Cyclical sectors lead the global equity market recovery

Posted on March 19, 2021March 19, 2021 by Vrasidas Neofytou

History repeats itself as the economically cyclical sectors have led global markets in each of the recent financial recessions, including the market’s recovery from the Covid economic recession.

Cyclical stocks are companies whose underlying business tends to follow the economic cycle of growth and recession.

The Dow Jones Industrial Average and the broad-based S&P 500 have hit fresh record highs as the hopes for a global economic reopening has increased the appetite for cyclical and value stocks among investors.

Reopening sectors such as finance, energy, retail, industrial, and travel have outperformed the growth sectors in 2021, as the successful vaccination programs are bringing the world closer to a fully reopened economy.

Large financial institutions including insurance companies, retail, and investment banks have posted a strong rally over the last months, as the rising interest rates are positive for their profit margins.

The travel industry which includes airlines, cruise, and hotel operators is trading near 1 year high as the demand for travel and entertainment trips is rising over the next quarters.

WTI oil plunges 7%, breaking below $60/barrel on fuel demand concerns

Posted on March 19, 2021March 19, 2021 by Vrasidas Neofytou

WTI and Brent crude oil contracts plunged 7% on Thursday, posting their sharpest one-day decline since last November 2020, amid the growing worries for weaker oil demand after the recent surge in new Covid-19 cases in Europe, coupled with the rising US fuel stockpiles.

Market Reaction:

New York-traded WTI crude (West Texas Intermediate), the benchmark for crude oil in North America (USA-Canada) fell to as low as $58/b before bounced near $60/b or down -7%, posting its sharpest one-day decline since last November 2020. The WTI oil contract has lost 8% since the beginning of the week, and 12% or $8/b since it topped at $68/b on March 08, 2021.

London-traded Brent crude, the international benchmark for crude oil (approx. the 75% of global oil supply) also lost more than 7% of its value yesterday, settling near $63/b, after it posted an intraday low near $61.50/b.

Bearish fundamentals weigh on oil prices:

Energy investors have taken some money or profits away from the crude contracts this week, as the crude fundamentals deteriorated, adding to the concerns about the global demand recovery after the pandemic.

The demand for petroleum products is under threat in Europe, as the continent sees the rise of a third wave of the Covid-19 pandemic, coupled with the “out of the schedule” vaccination campaign in the bloc. Numerous European countries have paused the use of AstraZeneca’s COVID-19 vaccine due to worries over possible side effects.

The number of confirmed coronavirus cases in Italy, Greece, Germany, and other EU countries jumped to the most this week, forcing some of them to increase the social restriction measures or to extend local lockdowns to limit the spread of the virus.

The recent rally in crude oil prices capped a few days ago after the release of the latest monthly report from the IEA (International Energy Agency), which said a super-cycle was questionable, while the petroleum demand will not return to pre-pandemic levels until 2023.

Larger-than-expected build on US fuel stockpiles:

Adding to the pandemic-led global oil demand concerns, the US EIA agent (Energy Information Administration) announced on Wednesday a larger-than-expected build in crude and gasoline stockpiles for last week.

The US fuel inventories have been building since mid-February after the major refineries in Texas were forced to shut down production or limit capacity due to extreme cold weather in the region.

Euro trades near $1.20 after ECB pledges to step up bond purchases in Q2

Posted on March 12, 2021March 16, 2021 by Vrasidas Neofytou

Euro trades near the $1.20 mark after the European Central Bank promised to step up its pace of bond purchases over the next quarter, easing the concerns for the elevating bond yields in the Eurozone.

European Central Bank’s decisions:

The Frankfurt-based European Central Bank decided yesterday to maintain its interest rates at 0.00% and leave its 1.85 trillion euros ($2.21 trillion) PEPP-Pandemic Emergency Purchase Program unchanged until March 2022, without discussing the further increase of the amount.

Hence, it pledged to ramp up its bond purchases in the second quarter of 2021 at a higher pace than during the first quarter, based on the EU inflation outlook and current market dynamics. By increasing its bond purchases, ECB could tap the recent bullish momentum in yields, keeping the borrowing costs lower.

ECB’s president Christine Lagarde’s targets were to calm down the bond markets and ease the inflation concerns among investors as the Eurozone’s bond yields have been rising in tandem with the US bond yields since mid-February amid the massive fiscal and monetary policies.

Market participants afraid that the faster-than-expected rally in the bond yields around the world could harm the global economic recovery, by increasing the lending costs of the companies and countries that already struggling with the pandemic.

Eurozone’s Economic Outlook 2021-2022:

According to the latest ECB’s forecasts, the 19-Eurozone’s economies GDP-Gross Domestic Product could grow by 4.0% in 2021 and 4.1% in 2022, getting support from the massive fiscal stimulus, low interest rates, successful vaccine rollout, and the reopening of the local economies.

However, the ECB’s projections for faster economic recovery could be at risk as many countries remain under strict social restrictions to limit the spread of the Covid-19, while the EU’s vaccine rollout program is far behind the schedule, compared to the UK.

King Dollar is back again as bond yields rally

Posted on March 12, 2021 by Vrasidas Neofytou

King dollar shines again. The world’s reserve currency advanced 3% so far in 2021, on the back of rising US bond yields, vaccine rollouts, and the expectations for a faster reopening of the US economy as it emerges from the pandemic.

The bond yields climbed to a one-year high across all maturities, increasing the demand for the US currency. Investors have already priced in higher inflation figures, driven by the massive fiscal and monetary packages, and the higher commodities prices.

The DXY dollar index rose near the 92.50 marks, its highest level since late November 2020. The dollar gained almost 500 pips against Euro, trading near the 1.18 mark, while it rose to a 9-month high against the safe-haven currencies of the Japanese Yen and Swiss Franc.

The greenback has also managed to recover some losses against commodity-linked currencies such as the Australian and New Zealand dollars, and emerging market currencies of Turkish Lira, Brazilian Real, and Chinese Yuan.

The continuing rally in the dollar and bond yields have also pressured the price of Gold below 1.700 dollars per ounce, as they increase the opportunity cost of holding the non-interest precious metal.

Dow Jones closes above 32.000 for the first time, Nasdaq bounces back strongly

Posted on March 11, 2021March 11, 2021 by Vrasidas Neofytou

The US stock markets left behind the turbulent period of the last weeks, advancing towards fresh record highs amid the improved risk sentiment after US lawmakers passed a $1.9 trillion pandemic-relief bill, coupled with the falling bond yields, vaccine rollouts, and the hopes for a faster US economic recovery.

Dow Jones index ended above 32.000 mark for the first time:

The industrial-heavy Dow Jones index added 464 points, or 1.5%, to close at a fresh record high of 32.297 during Wednesday’s trading session, followed by 1.8% gains in the small-cap Russell 2000 index, and 0.60% gains in the S&P 500 index, while the tech-heavy Nasdaq Composite settled flat at 13.068.

The 30-stocks economic-sensitive Dow Jones index settled above the psychologically major 32,000 mark, for the first time. Gains were led from the cyclical sectors which would benefit from the faster recovery from the pandemic, such as Financials (Goldman Sachs, JP Morgan, American Express), airlines (Boeing), and Energies (Chevron).

Cyclical stocks have been outperforming the rest of the market since the start of the year, pricing in the reopening of the global economies from the pandemic, with the energy sector advancing nearly 40% so far in 2021, followed by significant gains of more than 20% in industrials, financial, materials, and tourist-entertainments.

Biden’s stimulus bill passes:

The new record highs came after the Senate House passed on Wednesday night Biden’s $1.9 trillion coronavirus relief package, sparking hopes for faster economic recovery in the USA after the pandemic.

President Joe Biden, who is expected to sign the bill on Friday, said that the cheques of up to $1,400 should start going out this month, while a new round of government spending and investments is looming.

Nasdaq’s sell-off followed by a strong rebound:

The tech-heavy Nasdaq Composite ended yesterday’s session flat, however, it managed to hold Tuesday’s massive gains of 4%, its best day since November 2020. The declines in bond yields amid the eased inflation worries have helped tech stocks to post a significant rebound during the last two days.

Nasdaq 100 had fallen into correction territory on Monday, after losing more than 10% since its record highs in mid-February, as the biggest concern from investors over the last weeks has been inflation stretching faster than expected. Tesla shares led the losses by more than 35% during the last weeks, with tech-giant Apple losing 15%, while the pandemic bets Zoom Video and Peloton have tumbled 24% and 30% in the same period.

The 10-year US Treasury yield has risen sharply in recent weeks, posting an impressive rally from 1% in January to above 1.60% on Monday. Yields rally in anticipation that the massive fiscal and monetary stimulus coupled with the growing hopes for a faster economic reopening could lead to a higher inflation.

The rising bond yields have forced investors to rotate out of the high-flying tech names, “stay-at-home” stocks, and growth-oriented stocks and into the cyclical stocks as the faster-than-expected recovery of the US economy could propel higher inflation rates.

Tech stock’s future earnings could be harmed from the elevating interest rates, as their true earnings lie many years in the future. Hence, it could increase their borrowing costs, and discount their ballooned valuations after their impressive gains during the pandemic in 2020.

However, yesterday’s US CPI data (Consumer Price Index) which came online with estimates of +1.7%, eased the inflation concerns at least for now, letting the 10-year US bond yields retreat from their recent highs of 1.60% to 1.49%, and triggering a strong rebound rally of the high-growth tech stocks.

The inflation question and higher bond yields

Posted on March 10, 2021March 10, 2021 by George Kessarios

A short while ago I questioned if 2021 might be a sell the COVID 19 vaccine news trade. I said it probably won’t, because central banks will keep pumping liquidity. However, a new twist is now unfolding, and that is higher bond yields.

For example, 10-year US government bonds yields have risen to 1.5%, and the 30-year yield is now at around 2.20%, with most yields in other major markets also increasing.

In my mind, irrespective if inflation comes back, as most think it will, I find it hard to believe that the long end of sovereign debt can increase by a lot without central banks intervening. This because the interest cost to governments will rise substantially, something that will make an already bad fiscal situation much worse.

So, the question is, can central banks bring down long dated bonds if they want to? The answer is yes, and I think they will do just that at some point. But the even more important question is, how might markets react to such a development? The answer is we don’t really know, because on the one hand we will have inflation and higher growth because of a COVID vaccine, but yields will not be reflecting such a reality, as they have in the past.

My guess is that if markets start correcting, central banks will communicate that they will start buying longer dated bonds to keep yields down to avoid markets correcting by much. But the truth is we don’t know how markets will react to such a reality, irrespective of what central banks say and do. But until we see price action to the contrary, we have to keep trusting an old Wall Street saying that says never fight the Fed, or generally speaking, never fight Central Banks.