- U.S. stocks gained 0.40% last week, despite a global risk-off sentiment mid-week amid lower growth expectations and virus variants threatening the full reopening.
- After a rampant start of the year, financials were challenged by falling yields as the 10-year fell to 1.30%.
- Growth stocks gained 0.91%, led by mega cap tech stocks, while value stocks dropped 0.10% as cyclicals came under pressure.
- Small caps on the other hand appear to be losing their appeal now as the Russel 2000 index has only gained 2.15% in the last three months, versus 6.22% for the S&P 500.
- The S&P 500 gained 0.35%, lifted by cyclicals. Auto manufacturers gained 3.58% and investment banks and brokerages added 2.23% ahead of banks’ earnings.
- Prices paid by U.S. consumers surged in June by the most since 2008, topping all forecasts and complicating the Federal Reserve’s debate.
- The European Union (EU) has decided to put on hold its digital levy proposal to focus on the global tax agreement proposed by U.S. Treasury Secretary Janet Yellen.
- China’s government adopted new rules that will give Beijing authorities the right to veto international stock market listings. The Hang Seng Index dropped 3.41% last week.
- In South Korea, year-over-year exports grew 39.7%, slightly lower than the 45% growth registered a month earlier.
- In Brazil, policy makers said that they will remain committed to achieve their inflation target of 3.75% in 2021. The Brazil Ibovespa index dropped 1.72% last week.
Last week, U.S. stocks gained 0.40% despite a global risk-off sentiment mid-week amid lower growth expectations, and virus variants threatening the full reopening. Once again, the market was bifurcated between secular growth stocks and value-oriented reopening names that have done very well year-to- date. Growth stocks gained 0.91%, led by mega cap tech stocks, while value stocks dropped 0.10% as cyclicals came under pressure. The CBOE Volatility index (VIX) peaked at 20.97 on Thursday, before collapsing to 16.18 on Friday as the market recovered.
After a rampant start of the year, financials were challenged by dropping yields as the Fed gave its timeline for rate hikes and inflation fears cooled off. As we entered the summer season, which is typically synonymous with low volume and low volatility, investors flew to what became the safety trade last year during the pandemic. The so-called FANG stocks are in the spotlight again in the media, as momentum appears to be on their side.
On the other hand, small caps appear to be losing their appeal now as the Russel 2000 index has only gained 2.15% in the last three months, versus 6.22% for the S&P 500. Last week, small caps underperformed large caps, down 1.12%. Investors entered the year with strong assumptions regarding inflation, but the rate of change of economic data gave valid reasons to reconsider. For instance, chasing commodities at elevated levels has been a painful exercise in the last couple of months.
PRICE DISCOVERY IN COMMODITIES
Despite the difference between precious metals, metals, grains, crops, and other natural resources, their recent chart patterns are very similar. The steel index peaked at the beginning of May and has been consolidating ever since. The same is true for lumber, copper, corn, and even gold and silver. Peak prices in commodities also coincided with peak global PMI. In fact, the June JPMorgan Global PMI print showed signs of growth rolling over. In a few months, we will be able to tell if the correction in commodities was a leading indicator of a broader market event.
Crude oil has been resilient to the strengthening of the U.S. dollar unlike other commodities. Indeed, the WTI price momentum showed no sign of slowing down until the recent Saudi-UAE clash at a highly anticipated OPEC+ meeting. The failure to reach a deal initially pushed WTI as high as $76.94 per barrel, before coming back down close to the $74 level in the following days. Uncertainty remains regarding the next meeting and whether OPEC+ will decide to raise its output. Last week, the oil volatility index peaked up mid-week as the market tried to find fair value following the aborted OPEC+ meeting.
Last week, the 10-year dropped below 1.30% as economic data continues to show weakening inflation pressure. The Corporate high yield spread with the 10- year moved off the lows from 2.22% to 2.35%. The AGG index rallied, lifted by investment grade bonds, before rolling over at the end of the week. Financials suffered an over 3.6% weekly loss before recovering on Friday as yields rose. Looking at the Fed’s balance sheet, we did not find any clue of buying activity, which shifted the focus to foreign buyers. Last week, we saw a slight uptick in the U.S. dollar, hinting that safety assets were in demand globally.
Throughout the last few weeks, the 10-year has not shown any clear directional conviction, which shows that the market is struggling to identify if inflation is transitory or not. According to the Atlanta Fed Wage growth tracker, wages grew 3.2% in June, versus 3% a month earlier. Labor shortage appears to be a continuing concern as evidenced by the 9202k outstanding job openings. Recent reports showed that the Biden administration has cancelled over $1.5 billion of student loan debt. This measure, in theory, should add liquidity to the economy and fuel inflation expectations. The market has already priced in the impact, and for now, it looks marginal.
Domestic equities advanced on Monday following the strong rally on Friday. The S&P 500 gained 0.35%, lifted by cyclicals. Auto manufacturers gained 3.58% and investment banks and brokerages added 2.23% ahead of banks’ earnings. The tech-heavy NASDAQ gained 0.21% as software and computers were outshown by banks and insurance companies, which were up 0.91% and 0.72% respectively. Reporting this week and kicking off the earnings season big banks JPMorgan, Bank of America, and Goldman Sachs. Investors will monitor the second quarter performance and the guidance given the current interest rate environment.
The CPI rose 0.9% month-over-month in June, higher than the 0.5% survey estimate. The increase is mostly attributed to the surge in used vehicles prices, as well as hotel stays, car rentals, apparel, and airfares. Inflation rose 5.4% year-over-year, versus the anticipated 4.9%. On Wednesday, Fed Chairman Jerome Powell will testify before the U.S. House Committee on Financials Services at the Semiannual Monetary Policy Report to the Congress. On Thursday, he will testify before the U.S. Senate Committee on Banking, Housing, and Urban Affairs. We will closely monitor these events as we expect some headlines that can potentially move the market.
Last week, global equities dropped 0.15%, dragged by the underperformance of cyclicals. Energy stocks lagged the index, down 2.64% amid fear that the reopening could be delayed in certain regions. Real estate led the MSCI ACWI index with a 1.47% weekly gain as demand for residential properties continues to outpace supply. Overall, flight to safety was the prevalent theme as uncertainties regarding global supply chains as well as supply and demand dynamics impede investors’ confidence.
The European Union (EU) has decided to put on hold its digital levy proposal to focus on the global tax agreement proposed by U.S. Treasury Secretary Janet Yellen. Margrethe Vestager, EU’s technology Chief, said that digital levy discussions would resume in October, once the global tax deal is finalized. According to her, it has a different purpose because it is designed to take a cut of company revenue, not profit. Last weekend, G-20 nations agreed on the outline of a global tax deal. The Euro STOXX index declined 0.24% last week.
Margarita Delgado, a member of the European Central Bank’s (ECB) supervisory board, warned that the ECB could use tools to constrain banks to return to an average dividend policy if banks reward shareholders excessively. Some of the tools that the ECB could use include increasing capital requirements or implementing qualitative measures. The ECB is trying to prevent insolvency risks and is pushing banks to have a prudent recognition of non-performing loans. European banks were down 1.95% last week.
China’s government adopted new rules that will give Beijing authorities the right to veto international stock market listings. According to the ruling, companies possessing over one million users’ data will be pre-screened before their international IPO. Consequently, ByteDance, the parent company of the social media app TikTok, decided to delay its IPO to address data security risks. There are currently 248 Chinese ADRs listed on U.S. exchanges with over $2.1 trillion of market capitalization. The Hang Seng Index dropped 3.41% last week as mega tech stocks continued to slide. The Shanghai Composite index gained 0.15%, lifted by industrials, up 1.68%.
In Japan, Prime Minister Yoshihide Suga decided to ban spectators from the Tokyo Olympics to control the spread of COVID-19. The alarming infection rate pushed the government to declare another state of emergency in Tokyo from July 12th to August 22th. The Games will take place from July 23th to August 8th, with over 11,000 competitors and thousands of staff and officials. A recent survey by broadcaster JNN showed broad support for fan-free Olympics. The NIKKEI 225 declined 2.93% last week.
In Brazil, policy makers said that they would remain committed to achieving their inflation target of 3.75% in 2021. The Central Bank of Brazil is monitoring the impact of the reopening on inflation. Brazil economists now anticipate that policy makers would raise the benchmark interest rates to 7% at the end of the year. At the last meeting, Central Bankers pledged a 75 bps rate hike at the August meeting. In June, the year-on-year CPI climbed 8.35%, which is the highest level observed since September 2016. The Brazil Ibovespa index dropped 1.72% last week.
In South Korea, year-over-year exports grew 39.7%, slightly lower than the 45% growth registered a month earlier. The data point fuels the narrative around global decelerating growth, although global demand remains strong. The Korea manufacturing PMI improved from 53.70 in May to 53.90 in June as business trends continued to improve. According to IHS Markit, input costs rose at the fastest pace since January 2008. The Bank of Korea expects 4% GDP growth this year. The KOSPI index declined 1.94% last week.
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