- Stocks closed out the week with the S&P 500 posting its best weekly performance in 20 weeks following a bipartisan agreement of a $1.2 trillion infrastructure spending deal.
- The S&P posted a record close on Friday after value sectors outperformed growth.
- Crude oil crossed above $73/barrel for the first time in almost three years with the commodity adding to its four-week winning streak ahead of the OPEC+ meeting on July 1st.
- Volumes were lackluster at best with the VIX registering new 52- week lows on Thursday.
- The Federal Reserve announced the results of their Stress Test with all U.S. banks passing. Based on initial figures, capital distribution plans of the largest six U.S. banks could surpass more than $140B being distributed to shareholders.
- President Joe Biden announced a tentative infrastructure package with a group of 10 bipartisan senators, worth about $559B.
- On Monday, reopening names such as U.S. airlines, theme parks, and casinos underperformed due to concerns surrounding the Delta COVID-19 variant.
- ECB member Isabel Schnabel continued to signal that policy makers would do what is needed to support the ongoing economic recovery, saying the worst thing that could happen is to end support prematurely.
- In Hong Kong, the government decided to ban all passenger flights from Britain. The Hang Seng index gained 1.69% last week.
- In Mexico, the Central Bank raised interest rates last week by a quarter point to 4.25%. Mexican stocks gained 0.46% last week.
Stocks closed out the week with the S&P 500 posting its best weekly performance in 20 weeks following a bipartisan agreement of a $1.2 trillion infrastructure spending deal, and waning concerns about a sooner-than-expected policy tightening from the Federal Reserve. The Dow and NASDAQ composite also jumped, posting their best weekly gains since early April with the renewed risk on sentiment. Value outperformed growth although both posted strong gains, as Energy, Financials, and Industrials were the only three sectors to outperform the broader S&P gains. It is worth noting Financials posted their best week since Early February.
RESURGENCE OF OIL
Crude oil, which crossed above $73/barrel for the first time in almost three years, continued its five-week winning streak, its longest streak since December when it registered seven weekly advances. With the OPEC+ alliance set to meet on July 1st to discuss its production policy for August, expectations appear to be set that the group will only provide a fraction of supply increases, leading to a continued supply shortfall in the near term. Despite the 23 nation alliance restoring roughly 40% of the almost 10Mbpd in supply that it brought offline when demand collapsed last year, the groups most influential nations appear to be proceeding with caution and are not inclined to offer significant increases in supply.
MARKET VOLUMES & HEDGING COSTS
Volumes throughout the week were lackluster at best, as the VIX continued its decline, registering a new 52-week low on Thursday at 14.19. With the S&P 500 registering a new record close on Friday, and other U.S. indices trading near all-time highs, investors have been bidding up the prices of contracts that protect against market declines, fueling a metric known as “skew”. One such metric, the Nations SkewDex, is trading at its highest level in more than a year, highlighting the underlying skepticism of investors according to Neil Patel, Derivatives Trader at Optiver.
FEDERAL RESERVE STRESS TESTS
With the Federal Reserve announcing the results of Wall Street’s stress tests, the passing marks by all U.S. banks showed that corporations are officially free from restrictions placed on capital distributions last year as COVID-19 throttled the global economy. Of the hypothetical crisis tested, there was an 11% unemployment rate and a stock market that fell by nearly half its value. Based on the business models for each of the 23 lenders tested, all dollar figures varied but stayed above the Fed’s key capital ratio of 4.5%. If any bank falls below the required capital buffer at any point, the Central Bank could sanction the lender, including restrictions on:
- Dividend payments
- Stock buybacks
- Bonus payments
Although investors will have to wait until Monday post close to see company specific plans for the distribution of capital, the strong results mean that payouts could be near the largest ever according to Bloomberg. Early estimates show that the six largest U.S. banks could return more than $140B to its shareholders in various capacities.
On Thursday, President Joe Biden announced he had reached a tentative infrastructure deal with a group of 10 bipartisan senators for about $559B. Despite opposition from the GOP, the deal agreed upon would look to move alongside separate legislation worth trillions more, on what the president described as “human infrastructure”.
Nancy Pelosi said the House would not consider the deal without the accompanying legislation, which Democrats will attempt to pass through the Senate using a budget reconciliation process, which prevents a Republican filibuster. To make matters more complicated, the President has indicated he would like at least one of the proposed packages to pass through the Senate in a bipartisan manner, rather than using a budget reconciliation process for both, meaning he will need at least 60 votes to pass the legislation under the usual way.
U.S. Equities finished mixed as the NASDAQ surged to yet another all-time high behind strength in biotechs and Large Tech, the latter of which was the best performing sector in the S&P on Monday, gaining 1.11%. The S&P 500 posted another all-time closing high as well, while the Dow Jones fell slightly behind weakness in Boeing and United Health, both of which are among the heaviest weights in the index. The Russell 2K declined with weakness in small caps, in particular, Energy-related names as investors await jobs data, expected to be released later this week. Despite WTI crude initially rallying to two-and-a-half-year highs, the commodity ended lower ahead of this week’s OPEC+ meeting.
NO FLY ZONE, COVID-19 UPDATE
U.S. airlines, theme parks, casinos and other reopening-related names were also notably weaker in Monday’s session after commentary surrounding the Delta COVID-19 variant ramped up. Hong Kong announced they have banned flights from the UK starting July 1st after the European country reported almost 23K new COVID-19 cases, its highest new case count since January 30th. Australia continued to enforce and implement additional lockdown measures after officials urged that the country is entering a “critical time”.
Financials, more specifically banks, were busy after the close as they announced various capital distribution plans. Looking toward the rest of the week, investor attention should be on economic data releases, with perhaps most importantly being jobs data released on Friday.
Technology outperformed with strength in semi-conductor and chip-related names as the Philadelphia semi-conductor index rallied more than 2.50%. Large cap tech names also rallied on Facebooks news, after they won the dismissal of two U.S. antitrust lawsuits, delivering a blow to the FTC and a coalition of states who claimed they violated competition laws by buying both Instagram and WhatsApp.
WRAPPING UP Q2
Goldman Sachs Asset Management noted that they prefer equities over credit and government bonds in the 2H of 2021 due to expectations of continued robust global growth, which have ramped up to 4.5% from 3.7% earlier this year. The firm said they favor pro-cyclical value areas such as Financials, Energy, and Industrials. Heading into the final trading week of the quarter and first half of 2021, the S&P 500 is up about 14%, while the Russell 2K has gained 18%, followed by the Dow Jones at 12.5%, and the NASDAQ Composite posting an 11.5% gain.
Last week, global equities rallied 2.26% following the path of least resistance on a relatively uneventful week. Energy surged 4.4%, as Brent oil hit a new 52-week high of $76.18 per barrel. Materials rebounded after a sharp selloff initiated mid-May due to valuation and inflation concerns. The Delta variant of the virus continues to represent a headwind for the tourism and airline industry as government support programs fade.
Isabel Schnabel, Executive Board member of the European Central Bank (ECB), said that policy makers will continue to support the economic recovery and asked governments to avoid tightening fiscal policies that could offset ongoing progress. She said, “The worst thing that can happen is that the support is ended prematurely. I can assure you that on the monetary policy side, we’ll do everything to avoid that.” The Euro STOXX index rose 1.16% last week, led by basic resources, up 4.74%.
The German economy minister expressed optimism over settling the U.S./EU tariffs dispute over steel and aluminum by year-end. As a gesture of good faith, the European Commission suspended retaliatory tariffs on certain American goods such as Harley Davidson motorcycles. The United States and the EU agree that they must be proactive to reduce the reliance on China’s steel capacity. The steel price index is up 14.97% year-to-date, despite a 17.95% drawdown from the May 13th peak.
In the United Kingdom, Public Health England announced that a fourth lockdown might be needed this year to contain a surge in COVID-19 infections. Travel industry officials warned that195,000 jobs are at risk and advised against further restrictions. Under current rules, travelers from non-green-listed jurisdictions must quarantine upon arrival. The British aviation industry has been the hardest hit in Europe according to the British Airline Pilots Association. The FTSE 100 index declined 1.63% last week.
In Hong Kong, the government decided to ban all passenger flights from Britain as a preventive measure against the spread of COVID-19. The government issued a statement explaining that the decision was made “in view of the recent rebound of the epidemic situation In the UK and the widespread Delta variant strain there.” According to Bloomberg, 19% of Hong Kong’s population has been fully vaccinated. The Hang Seng index gained 1.69% last week.
In Japan, Bank of Japan (BOJ) decided to leave interest rates unchanged at the last meeting while extending its COVID-19 support program for small businesses. Consumer prices were down 0.10% year-over-year in May, as deflation continues to be the main concern for policy makers. BOJ Governor Haruhiko Kuroda joined Christine Lagarde on the climate change front and pledged to support environmental initiatives through monetary policy. The NIKKEI 225 gained 0.05% last week.
In Mexico, the Central Bank raised interest rates last week by a quarter point to 4.25% to cool off rising inflation. Markets started to price in additional rate hikes on Friday. Gerard Esquivel, Deputy Governor at the Mexico’s Central Bank, said that the market overreacted to this rate hike. He added, “if inflation is more or less what we expect, I don’t think there’s reason to necessarily anticipate additional hikes”. Mexican stocks gained 0.46% last week as the Mexican Peso appreciated 4%.
In Chile, policy makers signaled that a 25bps rate hike is possible in the coming weeks as the economy heats up. To prepare the markets for the policy shift, Chile’s Central Bank issued a statement highlighting that despite the imminent withdrawal of monetary stimulus, its monetary policy would remain “expansionary for a long period of time”. The Central Bank of Chile expects the economy to grow at 9.5% this year. Chilean stocks gained 1.28% last week, led by energy and materials.
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