to be little consensus on what the “tipping point” may be when they no longer move in tandem. Higher inflation expectations have historically been positive for equities in large part because they reflect a pickup in future growth and earnings estimates.
RISE IN RATES
Although other themes such as the improving COVID-19 trends and continued fiscal and monetary policy support persisted throughout the week, it’s follow-through to market price action was limited. While there was nothing notable behind the large backup in bond yields throughout the week, investors saw the yield on the 10-year note jump 15bps to 1.34%, and the 30-year bond jump 12bps to settle at 2.13%, its highest level in more than a year.
With the pro-cyclical rotation staying in focus, investors piled into rate sensitive and re-opening related names. Energy, Financials, Materials, and Industrials rallied, while all other sectors within the S&P 500 declined. Growth and momentum names were the hardest hit with rates continuing their trek higher with some of the most coveted names amongst the largest decliners. Fan favorites included Tesla -4.3%, Facebook -3.3%, Microsoft -1.6%, Netflix -1.5%, Adobe -4.0%, ARK Innovation -2.5%.
Financials rallied with leadership in Banks (BKX Index +4.9%), while Energy rallied over 3% after supply waned due to winter storms throughout Texas, which caused drillers, transporters, and refiners to scale back operations. Re-opening names such as airlines, cruise liners, hotels, casinos, and diners all rallied with the improving Coronavirus trends.
On the COVID-19 front, U.S. cases were down about 80% over the last six weeks and health officials believe that herd immunity could be achieved as soon as April, according to the Wall Street Journal. Additionally, the current pace of 10M-15M vaccines administered weekly in the U.S. is projected to rise to more than 25M per week in April.
The economic calendar was a busy one throughout the week, however largely surprised to the upside. Retail sales, perhaps the most talked about surprise on the week, increased 5.3% month-over-month, coming in ahead of consensus estimates, which called for a 1.1% gain. Economists noted broad based strength, however also added that there was a likely tailwind from stimulus checks. Additionally, while the housing market has been a bright spot throughout the pandemic amid historically low rates, housing starts actually eased month-over-month, yet remain at elevated levels.
U.S. equities ended the day mixed as the Dow Jones was the only major index to close higher, rising for a fifth time in six sessions. The index was propelled again by strength in Financials, Energy and various re-opening plays including airlines, gaming, and lodging names. The S&P 500 logged another session in the red, extending its losing streak to five straight days. Small caps posted slight declines, closing down only 0.69%, while the NASDAQ was the largest underperformer, dropping 2.46% with weakness in large cap tech, semiconductor’s, and software-related names.
YIELDS AND COMMODITY COMPLEX
Treasury yields continued to climb amid prospects of rising inflation rates, which have triggered some valuation concerns in high-flying growth companies. With the 10-year yield adding just under 3bps on Monday, it now brings its month-to-date gains just under 26bps in February alone.
Gold prices rose in Monday’s session to a one-week high amid rising inflation expectations and a sliding U.S. Dollar. With investor appetite booming for exposure to commodities, the Bloomberg Commodity spot index, which tracks the price movements for 23 raw materials, rose to its highest levels since March 2013. The index now stands 67% higher than it did in March of 2013 since touching a four-year low in March of 2020.
Oil surged on Monday with crude closing up more than 3.75%, settling at a 13-month high. The rally came amid an upward revision in demand forecasts from Goldman Sachs and Morgan Stanley, along with supply that is expected to take longer to come back online after the deep freeze that plagued Texas last week. With global economies reopening and vaccines accelerating, Goldman Sachs revised their forecast, calling for Brent oil to reach $75/barrel.
KEY ITEMS FOR THE WEEK
Stocks could find some footing this week as the U.S. House of Representatives will likely vote on President Joe Biden’s proposed $1.9T stimulus package. The proposed bill includes $1,400 stimulus checks, an increase in minimum wage to $15/hour, and an increase of $400/week in unemployment benefits extending through September.
Although little is expected to change, investors will also be watching Federal Reserve Chairman Jerome Powell’s testimony to the Senate Banking Committee on Tuesday to see if he offers any policy modifications in regards to the Central Bank’s dovish outlook. The testimony will come after Treasury Secretary Janet Yellen said President Joe Biden favors boosting the corporate tax rate to 28%, and has signaled openness to raising rates on capital gains. She added that while a wealth tax had been discussed, it is not something the President favors.
THIS WEEK INTERNATIONAL
Last week, global equities declined 0.37% as investors took profits from growth stocks and rotated towards value. The energy sector rose 2.6% amid strengthening demand that sent Brent crude oil above $62 per barrel. Chinese stocks provided a small boost to the MSCI ACWI index as trading resumed on Thursday after the long Lunar New Year holiday. During a virtual meeting held last Friday, G7 leaders pledged continued fiscal support for economies. Meanwhile, restrictions are less and less stringent in certain regions as COVID-19 infection rate curbs.
In Germany, the government plans to spend an additional $61 billion for Coronavirus relief. Finance Minister Olaf Scholz plans to suspend the debt brake for a third straight year in his 2022 draft budget. After weeks of decline, COVID-19 infections are ticking up again in Europe’s largest economy. According to Bloomberg, 3.8% of the German population received at least one COVID-19 shot and 2% of the population has been fully vaccinated. The DAX index dropped 0.4% last week.
In Italy, the government received a record 110 billion Euros of bids for its newly issued 10-year bond. Investors received positively the appointment of former European Central Bank (ECB) President Mario Draghi as the new Prime Minister of Italy. He composed a government with a mix of technocrats and politicians to maneuver a fragmented political landscape. Draghi inherits over 158% national debt-to-GDP ratio and high expectations from European counterparts. The FTSE MIB index declined 1.17% last week.
In the United Kingdom (UK), new findings show that a single COVID-19 dose is effective against infection and illness. According to Bloomberg, 26.3% of the British population has received at least one dose, while 0.9% has been fully vaccinated. Prime Minister Boris Johnson has laid down the reopening plan starting March 8th with the reopening of schools. Most non-essential businesses will be able to reopen starting April 12th according to the plan
In China, the China Securities Journal alleged that the People’s Bank of China (PBOC) monetary policy is expected to remain neutral. The comment came after the Central Bank withdrew $40B of liquidity last week through open market operations. The China Securities Journal added that “it is not appropriate to simply link the normal fluctuations of funds and the routine operations of the Central Bank with the tightening of monetary policy.” The PBOC echoed this message by warning that “excess attention on the size of liquidity injections would lead to misunderstanding of monetary policy.” The Shanghai Composite Index rose 1.12% last week, led by utilities, up 4.74%.
In Japan, Japanese insurers and regional banks are increasing their holdings of the 30-year Treasury bond as yield curve steepens. Takenobu Nakashima, Chief Rates Strategist at Nomura Securities, said “the increased purchase of super-long bonds by regional banks is very positive for the debt market considering they tend to be more cautious about taking duration risks than life insurers.” The government observed that economic conditions were improving despite weakening consumer spending. Analysts project an economic contraction in the first quarter. The NIKKEI 225 gained 1.69% last week.
In Brazil, stocks dropped over 4% on Monday after President Jair Bolsonaro replaced the CEO of the state-controlled oil company Petrobras following a disagreement over fuel prices. According to him, the management has shown “zero commitment to Brazil”. Investors are now concerned that more government interventions will alter the proper functioning of markets. In 2013, the decision by former President Dilma Rousseff to reduce electricity prices plunged Brazilian stocks into a bear market. In the last three months, the largest Latin American economy has not participated in the Emerging Market rally as much as its peers have. The MSCI Brazil index is down over 10% year-to-date.
In Taiwan, the Statistics Bureau updated its annual export growth forecast from 4.59% to 8.58% and revised the annual GDP growth higher from 3.11% to 4.64%. The international demand for chip contributed to the 7% annual appreciation of the Taiwanese dollar over the greenback. In 2020, Taiwan’s chip industry revenue grew 20.9% to $108.9B. The Biden administration has contacted the Taiwanese government regarding the global semiconductor shortage disrupting auto manufacturing. The Taiwan TAIEX Index gained 3.41% last week.
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