The week started on a downer, with pundits trying to attribute the negative worst single-day equity performance since May 12th to everything we already knew plus #Evergrande, a largely indigenous Chinese situation that represents limited significant risk outside of #China (aside from suppliers). Perhaps the dearth of news was the simple reason that Evergrande stole headlines, although admittedly, how this situation is “resolved” will be interesting. Even though it is largely a China matter, we can’t forget that China is the world’s second largest economy and that anything that slows China’s growth can and will be felt internationally. I wrote about Evergrande on Monday in an article you can find here should you want to know more about this intereting situation.
Investors seemed to quickly figure out that Evergrande would not have an effect broadly across global markets by Tuesday, as they turned their attention to the #FOMC decision and the Q&A with Chairman #Powell on Wednesday that was to follow the press release. I listened to the Q&A and read the press release and revised economic plan for the US, and I didn't think that there were any surprises. #Tapering is set to begin later this year and should wrap up by mid-2022, with a series of increases in the Fed Funds rate to follow beginning in 2H22 and continuing through early 2024, assuming the Fed’s economic assumptions prove correct. Mr Powell also addressed some other issues, which you can read about in this short article I wrote on Wednesday here. The reaction of investors to the FOMC minutes was largely nonchalant initially, although by Thursday, Monday’s downtrodden sentiment seemed to be forgotten, and off we went again. However, the central bank’s uber-accommodative policies also served as a reminder that the Fed has the back of the US economy, perhaps leading to ongoing inflationary pressures. Yields on US Treasuries responded accordingly in the latter half of the week, as did the tilt in US equities.
Let’s turn to the tables. Although global #equities got hammered on Monday in the worst single-day sell-off since May, they found their footing most of the rest of the week and clawed back the day’s severe losses plus some. The best performing global index that I track for the week was the #FTSE 100, and the worst was the MSCI emerging markets index. Someone, China – very much in the centre of the storm – ended flat, perhaps it was closed the first two days of the week.
In the US, there was a clear tilt back towards reflation and value and away from momentum stocks, at least if you accept that the #DJIA (+0.6% W-o-W), the #Russell 2000 (+0.5% W-o-W) and the #NASDAQ Composite (flat W-o-W) are proxies for reflation, value and momentum, respectively. The week started badly as already mentioned, with the S&P 500 down 2.9% at its lowest point on Monday although the index managed to claw back some these losses by the end of the day, ending the tumultuous day down “only” 1.7%. The “buy-the-dip” crowd did indeed show up, and these investors helped stabilise equities the rest of the week as the S&P 500 clawed back the rest of Monday’s losses as the week wore on, even managing to end positive W-o-W.
US Treasuries came under pressure mid-week, with perhaps the FOMC minutes and #Powell Q&A that followed being the catalysts. As I mentioned already, I didn’t think that there was anything new in the FOMC release and the Q&A, other than reminding investors that the Fed will remain accommodative until the US reaches full employment, which is likely to be for some time. The benchmark 10-year UST yield widened 10bps W-o-W, closing at its highest level (1.47%) since late June. The #UST yield curve also steepened as measured by the 2-10 year yield difference
In fact, it was not only the UST market that felt pressure last week, but government bonds in all of the markets I track. The most pronounced yield widening occurred in the UK, with the 10-year UK #Gilt closing the week at 0.92% (+11bps W-o-W), its highest yield since May 2019 – well before the beginning of the pandemic – and significantly higher than its closing yield at the end of 2020 (0.20%). The #UK is facing increasing inflationary pressures, something the BoE will most certainly be focused on in the coming weeks.
In #corporate #credit, there was little movement this week in spreads although yields widened slightly as yields on underlying UST bonds increased. The fact that credit spreads across the quality continuum remained relatively stable, even with equity market turbulence, shows that US and European corporate bonds remain well bid and have not been affected by the Evergrande situation in China (Evergrande $ bonds 25-30 cents on the dollar).
Speaking of China, the Chinese government announced on Friday that it would ban all #cryptocurrency transactions and stop digital mining, which caused the cryptocurrency broadly to fall further after what had been a difficult week anyway. #BTC was at $42,730 as of the time I am writing this, a decline of 10.3% W-o-W.
As far as havens, the US #Dollar was flat on the week whilst #gold and the #Yen were slightly weaker. #Oil prices continue to buck the trend, with perhaps the ongoing accommodative stance of the Fed and other central banks contributing to a solid 2.8% increase in WTI crude (to $73.95/bbl) W-o-W. After a week that started on a difficult foot, we in fact ended the week on a fairly positive and constructive tone, closer to “risk on” than “risk off”. It all continues to make me relatively uneasy as we look towards October, which has been a difficult month for financial markets in the past.
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