Week from 22 to 28 February 2021
Despite repeated dovish comments from Fed Chair Jerome Powell during his two-day testimony to Congress, U.S. bond prices remained under pressure all week long, on fears about rising inflation. The 10-year Treasury yield was back at +1.44%, its highest level in a year, after hitting +1.6% on Thursday. It comes as no surprise that T-Note yields spike. While the Fed’s bond-buying program amounts to $120 billion per month (i.e. $80 billion in Treasuries and $40 billion in mortgage-backed securities) or $1.44 trillion on an annual basis, the U.S. federal budget deficit is projected to total $2.3 trillion in the 2021 fiscal year, not counting additional stimulus! Unless the QE program is adjusted upward (the Federal Reserve can obviously stem surging Treasury yields), it is likely that the U.S. bond yields will continue to move higher to close the gap.
As a result, it was a tough week for investors around the globe as prices of investments dropped across all asset classes. It should be noted that the U.S. 10-year Treasury yield now matches the S&P 500 dividend yield, thereby wiping out the stock market’s advantage.
The S&P 500 closed with losses of 2.45% while the Nasdaq Composite nosedived 4.92%, as traders rotated into cyclical stocks out of high-flying tech firms. As an illustration, Apple’s share price plummeted 6.63% over the week (compared with a fall of 3.95% for the tech sector). That being said, many sectors also took the brunt of the blow, especially consumer discretionary (-4.90%) and utilities (-5.05%). Investors are increasingly worried about the profitability of the utilities industry in an environment of higher interest rates. By contrast, energy bucked the trend, up +4.33%. It was the only sector in positive territory on expectations of a boost to demand from a stronger recovery. Crude oil prices resumed their upward trend (WTI up +3.81% week-over-week, closing at $61.50 per barrel) despite Tuesday’s surprise announcement of an increase in U.S. crude and gasoline stocks. Compared with the other sectors which closed deeply in the red, financials (-0.36%) and industrials (-0.50%) showed resilience against the backdrop of rising yields.
Unsurprisingly, major APAC and European equity indices ended sharply lower. Japan’s Nikkei slumped 3.50%, just below the 29,000 mark, while the Shanghai Composite and Hang-Seng indices plunged 5.06% and 5.43% respectively, in the wake of a government plan to increase stock-trading tax for the first time since 1993. European markets were also in a sea of red though to a lesser extent (MSCI EMU down 2%). Emerging markets were hit the hardest by the significant ramp-up in inflation expectations (MSCI EM down 6.35%).
In credit markets, risk indicators flashed red too. Investment grade corporate bonds suffered again (-0.50% in the U.S. and -0.38% in Europe). Unlike the previous week, high-yield bonds lost ground (-0.31% in Europe, -0.78% in the U.S.) but the worst performance came from emerging debt (-2.10% WTD in local currencies, after a loss of -1.44% last week).
In commodities, Gold struggled to stay above the $1,700 threshold, falling -2.65% to $1,728.80/oz. Silver (-2.23%), Platinum (-6.54%) and Palladium (-2.55%) prices followed suit.
In the currency market, the euro stood little changed against the U.S. dollar at $1.2137, but gradually strengthened against the Swiss franc (+1%), the British pound (+0.24%) and the Japanese Yen (+0.69%).
Elsewhere, Bitcoin had a wild week, cracking 20% to break just below $45,000 as the cryptocurrency selloff gathered pace. Bitcoin was indeed battered by negative comments, especially those from U.S. Treasury Secretary Janet Yellen warning at a New York Times conference on Monday that BTC is an extremely inefficient way of conducting transactions.” She also said there remain important questions about legitimacy and stability as the token may be used for “illicit finance”: a sword of Damocles hanging over crypto investors’ heads.
Find the full report: https://www.trackinsight.com/en/weekly-flow-report/2021-02-26/global
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