After a rather wobbly start to the week on Monday, equity markets gradually improved until Friday, with the “in form” value-driven indices and markets powering forward slowly but surely. The steady improvement in value plays was joined during much of the week by an improvement in momentum names, a needed recovery from the prior week’s sharp losses in the go-go new tech names and other high vol markets. It appeared that US government bond yields had settled into an “acceptable” trading range for most of the week. However, just when investors thought the worst might have passed, yields gapped up early Friday morning, weighing on momentum stocks the most heavily. In fact, it felt like déjà vu. The $1.9 trillion fiscal stimulus plan signed into law by President Biden on Thursday and/or better-than-expected payrolls might have been catalysts to the sudden increase in yields on Friday. As technology shares slumped on Friday, attention turned back to value markets / indices / stocks at the expense of (still very expensive) momentum stocks, with financials also benefiting. Overall, momentum names fought till the end on Friday, managing to recover from session lows and claw back a good portion of their intraday loses. Hopefully, this will set the stage for a better week ahead, although it is unlikely to stop the thematic rotations that have been occurring now for several months, gaining steam the past few weeks. And speaking of themes, if you want to read more about disruptive and innovative companies, see the article I wrote mid-week about ARK Invest, which is here.
What happened last week?
After a soft start on Monday, equity markets were fairly strong across the board, at least until the end of the week. Importantly, the recently under-pressure technology sector – most visible in the NASDAQ and other risk markets like China and emerging markets – staged a strong recovery which fizzled as yields increased sharply on Friday. This caused the themes that have largely dominated equities for several months now – value, reflation and sectors benefiting from a steeper yield curve – to retake centre stage. New tech companies and other high volatility momentum stocks and markets remain under pressure as investors rotate to less expensive stocks and geographic markets, and position their portfolios to benefit from recovery trades. Across major indices, Europe had the best weekly performance and China the worst. Performance of the US indices sound like a broken record week after week, with the DJIA and Russell 2000 outperforming the NASDAQ composite and broader S&P 500.
The most prominent IPO last week was for Korean e-commerce company Coupang (NYSE: CPNG, market cap $63 bln). CPNG – an AMZN/BABA-lookalike company focused on Korea and backed by Softbank – went public at $45/share, with shares soaring to $69/share during the first day of trading. The shares returned to earth on Friday, closing the week at $48.47/share. There was also a much-followed direct listing on the NYSE of US on-line gaming company Roblox (NYSE: RBLX, market cap $34 bln). The reference price at listing was $45/share, and the stock closed the week at $69.70/share, performing more like a traditional IPO than a direct listing. Away from these two interesting issues and more broadly, SPACs remain under severe pressure.
The US Treasury auctioned $120 billion of 3-, 10- and 30-year US Treasury bonds this week, and these seemed to go well enough as yields settled and inflation expectations moderated. CPI was 1.7% (Y-o-Y) in February, right on expectations and not troublesome in isolation. Perhaps it was the combination of better-than-expected jobless claims and President Biden signing the massive $1.9 trillion stimulus plan into law that triggered the sudden sell-off in US Treasuries on Friday, pushing yields to highs not seen since early February 2020 before the coronavirus started to kick in.
One of my readers sent me the chart below from BofA, which in very simple terms illustrates where various US market and economic metrics stood before COVID-19, where the levels stand now, and the high or low that has occurred in-between. It is
surprising really how close we are today (BTC exception) to where we were pre-pandemic in many of these metrics, although the middle column tells the real story because it depicts the changes that have occurred during the endpoints of this unusual journey.
Gold finally managed to hold its ground this week whilst oil weakened for the first time in several weeks. The Yen continued its decline, and the US dollar was slightly weaker too. However, the one thing that investors seem to be able to count on week in and week out is an increase in the price of Bitcoin!
In the corporate credit market, yields were steady albeit spreads slightly wider (3bps) in BBB (investment grade) through Thursday. The direction of high yield remained similar to prior weeks – higher underlying yields are causing spreads to narrow, but yields are continuing to grind tighter as this segment of the market has more to work with (as far as spreads). In other words, higher credit spreads in non-investment grade credit take away much of the bite of higher yields. As I have written about in weeks before, the biggest gainers in high yield are the weakest credits (meaning B/CCC), because these also generically have the most to gain from the economic recovery.
Japanese GDP was 2.8% in the 4Q2020, or 11.7% annualised for 2020. This figure, released early in the week, was revised down from the initial estimate of 12.8% in mid-February. Japan’s GDP shrunk [4.8]% in 2020 due to the global pandemic. Eurozone GDP decreased 0.7% in 4Q20 (vs 4Q19) and was down 4.9% for FY2020.
On Thursday, the ECB released the recent decisions taken by the Governing Council of the ECB which you can read here. The ECB left its overnight borrowing rate and its quantitative easing programme intact. There was a slight twist in that the central bank announced that it will (re)accelerate the magnitude of its weekly purchases pursuant to the Pandemic Emergency Purchase Programme (“PEPP”) in an effort to provide more ammunition to the recovery in Europe. This sounds like backhanded yield curve control to me, an assertion the ECB of course denied.
The Week Ahead
The momentum segments of global equity markets will likely remain under pressure from ongoing rotation into less expensive stocks and segments. Super-high valuations will make momentum stocks vulnerable to even slight increases, especially unanticipated gaps, in interest rates. Any and everything that screams “value”, or benefits from higher rates and a steeper yield curve (financials), or benefits from a strong economic recovery especially in the US, should be in demand. Even many of the high flyers could see a temporary boost in their prices from the helicopter money coming from the Biden stimulus plan, although these gains might be short-lived. For these names, many of which are disrupters and look destined for success in the future, select an entry point and be patient, both before and after you invest. I would continue to avoid US Treasuries, unless you wish to take a contrarian view, and steer clear of US$ investment grade credit which remains vulnerable to sell-off in USTs. The best credit play for the time being remains in high yield, which is not cheap but has more buffer against rate increases.
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