We’re up, we’re down, we’re all around. Still yet, the trend of steady improvement across most asset classes carried on for much of the week, although equity markets faded into the close during the second half of Friday’s session to end the week mixed. In summary:
Global equities mixed, with US and Japanese stocks being the worst performers and European and emerging markets stocks the best
US Treasury yields were lower 8bps-10bps across the curve
Corporate credit continues to be better bid with spreads tightening in both investment grade and high yield
Gold hits record highs, Bitcoin surges (again), the US Dollar weakens, and Yen strengthens
SENTIMENT DRIVERS LAST WEEK
Even though there was some US economic data released last week (including Friday’s jobs report) and an ECB rate decision, the focus seemed to be more squarely on politics, at least in the UK and Stateside.
UK spring budget: Conservatives woo voters
In the UK, Chancellor of the Exchequer Jeremy Hunt released his spring budget on Wednesday, which included tax cuts (to the extent of projected headroom) in order to prop up the sagging prospects of the Conservative Party as an election looms in the autumn, which it appears highly that they will lose anyway. Although I personally tilt more towards the philosophy of the Conservative Party, it’s hard to argue that Labour doesn’t deserve a chance given how the string of incumbent Conservative PMs have bungled nearly everything over the last seven years, starting with calling a BREXIT referendum that did not go at all as expected. You can find the spring budget on the gov.uk website.
US presidential election: get ready for the fireworks
In the US – much to the chagrin of supporters of both major political parties – Americans are left with what are two far-from-satisfactory choices in the upcoming Presidential election – an arguably “too old” President Biden and a former president (Trump) facing a litany of criminal and civil charges. Is that the best we can do? Now the world has to endure eight months of misinformation and vitriol flying back and forth. Can you imagine choosing between an increasingly frail 81-year old incumbent, who has done (in my opinion) a decent job but is arguably too old, and a bombastic nutter who can veer one way or the other so fast it’s hard to say at times what he is even talking about? I don’t know – I just can’t get my head around the fact that the President Biden wouldn’t step aside for a higher-energy candidate that connects more with the electorate, or that former President Trump won his party’s nomination so easily given his very dodgy past. Regardless, the campaign is off-and-running with President Biden setting the stage with a fiery State of the Union Address on Thursday, which you can watch here (go 20 minutes into the video for the start).
ECB rate decision: nothing doing
The European Central Bank concluded its latest monetary policy meeting on Thursday and announced its decision, which was to do nothing just as expected. However, the groundwork is clearly being laid for a series of rate cuts this year based on comments by ECB President Lagarde, who suggested that “summer rate cuts” are likely. According to #Bloomberg, investors are indicating with a 90% probability that the ECB cuts its policy rates for the first time in April, with probability-adjusted reductions of 141bps expected for the full year. With inflation slowing and an increasingly stagnant European economy, especially the bloc’s largest member Germany, it is almost certain that the ECB will officially shift to a dovish stance soon. I expect the ECB will reduce its policy rates before the Fed and Bank of England. The ECB press release from Thursday is here.
Fed chairman Powell: Congressional interrogation
How I loathe when the Fed Chairman is dragged in front of Congress for two days (House committee on Weds, Senate committee on Thurs) to handle the inquests of Congressmen. Some members of Congress come across as blatantly ignorant as far as financial markets and basic economic principals, and nearly all of the House and Senate committee members use these inquisitions as an occasion to “grandstand” for their next election. It is horribly distasteful, but very much in line with messy, partisan and dysfunctional US politics at the moment. I didn’t really learn anything differently reading and listening to some of the testimony and Q&A vis-à-vis what Mr Powell and the Fed talking heads have been saying now on the speaking circuit for weeks – expect “higher for longer.” I did find the Mr Powell’s comments about the Fed’s willingness to continue to scrutinize (rather then immediately endorse) the so-called BASEL III Endgame proposals (mainly higher capital requirements if I understand) both a reflection of banks’ highly effective lobbying efforts and perhaps – at least for me – more common sense than I would normally attribute to the Fed. US banks are well-capitalised already, arguably some of the strongest in the world. Piling on more and more regulation is so very European, and can lead to distortions in the allocation of capital and dampen the lending market. And speaking of US and European banks and financial markets, the Financial Times ran two interesting articles last week, one focused on why European banks have never been able to effectively compete with the dominant global US banking giants, and the other on why European stock markets are so weak vis-à-vis the US stock markets. If you are an #FT subscriber, you can find these articles here:
NYCM “rescue”
Not all US bank news is rosy. New York Community Bank was essentially rescued via a private capital injection of $1 billion led by Liberty Street Capital, headed by former Trump Treasury Secretary Steve Mnuchin. I read a lot about concerns with US banks, especially those with significant and concentrated commercial real estate portfolios. This is entirely understandable, and some banks will face trouble ahead. However, keep in mind that while troubled banks grab news, the reality is that there are over 4,000 banks (and over 75,000 bank branches) in the US. Overall, the US banking system is in solid shape and seems ready to handle severe stress scenarios should they unfold.
US February jobs report
The February jobs report was released Friday before the open. The report (here) indicated that 275,000 new jobs were added in February, more than the 198,000 expected, but the unemployment rate increased to 3.9% (from 3.7% in January). Wage growth was a modest 0.1%, an encouraging signal as far as inflation. Payroll additions for December and January were modified down. The report was relatively benign in aggregate and well-received by investors.
What is ARK doing (if you should you care)?
Do you care about what Cathy Woods’ flagship #ARK Innovation Fund (ARKK) is doing? Do you consider her recommendations like some investors consider Jim Cramer’s – bet the other way? For my readers that do not know, Ms Woods heads a series of actively managed ETFs focused on disruptive technology (including biotech). ARK’s ETFs report their trades the next day. If you are interested in knowing, #ARKK was buying Tesla (TSLA) and ROKU and selling Coinbase (COIN) all week, rather contrarian trades. She has in the past been the other way on the same names, so perhaps this is a valuation judgement, something I find unusual as far as the ARK philosophy.
Larry Summer weighs in on the neutral rate
Larry Summers was interviewed by David Westin on Bloomberg’s Wall Street Week last night, stating that the Fed’s apparent target of a 2% neutral rate (for Fed Funds) is far too low. He also suggested that the Fed might not reduce Fed Funds rate at all this year, and that there is even a 15%+ chance that the Fed could increase the Fed Funds rate again. I have a lot of time for Mr Summers, and this interview is worth listening to. You can find it on YouTube here.
MARKETS
As I mentioned at the start of the update, markets were up and down this week, sliding the first couple of days, clawing the losses back plus some mid-week, then fading in the second half of Friday’s session having moved into positive territory in the morning. It’s a rare occasion when I report that the US and Japanese markets were the weakest equity markets last week, all of which lost ground, while European and emerging markets were the best performers. US bond yields were lower across the curve as investors ultimately interpreted the February jobs report as a tilt towards earlier-than-expected Fed rate cuts (I don’t buy that). Bitcoin was interesting in that its trading range widened, but still, it was up nearly 10% WoW (again). Gold was better bid, also reaching record highs. (I released a guest-post on gold mid-weak courtesy of #BullionVault, which you can find here.) The US Dollar weakened against the Dollar index, which I attribute more to a strengthening Yen as investors get on board with the Bank of Japan starting to tighten its years-long accommodative monetary policy.
MY TRADES LAST WEEK
I got a bit of an itch early in the week when markets were weak, adding back some Eli Lilly (LLY), even though the valuation is ridiculous, and a bit more Visa (V). I was “legging in” as my son would say through these scrappy adds. I also wrote come covered calls on Apple shares and used the proceeds to buy puts as a hedging strategy; better late than never but felt I better put this on since AAPL is such a significant position in my portfolio. Otherwise, I am waiting on opportunities should markets ever stop this one directional march higher.
THE TABLES
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.
Global equities
US equities
US Treasuries
Corporate bonds (credit)
Safe haven and other assets
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