- U.S. equities finished most lower on the week after record setting performance by the Russell 2K, S&P 500, and Dow Jones Industrial the prior week.
- Treasuries came under further pressure as the 10-year yield climbed to its highest level since January 2020, topping 1.7%.
- WTI crude fell over 6% on the week amid short term demand concerns & a stronger USD.
- There were a flurry of re-opening headlines which continued to be supported by corporate commentary from Lyft, AMC Theatres, Disney and Google.
- The Fed left rates unchanged in a widely expected decision, however, additional Central Bank governors now see a rate increase by the end of 2023.
- According to Bank of America’s latest flow show report, equities attracted $68.3B in inflows, with $53B coming into the U.S.
- Monday’s session was a quiet one with volume traded on U.S. exchanges registering just over 11B shares, it’s lightest day in 2021. Tuesday marked the one year anniversary of the S&P 500 Index bottoming out from its fastest-ever bear market selloff. Twelve months later, the U.S. benchmark has surged more than 76%.
- Initial jobless claims for regular state programs unexpectedly climbed by 45,000 to 770,000 in the week.
- French government announced a month-long lockdown in the Paris area in its latest effort to contain a third wave of COVID-19 infections. Germany also announced they will extend their lockdown until April 18th following rising COVID-19 contagion rates.
U.S. Equities finished lower last week after an impressive rally the week prior in which the Dow, S&P 500, and Russell 2K all ended at record levels. Performance on the week was not clear cut, as both value and growth performed in-line with one another, while there were both some outperformers and underperformers within the stay-at-home and re-open groups. Treasuries came under further pressure with the 10-year yield climbing to the highest level since January 2020, pushing above 1.75% briefly, before settling at 1.72%.
WEEKLY SECTOR PERFORMANCE
On a sector basis, Energy came under pressure with the selloff in oil as crude dropped over 6% on the week, losing 7% in Thursday’s session amid concern over short-term demand and a stronger U.S. Dollar. Financials, a recent beneficiary of the rise in rates, underperformed with the Bank Index (BKX) closing down 1.7% despite the 10-year yield adding almost 12bps over the course of the five days.
Technology lagged with the continued scrutiny of higher rates and their effect on valuations; however, it is worth noting Semi- Conductors were a standout performer with the Philadelphia Semi-Conductor Index closing up 1.6%. Consumer Discretionary was the best performing sector on the week, adding 0.54% after giant Facebook buoyed the group, closing up over ~8% after Mark Zuckerberg’s comments about managing Apple’s privacy changes.
The week saw another bout of re-opening headlines which included support by continued positive updates from various U.S. companies, including many travel and leisure-related names which was mentioned at the JPMorgan Industrial conference. Commentary included:
- Lyft said they posted positive y/y growth in daily riding volume for the first time in over a year
- AMC Theatres said 99% of their locations should be open by the end of the March 22nd week
- Disney announced they plan to re-open their California location on April 30th
- Google said they plan to spend more than $7B this year on Real Estate to expand data centers and offices
- The Wall Street Journal noted restaurant and hotel bookings continue to increase, and that consumers appear to be spending more on gyms and salons. Following along the same lines, the Washington Post pointed out that consumers are starting to replenish their workwear.
JEROME POWELL & THE FEDERAL RESERVE
There were a number of moving aspects throughout the week; however, the narrative still seemed to focus on the continued backup in interest rates. One of the key aspects behind the narrative was the Federal Reserve’s continued dovish leaning stance. As expected, the Central Bank left their policy unchanged with no change to their current guidance for asset purchases.
Despite more Central Bank governors (seven versus five in December) expecting a rate increase by the end of 2023, they continued to seemingly embrace their shift to the average inflation target, knowingly allowing inflation to potentially run hotter in the short run than their long-term targets. While Chairman Jerome Powell did not push back against higher rates, he continued to reiterate the group’s belief that it is still too early to discuss tapering and that they would not react based on forecasts.
GLOBAL FUND FLOWS
With the rise in rates continuing to be flagged as the main overhang on equities, Bank of America pointed out that the ~100bps surge in yields is not unprecedented. In fact, similar moves in the past have been able to avoid any prolonged effect on equity markets. According to the firm’s latest flow show report, equities attracted a record $68.3B the week prior, bringing total global equity inflow to $347B on a year-to-date basis. With the huge inflow into equity funds, U.S. equities were the main beneficiary the prior week, raking in nearly $53B.
U.S. equities finished broadly higher in Monday’s session as Technology stocks led U.S. markets higher after a dip in Treasury yields helped provide a tailwind. The tech-heavy NASDAQ 100 and NASDAQ Composite were the best performing indexes in the session, ending up 1.7% and 1.2%, respectively. Growth-related names outperformed Value by ~1.4% with buyers in the Treasury market starting to nibble at opportunities after the recent selloff in bonds.
Rates on 30-year bonds fell about 4bps to 2.4%, while 10-year yields fell almost 3bps to 1.69% as long dated Treasuries absorbed most of the demand, causing the 2-year/10-year spread to flatten after the curve hit its widest level since 2015 on Friday.
LACKLUSTER MONDAY SESSION – MERGERS & ACQUISITIONS HEADLINE
Monday’s session was a quiet one with volume traded on U.S. exchanges registering just over 11B shares, its lightest day in 2021 and well below the average of 14.8B. Headlines were primarily led by Mergers & Acquisitions activity in the Industrial space (Railroad, with Canadian Pacific announcing they would be acquiring Kansas City Southern for $25B in cash).
The merger between two of the largest railroad companies would create a network that cuts through the U.S., Mexico and Canada. The merger would be the largest purchase of a U.S. asset by a Canadian company since 2016, and could ultimately help provide a more affordable solution for various manufacturers who are looking to bring back various supply chains to North America.
BIDEN ADMINISTRATION ECONOMIC POLICIES
Upon passing the $1.9T COVID-19 stimulus package, the Biden administration is now said to be considering additional spending measures up to $3T. Climate change and infrastructure are said to be the key components of the potential spending package, with nearly $400B earmarked for “green spending”.
While all facets of the bill are still under consideration, funding or an offset for the additional costs will need to be accounted for. Some measures the White House is considering, according to aides and media outlets are:
- An increase in corporate tax rates
- Taxing capital gains as ordinary income for individuals
- Eliminating a step-up in cost basis
- A reduction in lifetime exemptions
- A wealth tax for individuals with assets over a pre-stated level
- A financial transaction tax on the sale or purchase of securities
Last week, global equities were slightly lower with notable weakness from the energy sector and materials. Information technology remained under pressure amid rising yields. Additional Central Banks’ policy announcements were the highlights of the week, with contrasting outcomes in emerging markets and developed countries. While fighting inflation is a priority in Latin American economies, transitioning from economic stimulus to a more neutral stance is the focus in some developed countries. As we wrap up the first quarter, we can already observe that the sectors leading to the upside are significantly different from those of 2020. Will this trend continue?
The European Central Bank (ECB) increased its pandemic purchase program last week to fight against the tightening of financial conditions. Indeed, Bloomberg reports that net purchases climbed by $25.2 billion. Christine Lagarde, European Central Bank President, reiterated on Monday that the ECB has the option to modify the pace of purchase at any time. The Euro STOXX index remained flat last week.
German Chancellor Angela Merkel agreed with regional leaders to extend the lockdown until April 18th following rising COVID-19 contagion rates. The trigger for tighter curbs was reached after infections per 100,000 people rose above 100 last week. The health care system could come under pressure over the next few weeks as a significant increase of hospitalization is expected. On Monday, Germany recorded the highest number of patients in ICUs in a month. The DAX index gained 0.82% last week.
The French government announced a month-long lockdown in the Paris area in its latest effort to contain a third wave of COVID-19 infections. Prime Minister Jean Castex said “it’s not good news and I know how tired you are with the succession of restrictions. These measures are vital and balanced. They aim to put the break on the virus without locking us down.” According to the French Finance Minister, Bruno Le Maire, these restrictions will take 0.2% off annual gross domestic product. The CAC 40 index was down 0.8% last week.
Two new economists joined the People’s Bank of China’s (PBOC) policy committee with a strong background in the labor market. This latest reshuffle signals more focus on full employment and household incomes. PBOC governor Yi Gang said on Sunday that the
Central Bank is currently focused on finding the right balance between supporting growth and preventing asset bubbles. The Shanghai Composite Index was down 1.4% last week.
Bank of Japan (BOJ) maintained its policy balance rate at -0.1% and announced that it will allow yields to fluctuate 25bps either side of 0%. The BOJ also put an end to decade-long buying of ETFs tracking NIKKEI 225 and switched to purchasing funds tracking the broader Topix index. In the press release, policy makers announced that “the Bank will continue with Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner.” The Nikkei 225 gained 0.25% last week.
The Brazilian Central Bank raised interest rates from 2% to 2.75% last week and plans to raise interest rates by another 75bps in May. The move surprised most market participants as Bloomberg economists expected 50bps increase instead. Policy makers wrote in their press release statement “in the committee’s evaluation, a swifter adjustment has the benefit of reducing the probability of not meeting the inflation target of 2021, as well as keeping longer horizon expectations well anchored.” Brazilian stocks gained 1.81% last week.
India is working on a bill that will make owning a cryptocurrency illegal. The government plans to roll out its own digital currency and views private competitors like Bitcoin as a threat. If this bill passes, India will have the toughest stance in the world regarding cryptocurrencies. The news added some volatility to Bitcoin, but has yet to shake the confidence of the crypto bulls. This is not the first attempt to stop cryptocurrency as the Indian Central Bank cracked down on Bitcoin in 2018 and banned banks from dealing with digital currencies. In 2020, the Indian Supreme Court overturned the decision. Many nations are keeping an eye on this bill as they look for ways to control the booming market of cryptocurrencies.
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