- The 10-year move as high as 1.61%, which was above the widely watched dividend yield of the S&P 500.
- With 96% of the Q4 earnings completed, S&P constituents are posting a nearly 4% y/y earnings growth.
- The ICE Bank of America MOVE Index saw its sharpest upswing in more than four months last week.
- February ISM recorded a new post-lockdown high and matched February 2018 as the strongest month since 2004.
- Oil closed 2% lower ahead of a key OPEC+ meeting this week where it is anticipated the alliance will increase output by around 500Kbpd in April.
- The S&P 500 jumped over 2% on Monday posting its best day in almost nine months, while the NASDAQ moved back within 5% of all-time highs.
- Goldman Sachs’ Chief Global Equity Strategist, Peter Oppenheimer, gave comments saying he expects 6.5% global growth this year.
- European Union leaders made progress toward establishing bloc- wide vaccine certificates to help remove travel barriers. The Euro STOXX Index dropped 1.98% last week.
- In France, the government is contemplating additional restrictions in targeted cities, such as Paris, as virus cases surge. The CAC 40 Index dropped 1.22% last week.
- In Japan, the manufacturing PMI rose above 50.0 for the first time since April 2019. The NIKKEI 225 dropped 3.5% last week as the rapid rise in bond yields spooked investors.
U.S. stocks generally fell for a second straight week after investor attention turned to the bond market and Treasury yields rose, putting pressure on equity markets. With the selloff came a notable pro-cyclical rotation as growth names continued to come under outsized pressure amid crowded positioning and stretched valuations. The move lower in equity markets seen throughout the week picked up steam with the NASDAQ 100 tumbling as much as 3.7% as investors rotated away from pandemic beneficiaries.
Technology and Consumer Discretionary (primarily due to short-term pressure from Apple and Amazon) were among some of the worst performing sectors on the week. Communication Services was also lower, falling 1.39% with notable drops in Google (-3.2%) and Facebook (-1.5%), although the sector did outperform broader U.S. benchmarks.
Energy was once again the best performing sector, gaining over 4% for the week which brought its gains for the month to over 20%, making it its third best month since 2010 only behind March and November of 2020.
BOND YIELD BACKUP & FED COMMENTARY
The week saw significant weakness in bonds as yields moved aggressively higher, particularly in the belly of the curve. On Thursday, the worst down day of the week, investors saw the 30-year yield touch its highest level in more than a year and the 10-year move as high as 1.61%, which was above the widely watched dividend yield of the S&P 500. The moves were part of an ongoing bear market in bonds driven by:
- Rising inflation expectations amid a strong macro backdrop
- The continued push for re-opening global economies
- Potential for additional federal stimulus
However, even as volatility and the selloff accelerated (see MOVE and VIX Index’s for volatility) throughout the week, it did little to derail the Federal Reserve’s current thinking. Chairman Jerome Powell stressed the economy remains a long way from the Federal Reserve’s labor market and inflation goals, while New York Fed President John Williams said, “with strong federal fiscal support and continued progress on vaccination, GDP growth this year could be the strongest we’ve seen in decades.”
BULLISH NARRATIVE REMAINS INTACT
Overall, despite the scrutiny on the aggressive moves made in the bond market, the long-standing bullish narrative seemingly remained intact, including:
- New COVID-19 cases and hospitalizations continuing their steep drop off since touching highs in early January.
- Vaccine distribution continuing to pick up (46M Americans have now received at least one dose).
- The Federal Reserve’s reluctance to move rates higher.
- A much stronger earnings season than anticipated, and with 96% of the Q4 earnings season behind us, S&P constituents are posting a nearly 4% y/y earnings growth, well ahead of the decline forecast at the end of that calendar quarter.
Domestic equities surged on Monday after investors shook off concerns surrounding the impact of higher Treasury yields, which
plagued markets throughout last week.
All 11 sectors finished higher with the S&P 500 posting its best day in about nine months. The Russell 2K jumped the most since early November by gaining 3.40%, followed by the NASDAQ, which moved back within 5% of all-time highs. Gains were broad-based throughout the session, however, investors saw outsized gains in reopening and momentum stocks as the VIX plunged ~16% with last week’s fears abating.
REASONS BEHIND THE RISK ON RALLY
Investors jumped back into risk assets on Monday after last week’s rout that was triggered by the concern that another large stimulus bill could cause pockets of the economy to overheat, bringing inflation along with it. There were multiple factors that played a hand in Monday’s market rally, including:
- Positive vaccine news after Johnson & Johnson was the third company to receive Emergency Use Authorization for its single shot vaccine.
- Bond Yields taking a breather from the aggressive moves seen last week.
- House of Representatives passed the $1.9T COVID-19 relief package.
- Strong Economic data releases (Construction Spending and ISM).
Adding to the risk-on tone was Goldman Sachs’ Chief Global Equity Strategist, Peter Oppenheimer, who said “we’re moving into a period of very synchronized global growth” noting that he expects 6.5% global growth this year due in large part to intentionally coordinated easy monetary and fiscal policies.
With Monday’s rally, longer dated treasuries continued their sell-off as yields on the longer end of the curve rose, while the shorter end of the U.S. yield curve fell slightly. The 10-year added just under 4bps to close at 1.44% (off last week’s highs) while the five-year note fell 3% to close at 0.70%.
Although volatile and dramatic, the recent rise in yields has not been unprecedented. Looking back, the market has sold off four times over 8 years when looking at comparable time periods (80-140 days) once rates have seemingly bottomed. The current rally, which has most closely been related to the 2013 taper tantrum (the worst period for Treasuries in the past decade), shows the 10-year yield could continue its ascension and climb closer to the technical resistance level of 1.94%, adding further pressure to equity valuations and bond prices.
The latest release of the ISM Manufacturing number helped reinforce the view that the recovery in the manufacturing sector continues to be underway. February’s ISM of 60.8 was a new post-lockdown high, matching February 2018 as the strongest print since 2004. The release showed further accumulation of pent-up demand as an early cycle sign with order backlogs reaching their highest levels since 2004.
KEY EVENTS FOR THE WEEK
Looking forward, investors will have a lot to digest throughout the rest of the week including:
- The U.S. Federal Reserve’s Beige Book release scheduled for Wednesday.
- OPEC+ output meeting on Thursday.
- Initial jobless claims orders are anticipated to be released on Thursday.
- The February employment report on Friday should provide an update on the nation’s labor market.
Last week, the rapid rise in global yields halted the reopening trade and caused investors to reconsider their assumptions with a rising cost of debt. The MSCI ACWI Index declined 3.32%, with information technology down 4.81%. Energy was the only sector in the green, up 1.63%. Central Banks remained quiet as price discovery took place in a volatile fashion. The world economy weighted year- over-year inflation remained flat at 2.2% in February, while the global manufacturing PMI ticked up to 53.9 from 53.6. As we mentioned in previous newsletters, the rotation from growth to value will be something to keep an eye on to identify if the trend persists.
Andrea Enria, Chair of the Supervisory Board of the European Central Bank (ECB), said during an interview with Le Monde that European banks are in better shape than at the start of the Coronavirus crisis. He noted that banks Core Capital ratios are at the highest level since establishment of the banking union. According to Enria, banks can now absorb “a significant amount of losses and continue supporting households, small businesses and corporates through these difficult times.” Banks continue to lead the Euro STOXX index this year as we witness mean reversion playing out and rising yields powering the rally. The Euro STOXX Banks index gained 1.43% last week despite a broad market sell-off.
European Union (EU) leaders made progress toward establishing bloc-wide vaccine certificates to help remove travel barriers. After a five hour video call with European leaders, Angela Merkel, Chancellor of Germany, told reporters “we have all agreed that we need vaccine certificates. In the future, it will certainly be good to have such a certificate but that will not mean that only those who have such a passport will be able to travel; about that, no political decisions have been made yet”. Freedom of movement is one of the fundamental rights of EU residents; therefore, it will be interesting to see what the Supreme Court says about this issue. The Euro STOXX Index dropped 1.98% last week.
In France, the government is contemplating additional restrictions in targeted cities such as Paris as virus cases surge. Prime Minister Jean Castex reaffirmed that “a lockdown is a tool that we have to resort to when we can’t do anything else. We must do everything to put it off and allow the vaccines time to have an effect.” The nationwide curfew from 6pm to 6am is still in effect. According to a study by the Ministry of Finance, a third lockdown in France could cause the national economy to contract by 10% to 18% compared to pre- crisis levels. The CAC 40 Index dropped 1.22% last week.
The Hang Seng Indexes announced changes to the 51-year old Hong Kong stock index (HSI) benchmark traditionally dominated by financial and real estate companies. Under new rules, maximum weighting of any one firm in the benchmark will be 8% and the number of constituents will increase from 52 to 80. Additionally, at least 20 to 25 companies in the index will be classified as Hong Kong firms. Changes are expected to be implemented as early as May. The HSI did not escape the global sell-off last week, as the
index dropped 5.43%. In China, the 10-year remained resilient on a relative basis during last week’s global bond rout, prompting some analysts to give it safe haven status. The Shanghai Composite index fell 5.06%.
In Japan, the manufacturing PMI rose above 50.0 for the first time since April 2019. Indeed, the February headline PMI reading was 51.4, up from 49.8 previously. Input prices soared due to supply chain disruptions. Factory production rose 4.2% from the previous month despite state of emergency. However, the employment data was less encouraging, as firms continued to adapt their capacity requirement. The NIKKEI 225 dropped 3.5% last week as the rapid rise in bond yields spooked investors.
In Brazil, Federal District Governor Ibaneis Rocha, announced that Brasilia will enter a lockdown for 15 days to help hospitals manage the flow of COVID-19 patients. According to the decree, only essential services such as supermarkets, banks, pharmacies, and places of worship will be allowed to operate. President Jair Bolsonaro said in a speech last Friday that “the stay at home policy didn’t work and it won’t work.” The February reading of manufacturing PMI pointed to a solid expansion, reversing three consecutive months of decelerating growth. The headline PMI ticked up to 58.4, versus 56.4 previously. The Brazil Ibovespa index was down 7.09% last week.
Mexico received 800,000 doses of China’s Sinovac vaccine, thus adding to its existing supply of competing vaccines. According to Bloomberg Vaccine Tracker, 1.4% of the population received at least one shot and 0.4% of the populated has been fully vaccinated. The February manufacturing PMI advanced to 44.2, as the magnitude of contraction eased. According to IHS Markit, output and new orders sharply declined and led to declining employment and investments. Central Bank Deputy Governor, Gerardo Esquivel, has indicated a few weeks ago that two more interest rate cuts are possible in 2021 if inflation stays in line with expectations. Mexican stocks declined 0.68% last week.
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