highlights
- Domestic stocks rallied again as the three primary indexes all ended higher for a second straight week, dating back to April 9th and April 16th as the last time all three indexes pushed higher in back-to-back weeks.
- Non-farm payrolls showed the U.S. economy added 559K jobs in May versus consensus estimates of 675K. Markets rallied on the weaker data, as investors hoped this would keep the Fed lower for longer.
- After the jobs report, Treasury yields tumbled below 1.56%, falling more than 7bps on the 10-year, its sharpest move in over two weeks.
- According to the Washington Post, President Biden reportedly offered Congressional Republicans a 15% tax floor, instead of a corporate tax hike.
- U.S. Treasury Department is scheduled to auction about $120B in new debt throughout the week.
- The most talked about headline in Monday’s session was the FDA’s approval of Biogen’s Alzheimer drug, which buoyed the Biotech space and led BIIB to a 38% rally on the session.
- In Germany, unemployment fell by 15,000 in May, keeping the unemployment rate at 6%. The DAX index gained 1.11% last week.
- In China, the government announced a three-child policy to reverse the looming demographic trend. The Shanghai Composite Index dropped 0.25% last week.
- In India, the government plans to give free shots to citizens above 18. The Nifty 50 index gained 1.52% last week.
LAST WEEK
Domestic stocks rallied again as the three primary indexes all ended higher for a second straight week, dating back to April 9th and April 16th the last time all three indexes pushed higher in back-to-back weeks. Although equity markets rallied, the NASDAQ Composite unperformed the other U.S. benchmarks and continued its recent trend of being inversely correlated with bond yields, suffering its lowest close in almost two weeks. Cyclical sectors such as Energy, Real Estate, and Financials were amongst the best performing on the week.
Most of the week’s gains came on Friday after markets rallied in hopes that the Fed would keep rates lower for longer as payroll data released missed economist estimates. Non-farm payrolls showed the U.S. economy added 559K jobs in May, versus consensus estimates of 675K. The Dollar Index (DXY) retreated from three-week highs after the weaker jobs report, while Treasury yields tumbled below 1.56%, falling more than 7bps on the 10- year (4.40%), its sharpest move in over two weeks.
PUSH, PULL, TAX HIKE, TAX FLOOR – HIGHER OR LOWER FROM HERE?
With the move higher on the week, there were multiple outlets providing their rationale for the markets’ next move.
While history is no guide for future performance, the S&P 500 closed on its all-time intra-day high of 4,238 (previously set on May 7th), and finished at 4,229. Nautilus research analyzed the index’s performance after rising 10%-15% in the first five-months of the year, releasing their results on Tuesday.
Since 1950, the S&P 500 has now climbed between the referenced range 11 times, with the index gaining 11.9% through May this year. In all of the earlier instances, additional gains followed with an average increase of 11.5% from June through December.
While the investing and macro-economic backdrop is ever evolving, investors have been hearing about a tax increase by the Biden administration for some time with no clear-cut answers on the horizon. On Thursday morning, the Washington Post reported that President Biden was offering congressional Republicans a 15% tax floor, potentially scrapping his corporate tax hike plans in his latest effort to try and secure an infrastructure bill. Federal spending is generally financed by higher taxes, however, the market has seemingly taken the potential for an increase in capital gains in stride.
Although it may contribute to a choppier trading environment in the near term, investors have been assessing any potential move in taxes for quite some time and whatever the outcome should be, it should not come as much of a surprise.
THIS WEEK
U.S. Stocks closed mixed with the Russell 2K leading the way higher, adding 1.43% in Monday’s session, while the Dow and S&P 500 were largely unchanged, but finished lower. The NASDAQ composite saw early weakness as large cap tech underperformed, however, melted higher throughout the session, ultimately closing in the green. It was a quiet session in terms of economic news, data points and commentary, with nothing significant to note other than single stock headlines.
The dollar slipped again as the U.S. Dollar Index fell below the widely watched 90 level amid an ongoing dovish Fed, and ahead of key U.S. inflation data released later this week. Crude oil declined slightly (0.56%) from two-year highs in the most recent round of profit- taking after rallying 5% last week. Yields across the curve were largely unchanged, however, ticked higher by about 1bps throughout different maturities as the U.S. Treasury Department is scheduled to auction about $120B throughout the week in the form of 3, 10, and 30-year paper.
Perhaps the most talked about headline which buoyed the Biotech sector was the announcement from Biogen, who gained FDA approval for their Alzheimer drug Aducanumab, resulting in a ~38% rally. Other names related to Alzheimer’s rallied on the news, including Eli Lily and Company, Cassava, and AC Immune. Elsewhere, Reddit “meme” stocks surged again (AMC, Koss, GameStop, Bed Bath & Beyond, BlackBerry), while cruise lines were amongst some of the best performing after issuing an update on their summer restart timeline.
Technology stocks were initially weaker in the morning after the Group of Seven (G7) announced on Saturday that they would support a global corporate tax rate of at least 15%, potentially squeezing additional tax dollars out of large multi-national corporations such as Apple, Amazon, Microsoft and Google.
While a final accord will require the backing of additional nations with full implementation possibly taking years, it represents a cooling of transatlantic tensions seen during the Trump administration. However, even despite the news, which stands to affect the profitability of various corporations, it had little carry over into the trading session.
NEW DEBT ISSUANCE
It was a an extremely busy day for the issuance of new debt by corporations as companies borrowed money amid the best funding conditions since 2007. With 12 new U.S. investment grade deals, Monday was the biggest daily count of new issuance since March 3rd, in a sign that cheap money may not last ahead of the Fed’s decision to unwind its secondary market corporate credit facility later this year.
INTERNATIONAL
Last week, global equities gained 0.73%, as G7 finance ministers reached an agreement on a global minimum corporate tax rate of 15%. Energy led the MSCI ACWI with a 5.47% weekly increase amid Brent oil making a 52-week high of $72.27 per barrel during the week. Real estate continued to heat up, while health care lagged the index, down 0.56%. The JPMorgan Global Services PMI improved from 57.00 in April to 59.40 in May, helped by government support programs and pent-up demand.
EUROPE
European Central Bank (ECB) policy makers will meet this week to discuss the appropriate course of action regarding their monetary policy given the influx of positive economic data. In fact, the Eurozone Services PMI surged above pre-pandemic levels in May with a 55.2 reading. ECB President, Christine Lagarde, has indicated in recent weeks that she favors patience to let European economies recover, while other ECB members are more cautious about inflation. The Euro STOXX Index gained 0.55% last week.
In Germany, unemployment fell by 15,000 in May, signaling that the economy is recovering as the COVID-19 infection rate continues to trend in the right direction. Consumer confidence is also quickly rebounding from the lows, but remains below pre-pandemic levels. The German Services PMI expanded to 52.80 in May from 49.90 a month earlier, benefitting from the reopening of the economy. The DAX index gained 1.11% last week, led by auto manufacturers.
In the United Kingdom (UK), Bank of England Governor, Andrew Bailey, said that the Central Banks initiated discussions regarding the impact of climate change in the economy. According to him, there is evidence that climate risks are underpriced in financial markets. He added, “this means that continuing to replicate the structure of the sterling corporate bond market, without taking explicit account of the climate impact of bond issuers, is no longer in fact a truly market neutral approach”. The FTSE 100 gained 0.66% last week.
APAC
In China, the government announced a three-child policy to reverse the looming demographic trend. According to the Bureau of Statistics, on average, households are willing to have 1.8 children. Bloomberg Economist Eric Zhu said that the government must combine this policy with other steps to maximize its effectiveness. Some of the measures that he suggests include “birth-and parenting-friendly policies and an increase in the pension age”. The Shanghai Composite Index dropped 0.25% last week.
In Japan, Bank of Japan (BOJ) board member Seiji Adachi said that the Central Bank will be ready to act if tapering from the Fed causes a strengthening of the Yen. Household spending had an encouraging uptick in the last two months partially due to last year’s low base, but a growing number of economists see a contraction in the second quarter. In May, the Services PMI dropped from 49.50 a month earlier, to 46.50 due to COVID-19 Restrictions. The NIKKEI 225 index declined 0.71% last week.
EMERGING MARKETS
In India, the government is accelerating its vaccine rollout and plans to give free shots to citizens above 18. Prime Minister Narendra Modi has been criticized for his handling of the crisis and saw his popularity plummet from a 75% approval rating in 2019, to 51% this year. India’s top court called the government’s vaccine policy “arbitrary and irrational”. According to Bloomberg, it will take about 22 months to get 75% of the population fully immunized. The Nifty 50 index gained 1.52% last week.
In Brazil, the strong economic rebound led the Central Bank to raise its annual growth forecast from 3.52% to 3.96% despite rising inflation. The Economy Minister, Paulo Guedes, said “Brazil is on a surprising growth path. Tax revenue is breaking records month by month”. The Services PMI improved from 42.90 in April, to 48.30 in May as consumer spending surged. The Brazil Ibovespa index gained 3.64% last week, led by energy and bank stocks.
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