highlights
- U.S. indices generally ended lower on the week with the exception of the NASDAQ which closed higher, snapping its four-week losing streak.
- Bitcoin declined 28% over the five days, its largest decline since the beginning of the pandemic.
- May’s Philly Fed Index’s showed that the “prices paid” hit the highest in 41 years, while the IHS Markit Flash Services and Manufacturing PMIs both hit fresh records.
- Investors pulled $1.1B from technology-related funds for the week ending May 19th, while TIPS saw inflows of $2B.
- 86% of S&P 500 companies who have reported earnings have beaten expectations, with the average surprise being 22.5%.
- Rates on the 10-year breakeven dropped by the most on a weekly basis (due to inflation expectations declining) since September, capping any rise in Treasury yields.
- BlackRock’s $16B iShares MSCI USA Momentum Factor ETF is set for a major overhaul later this week, when upwards of 68% of the holdings will change.
- U.S. home prices surged the most since the end of 2005 as a shortage of properties to buy fueled bidding wars as the S&P CoreLogic Case-Shiller index of property values climbed 13.2% in March y/y.
- In Brazil, the two-year inflation breakeven rose to 5.39%, the highest level since 2016. The Brazil Ibovespa Index gained 0.58% last week.
- In India, the government extended its lockdown to May 31st and suspended vaccines on the 18-to-44-year-old population due to a shortage of doses.
LAST WEEK
Broader U.S. markets closed lower on the week, with the exception of the NASDAQ which ended higher by 0.31%, snapping its four-week losing streak. Growth outperformed value, buoyed in large part by the Tech sector, which was amongst the best performing on the week. Treasuries were little changed as the 10- year continued to hover around 1.60%. The Dollar was weaker against other major crosses, remaining near three-month lows (DXY staying right at the 90 level) while gold rallied, adding 2.10%.
Headlines and volatility throughout the week were primarily focused around the Crypto selloff, which caused Bitcoin to decline about 28% over the five days, its largest decline since the beginning of the pandemic. When all was said and done, the Bloomberg Galaxy Crypto Index fell the most on record since March 13, 2020.
The decline in various crypto currencies came after Elon Musk’s criticism of Bitcoin’s energy use, margin calls (700K traders had their accounts liquidated to the tune of $8.1B), and the prospect of growing regulatory oversight. Ultimately, there was a lot of noise with no change to the overall market narrative and themes that investors have seen persist the last six to eight weeks.
EARNINGS SEASON
Retail earnings released throughout the week only confirmed the stronger U.S. consumer theme as Target, Walmart and Home Depot all beat comparable estimates, driven by higher savings rates, fiscal stimulus, and pent-up demand.
By the close Friday, more than 95% of S&P 500 companies had reported 1Q results, with 86% of announcements coming in ahead of earnings estimates. For companies beating estimates, the surprise to the upside has been about 22.5%. Following only behind the 2Q of 2020, when the surprise above estimates was 23.1%.
INFLATION CONCERNS
inflation was once again the primary focus on the week as various data points released did little to combat what investors were already seeing. The release of May’s Philly Fed Index’s showed that the “prices paid” hit the highest in 41 years, while the IHS Markit Flash Services and Manufacturing PMIs both hit fresh records. Even as inflation read-throughs continue to push higher, fears appeared to somewhat abate as commodity prices, including lumber, copper, and iron ore all retreated from recent record levels. Additionally, rates on the 10-year breakeven dropped by the most on a weekly basis since September, capping any rise in Treasury yields and helping support growth names which have been rattled by rising inflation expectations.
With the recent spike in inflation expectations, Bank of America noted that investors pulled $1.1B from technology funds in the week ending May 19th, while TIPS inflows of $2B were the biggest in 24 weeks.
FED MINUTES
The release of April’s FOMC meeting minutes did little to surprise investors and continued to stress that the U.S. economy remained far from the Fed’s end goals.
While most Fed officials have maintained that they will remain patient, various participants in the group’s meetings have suggested that if the economy continues to progress, it might be appropriate to begin discussions on tapering bond purchases. Currently, purchases have remained unchanged at $80B/month for Treasuries, and $40B for Mortgage-Backed Securities. However, this was before the recent weaker-than-expected economic data was released, which may only extend the “lower for longer” mantra the group has adopted.
THIS WEEK
U.S. equities climbed across the board on light volume in Monday’s session. Trading volume in U.S. equities fell to the lowest of the year, as investors remained tentative on the direction of the S&P 500’s next move. Despite the S&P 500 climbing to a two-week high and the Dow Jones jumping nearly 200 points, the S&P remained stuck in its 170-point band since early April.
Tech stocks picked up where they left off last week and were the second best performing sector on Monday, behind Communication Services. All 11 sectors in the S&P 500 advanced and the NASDAQ was the best performing index on Monday, jumping 1.41%, its third best day in more than a month. Treasuries advanced ever so slightly, with yields declining around 1.5bps throughout the curve.
There was little news behind the advance as major indices moved higher on very light volumes. Stocks behind the economic re-opening seemed to advance (Airlines, Cruise Lines and Theaters) more than other pockets of the market as new infections in the U.S. rose at their slowest pace since the pandemic began. The positive sign offered hope that the U.S.’s vaccination campaign is continuing to cut down on the spread of the virus which could allow the CDC to remove further restrictions, including allowing cruises to resume. Thus far in the U.S., 287M doses have been administered (1.68B worldwide), with an average of 1.78M doses/per day in the past week.
FED COMMENTARY
Fed speak was once again in high demand as the following members gave comments around interest rates and the economy:
- Federal Reserve Governor, Lael Brainard, predicted near-term pricing pressures would subside and supply bottlenecks would eventually unwind. She added that the Fed has “the tools and experience to gently guide inflation” back down should it remain above the group’s target.
- James Bullard, Federal Reserve Bank of St. Louis President, told Yahoo Finance that the time to taper would come in the months ahead, but that “we’re not quite there yet”.
- Federal Reserve of Atlanta President, Raphael Bostic, said he doesn’t expect inflation to be “enduring” and called the economy more resilient than expected.
MAJOR MAKEOVER
BlackRock’s $16B iShares MSCI USA Momentum Factor ETF is set for a major overhaul later this week, when upwards of 68% of the holdings will change in order to incorporate the market’s top performers over the past year. Estimates out of Wells Fargo have shown that Financial stocks could comprise 33% of the ETF (currently it is less than 2%) while Technology names are anticipated to make up just 17%, a decrease of about 23% from its current weight.
INTERNATIONAL
Last week, global equities advanced 0.35%, led by health care, real estate, and information technology. Cyclicals came under pressure after recent outperformance narrowed the valuation spread with growth stocks. The Group of Seven nations (G-7) will meet next month to discuss the implementation of global COVID-19 certificates that will facilitate global travel. Some Central Banks have started to raise interest rates amid rising prices. Supply chain disruptions remain a concern as Coronavirus spreads in key manufacturing hubs.
EUROPE
Governing Council Member, Martins Kazaks, hinted that the European Central Bank (ECB) could make a decision on scaling back its emergency asset purchase program next month “if conditions remain favorable”. The ECB still expects 4% growth this year for the Eurozone, despite a difficult first quarter. According to Bloomberg, the EU has been very proactive regarding the COVID-19 vaccination campaign, as more than 25% of residents received at least one dose. The Euro STOXX index gained 0.29% last week, led by consumer staples, up 3.47%.
Germany plans to impose new restrictions for travelers from the United Kingdom (UK) as the Indian strain of the Coronavirus continues to spread quickly. German Chancellor, Angela Merkel, said, “this variant seems to be even more aggressive than the British mutation. That means we will have to be careful.” European Union officials agreed in principle to adopt a digital COVID-19 Certificate that will facilitate free movement among EU countries this summer. The DAX index gained 0.14% last week.
In the UK, Bank of England governor, Andrew Bailey, said that inflation would likely be temporary, while one of his deputies commented that it would eventually come down near 2% as growth loses momentum. The 10-year inflation breakeven rate gained 50 bps this year as cost pressures weigh on businesses and households. The British pound strengthened for the third consecutive week against the U.S. dollar. The FTSE 100 index declined 0.36% last week.
APAC
In China, commodity exchanges took measures to cool off surging commodity prices. Indeed, the Dalian Commodity exchange raised the margin requirement before commenting, “market players should participate rationally to guard against risks and ensure smooth functioning of the market”. The Shanghai Futures exchanges also raised trading costs to cool off speculation. Copper prices initially declined on the news before rebounding on expectations of strong demand. The Shanghai Composite index dropped 0.11% last week. In Japan, the government approved the use of COVID-19 vaccines developed by AstraZeneca and Moderna. According to Bloomberg, 8.78M doses have been given so far, enough to cover 3.5% of the Japanese population. The government continues to be under pressure as more and more public figures, including Softbank’s founder and CEO, Masayoshi Son, are calling for a cancellation of Tokyo Olympics. The government sees this event as an opportunity to jumpstart the economy after the GDP declined 1.9% in the first quarter. The NIKKEI 225 rose 0.83% last week, led by auto manufacturers.
EMERGING MARKETS
In Brazil, the two-year inflation breakeven rose to 5.39%, the highest level since 2016. Economists expect consumer prices to grow 8% in May, up from 6.76% in April. The Brazilian Central Bank lifted the benchmark interest rate to 3.5% earlier this month, and announced another 75 bps hike in June. Brazilian inflation-linked bonds have been a popular product among traders as a hedge against rising prices. The Brazil Ibovespa Index gained 0.58% last week.
In India, virus cases slowed to the lowest level in more than a month. The country reported 222,315 new infections on Monday and 4,500 daily fatalities. The government extended its lockdown to May 31st and suspended vaccines on the 18-to-44-year-old population due to a shortage of doses. The Indian economy grew 6.4% in the first quarter according to the Bureau of Economic Analysis. Indian stocks gained 3.39% last week.
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