- Following the risk-off tone on Monday, where the Dow posted its steepest loss since October, the index proceeded to rally for the next four sessions, recouping all its losses and closing up more than 1%.
- The Russell 2K continued to underperform other U.S. benchmarks, but posted a strong weekly gain of around 2%.
- Nine of 11 sectors finished higher led by growth sectors as growth outperformed value by more than 3.5%.
- Forward earnings estimates for S&P 500 company’s y/y have surged to more than 40%, the first time since 1990.
- This week will bring a flurry of earnings releases with more than one-third of the S&P 500 set to announce..
- Hedge fund positioning in the NASDAQ 100 showed net short contracts for 22-straight weeks, its longest streak since the 2008 great financial crisis.
- Real yields fell to a record low with the 10-real yield declining to -1.127%.
- Infrastructure talks in the Senate stalled once again after Republicans rejected an offer to address various outstanding issues from the White House. The setback now brings into question whether or not the goal of passing the $579B bill will actually occur before Congress’s recess.
- In Brazil, mid-July CPI data showed that prices rose 0.72% month- over-month and 8.59% year-over-year. Brazilian stocks dropped 0.72%.
- In South Korea, the 20-day exports data shows that recovery still has legs amid Delta variant fears. The KOSPI index declined 0.69% last week.
Every story has two sides, and the same can be said for U.S. equity markets. Following the Dow Jones 725-point rout (-2.09%) in Monday’s session, the broader index proceeded to rally 3.2% over the next four sessions to close up just over 1% on the week. By the end of the week, the S&P 500, Dow Jones Industrial, and NASDAQ Composite all set new record highs, led by strong earnings momentum in large cap names.
The Russell 2K continued to underperform other U.S. benchmarks, but still posted a strong weekly gain of around 2%. Bucking the low volume trend seen through most of the summer, volumes were above average with the volatility on Monday, however, and then tapered off towards the ladder part of the week as markets went back into auto-pilot mode.
Nine of the 11 sectors finished higher, led by Communication Services, Consumer Discretionary, Technology, and Healthcare, all which outperformed the broader S&P 500. Social Media and broadcasting names were the standout performers on the week with Facebook +8.39%, Twitter +7.95%, DISH +5.65%, Fox Corporation + 2.58%, and News Corp +2.35% all adding to the Communication Services’ strong weekly performance.
Initially, the week started out on a rough note with the risk-off tone coming as COVID-19 headlines reemerged as the Delta variant continued to spread through global economies, prompting concerns of the economic recovery. The move lower pressured equities and lead to its steepest one-day decline since late October. However, throughout the week, buyers stepped in to buy the dip as fears abated and quickly moved to the back burner with investor focus turning to:
- Earnings releases
- Macroeconomic news out of China
- Fixed Income markets as yields remained muted (however, moved off the lows of Monday’s session)
- Growth prospects looking forward with yields remaining subdued
Even as buyers stepped in to propel the market to new highs, ETF flows painted a different picture as we saw notable outflows in some of the most well-known ETF’s which included:
- SPY: Lost more than $5.4B in assets last week alone
- QQQ: Posted redemptions of more than $4.1B
Looking ahead to one of the busiest weeks of earnings season, estimates for the S&P 500 have surged in large part due to anticipated profits for economically sensitive companies according to Michael Purves, CEO at Tallbacken Capital Advisors. Forward earnings estimates on a year-over-year basis for S&P 500 companies surpassed 40% in May, and have hovered around those levels since. The jump over 40% is the first time since 1990 according to weekly data from Bloomberg and continues to be driven by:
- Low interest rates
- Easy monetary and fiscal policy
- Continued economic support
- Strong consumer
Although gains were fairly muted, equity markets finished in the green on Monday closing near the highs of the session. The market was led to the upside by Value sectors, Energy, and Materials while growth names lagged those of their counterpart with Healthcare and Technology underperforming. Travel-related names posted strong gains throughout the session with airlines being a bright spot within the group.
Initially, stocks opened lower and traded in a tight range before moving to the upside briefly after 10am CT as investors continue to await the release of quarterly earnings. With more than one-third of the S&P 500 expected to report over the next five-days, the week will bring an onslaught of broker upgrades and revisions, which will undoubtedly have an impact on the already fragile backdrop.
Outside of earnings releases, management calls, commentary, and The Federal Reserve beginning their two-day policy meeting on Tuesday, it was an uneventful session on Monday, with volumes remaining well below their one year and year-to-date averages. Headlines throughout the day were scarce and included:
- Bitcoin, which rose over 20% to top $40K for the first time since mid-June, before falling back below $38K
- Chinese corporation worries as Beijing continues their government crackdown, imposing restrictions on various industries
HEDGE FUND POSITIONING
As U.S. technology companies head into a very busy week of earnings releases, there appears to be some interesting positioning occurring underneath the surface, despite Technology names continuing to lead the market higher. Looking at Hedge Fund positioning, the group has sold NASDAQ 100 futures net short for 22 consecutive weeks according to data released by the Commodity Futures Trading Commissions (CFTC). The only other time this occurred was during the 2008 financial crisis when positioning for technology was net short for 41 consecutive weeks.
Despite yields ticking up ever so slightly in Monday’s session, real yields on the U.S. 10-year fell to a record low as concerns grew over the future of economic growth. Real yields, which removes inflation effects, fell 5bps on Monday to -1.127% ahead of the Federal Reserve meeting later this week, in which they are expected to hold rates near zero and continue with their $120B/monthly asset purchases.
As the economic recovery becomes more mature and inflationary pressures continue to build, growth in the U.S. is expected to stay moderate, leaving the Fed to combat the potential effects of stagflation. While the Fed has signaled that a policy shift should occur, fixed income markets continue to paint a skeptical picture that any changes may be on the horizon in the near future.
According to 51 economists recently surveyed by Bloomberg, consensus remained that the Federal Reserve will begin scaling back asset purchases next year. The group anticipates the Fed will first start with mortgage-backed securities (MBS), followed by Treasuries, and lastly, raising rates at a quicker pace through 2024. While the recovery remains underway, this is anything but guaranteed, and in fact will most likely change based on progress made throughout global economies
Last week, the Bloomberg World index gained 1.10% as the weekly performance was skewed by the strong rally that followed the Monday global selloff. Once again, uncertainty regarding the resurgence of the virus led to market overreaction on Monday as some industries are still feeling the sequels of the economic shutdown. Some governments in Europe are starting to tighten rules and in fact, require their citizens to be vaccinated. Consumer confidence and inflation expectations will be interesting to watch to infer the direct and indirect effects of these policies.
The European Central Bank (ECB) decided to maintain its deposit rate at -0.5% and the pandemic bond-buying program at $2.2 trillion. Policy makers pledged to keep monetary policy accommodative and avoid a premature interest rate hike. The ECB also decided to lift its restrictions on banks’ dividends and share buyback from September. The Euro STOXX index gained 1.87% last week, led by basic resources, up 5.57%. Banks advanced 0.16%.
Italy decided to restrict leisure activities for unvaccinated individuals in response to a surge of COVID-19 infections. The French government faced backlash from its constituents for implementing similar measures a week prior. Prime Minister Mario Draghi said at a press conference “the use of vaccine certificates is needed to keep the economy open. No vaccines mean a new lockdown”. Italian stocks gained 1.34% last week.
In the United Kingdom, Bank of England will meet next week to give a monetary policy update. British policy maker, Gertjan Vlieghe, hinted that it is too early to tighten monetary policy, as the economy remains fragile despite rapid growth. He added that “it will remain appropriate to keep the current monetary stimulus in place for several quarters at least, and probably longer”. The FTSE 100 index gained 0.28% last week.
In China, new regulations continue to take the market by storm as authorities decided to revamp several laws tied to national security. Ride-hailing giant, Didi Global, saw its offices raided by officials and its app delisted as authorities pledged unprecedented penalties over its IPO. A gauge of Chinese U.S.-listed companies fell to 17-year lows relative to S&P 500. The Hang Seng index dropped 2.44% last week, dragged by technology stocks.
In Japan, the government has stepped up its efforts regarding the regulation of digital currencies amid the proliferation of cryptocurrencies and the popularity of Bitcoin. In fact, Japan’s Financial Services Agency has created a division that will focus on “decentralized finance”. According to Reuters, the Ministry of Finance is also adding staff dedicated to digital currencies. In parallel, Bank of Japan is conducting its digital currency trial to establish a viable proof of concept. The Nikkei 225 dropped 1.63% last week.
In Brazil, mid-July CPI data showed that prices rose 0.72% month-over-month and 8.59% year-over-year. The Central Bank of Brazil pledged to raise its benchmark interest rates by 75bps at the next meeting that will occur next week. The 10-year yield rose 3bps despite the anticipated rate hike, while the stock market dropped 0.72%. President Jair Bolsonaro remains under pressure as protests against his handling of the COVID-19 crisis proliferate.
In South Korea, the 20-day exports data shows that recovery still has legs amid Delta variant fears. Indeed, July exports are on track to grow over 30% year-over-year. Notably, shipments of cars and semiconductors to Japan and China remain strong. Bank of Korea plans to normalize rates as soon as this year if the economic growth remains in line with its forecast. The KOSPI index declined 0.69% last week, dragged by health care and materials.
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