highlights
- U.S. Equities took a pause from the recent run higher as stocks came under pressure over the first three days of the week, before bouncing back on Thursday and Friday last week.
- The NASDAQ posted its worst week since late February as it led broader benchmarks lower, declining 2.34%.
- Inflation concerns were the main reason for the slight consolidation seen.
- Core CPI released showed a gain of 0.9% M/M, its largest increase since September 1981, and triple expectations for the month.
- With inflation concerns on the rise, investors continued to see the rotation out of momentum/growth names and into value oriented stocks. The 120-day correlation between growth and value continued to hover near record lows.
- Despite the selloff in the first half of the week, global investors increased their equity exposure, pouring ~$15B into equities for the week ending May 12th. Inflows were generally geared to value funds while tech saw outflows of $1.2B.
- Chip stocks continued their fall, coming under pressure again as the SOX index has now fallen about 10% from its peak in early April.
- Looking forward, retail earnings releases will be in focus throughout the week with TJ Companies, Macys, Walmart, Target, Home Depot, and Lowes amongst those reporting.
- The European Union and the United States found an agreement over metal tariffs as Biden is set to travel to Brussels next month. The Euro STOXX Index declined 0.49% last week.
- In China, retail sales rose 17.7% year-over-year in April, lower than the consensus forecast of 25% expansion.
LAST WEEK
U.S. Equities took a pause from the recent run higher as stocks came under pressure over the first three days of the week, before bouncing on Thursday and Friday. The week was busy as volumes picked up significantly with earning releases, economic data, a cyber attack on the Colonial Pipeline, inflation concerns, and continued crypto headlines all contributing to a turbulent trading environment. Ultimately, the NASDAQ led losses, posting its worst week since late February, losing 2.34%, followed by the Russell 2K, S&P 500 and Dow Jones.
Gold posted a modest gain of 0.4% and WTI crude gained 0.7% even after declining more than 3% in Thursday’s session. Treasuries were weaker across the curve but 10-year yields finished at 1.63%, pulling back after briefly pushing above 1.70%.

THEMATIC ROTATION
Investors continued to see the rotational theme play out, with money moving out of momentum/growth names and into value. On a weekly basis, growth and momentum names were amongst the largest decliners, while value also declined but fared much better, only losing about 0.5% on the week.
With the global reflation trade continuing to be in favor, it has now created a historic relationship between the two factors. The 120-day correlation between the MSCI AC World Value Index and its growth counterpart is hovering just above the lowest on record (which it hit last month) going back to 1996.

SECTOR PERFORMANCE
On a sector basis, Consumer Discretionary was the worst performing space over the five days, after homebuilders and housing-related names came under outsized pressure. It is worth noting that Tesla also weighed on the sector, posting its second worst week since March of 2020 and has now posted four consecutive weekly declines.
Technology underperformed as Semi- Conductors (Philadelphia Semi-Conductor Index sold off 4.2%) and some Mega-Cap names dragged benchmarks lower, with blue chip stocks Apple and Amazon losing at least 2%. Communication Services was also a drag on performance with Facebook, Google, Disney (Earnings) and large internet names underperforming.

GLOBAL FLOWS
Despite the selloff seen in the first half of the week, global investors continued to increase their exposure to equity funds in the week ending May 12th. According to Refinitiv data, global equity funds saw $15.1B worth of inflows, the largest in the last four weeks. The inflows mainly poured into cyclical funds with the biggest beneficiaries being financials and mining, each pulling in $1.3B, while growth-oriented plays, such as technology, saw outflows of $1.2B. Overall, global bond funds received inflows of around $11.2B during the same time period.
INFLATION CONCERNS
The key narrative throughout the week revolved around the pickup in inflation and concerns that transitory factors may continue to persist longer than expected, putting upward pressure on inflation expectations. Even as inflation dominated headlines with the release of core CPI (Ex Food & Energy cost), which showed an increase of 0.9% m/m, it’s largest increase since September 1981 (and more than three times the estimates), there were still no lack of upbeat headlines and positive corporate commentary from management teams that highlighted optimistic demand/growth trends.

FED POLICY
One of the major concerns in the current landscape continues to be a policy mistake made by the Fed and their lack of tools to combat inflation if needed. Investors have seen the Central Bank misstep before and are concerned that the group may have to reverse course on the lower rate backdrop and taper sooner than expected.
However, Fed speak throughout the week was in ample supply as various members of the Federal Reserve continued to note that the minimum goals have not been met, highlighting the groups embracement of the high bar that must be cleared in order to make adjustments to their policy framework. The group, for better or worse, remains committed to their current stance, keeping intact arguably the largest component to the bullish narrative – the Central Bank liquidity/tailwind.
THIS WEEK
Domestic equities generally closed lower in Monday’s session as the Russell 2K was the only major U.S. index to buck broader selling pressures and hold on to gains, closing higher by 0.11%. The NASDAQ underperformed other indices, falling -0.38% on Monday and is in jeopardy of falling for a fifth consecutive week, which would mark its longest losing streak since October and November of 2012 when it declined six straight weeks. Chip stocks continued their fall, coming under pressure again as the SOX index has now fallen about 10% from its peak in early April.

Overall, it was a quiet Monday session with little substantial news to note. Top headlines included:
- AT&T (T) agreeing to spin off their media operations in a deal with Discovery, in which T will receive $43B + stock
- The U.S. & EU agreed to “Chart a path” to end their tariff dispute over metals by the end of the year
- Traffic at U.S. airport reached a new pandemic high
With inflation fears persisting, investors continue to move money into precious metals such as Copper (+8% on Monday), Gold (+1.27%), and Silver (+2.73%). With the move higher in Gold, the commodity is now trading at its highest levels since the beginning of the year.
Looking forward, retail earnings will be in focus as Target, Home Depot, Lowes, TJ Companies, Macy’s, and Walmart are all set to report numbers from the first quarter. Additionally, Fed minutes will be released on Wednesday, giving investors potential insight into the committee’s April 27th and 28th meeting, despite all indications showing they will continue to be patient and provide support as needed, allowing inflation to run “hotter” in the near term in order to achieve their 2% target.

INTERNATIONAL
Last week, global equities slid 1.58% as inflation worries added to earnings announcement of volatility. The risk-off sentiment led to an accentuated selloff in consumer discretionary and information technology, down 3.62% and 2.99%, respectively. Brent oil fluctuated around the $68 level as global demand continued to recover. Gold gained 0.67% last week, slowly gaining momentum after a down cycle. On Friday, we saw a small rebound in equities as bargain hunting took central stage. However, whether the market accepts the new inflation regime remains to be seen.

EUROPE
The European Union and the United States found an agreement over metal tariffs as Biden is set travel to Brussels next month. Valdis Dombrovskis, Executive Vice President of the European Commission, commented “this decision affirms our determination to find effective joint solutions to this dispute which will end the tariffs imposed on the EU for reasons of national security, and to tackle global steel and aluminum excess capacity, and preserve our industries”. The Euro STOXX Index declined 0.49% last week.
In Italy, a new study from the National Health Institute showed that COVID-19 vaccines were highly effective after the first dose. According to the test results, 35 days after the first dose, hospitalizations and deaths significantly decreased among the non- vaccinated population. Prime Minister Mario Draghi plans to start phasing out restrictions previously set and seeks to remove it from June 21st in low risk regions, and introduce a “national green pass” to facilitate domestic travel in the second half of May. In April, the Italian Consumer Confidence index rose to the highest level since September 2020. The FTSE MIB index gained 0.63% last week.
In the United Kingdom (UK), Boris Johnson implied that the Indian variant of the COVID-19 virus could jeopardize the June 21st lockdown easing if existing measures failed to contain its spread. He said that there is no evidence suggesting that vaccines are not effective against the new variant. The variant has already caused 17 fatalities in the UK as infections tripled in the past week according the Public Health England figures. In April, the British Consumer Confidence index surged to the highest level since February 2020. The FTSE 100 index dropped 1.21% last week.
APAC
In China, retail sales rose 17.7% year-over-year in April, lower than the consensus forecast of 25% expansion. In the fourth quarter of 2020, retail sales reached a record four trillion Yuan before fading around three trillion Yuan from January to April 2021 due to the seasonal weakness. Frederic Neumann, head of Asian economists at HSBC said, “if households fail to step up their spending in the coming months, the authorities may be forced to loosen the reins on liquidity and investment spending to prevent a sharper deceleration in growth”. The Shanghai Composite Index gained 2.09% last week.
In Japan, the state of emergency status due to COVID-19 has been extended to three more prefectures. Prime Minister Yoshihide Suga said that a nationwide state of emergency is not a viable option for now, citing the uneven spread of the virus in different regions. He also told reporters that the government was ready to ease restrictions in areas of the country that kept the virus under control. Since the beginning of the third state of emergency, daily cases rose to the highest level since January. The Nikkei 225 index declined 4.34% last week.
EMERGING MARKETS
Taiwan announced new restrictions amid rising COVID-19 infections. Under new rules published by Taiwan’s Centers for Disease Control, indoor gatherings will be limited to 100 people and outdoor events will have a maximum capacity of 500 people for the next four weeks. Less than 1% of the population has been vaccinated so far, as virus cases have remained marginally relative to other countries. The government never had to impose lockdowns to protect its population since the beginning of the Coronavirus crisis. The Taiwan Taiex Index dropped 8.43% last week.
In Mexico, the Central Bank maintained benchmark interest rates at 4% despite annual inflation moving above its 3% target. Banco de Mexico stated in the monetary policy press release “since the last monetary policy decision, the Mexican Peso appreciated lightly, shorter-term interest rates increases and longer-term ones fluctuated in a narrow range. Although the economic recovery slowed during the first quarter, higher growth is expected for the rest of the year, with a more equilibrated balance of risks.” Mexican stocks slid 0.06% last week.
The information provided, including any tools, services, strategies, methodologies and opinions, is expressed as of the date hereof and is subject to change. Level Four Capital Management (“LFCM”) assumes no obligation to update or otherwise revise these materials. The information presented in this document has been obtained from or based upon sources believed by the trader or sales personnel or product specialist to be reliable, but LFCM does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this document. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view. Any headings are for convenience of reference only and shall not be deemed to modify or influence the interpretation of the information contained.
This material has been prepared by personnel of LFCM and is not investment research or a research recommendation, as it does not constitute substantive research or analysis. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject LFCM to any registration or licensing requirement within such jurisdiction. It is provided for informational purposes, is intended for your use only, and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned, and must not be forwarded or shared with retail customers or the public. The information provided is not intended to provide a sufficient basis on which to make an investment decision. It is intended only to provide observations and views of certain LFCM personnel. Observations and views expressed herein may be changed by the personnel at any time without notice.
Nothing in this document constitutes investment, legal, accounting or tax advice or a representation that any investment strategy or service is suitable or appropriate to your individual circumstances. This document is not to be relied upon in substitution for the exercise of independent judgment. This document is not to be reproduced, in whole or part, without the written consent of LFCM.
Asset management services offered through Level Four Capital Management, LLC an SEC-registered investment adviser.