March 19 2021 Market Commentary

Dow Jones fell for the second day on Friday after Fed’s decision not to extend its capital break for banks triggered a rise in bond yields and a sell-off in financial stocks. The rule allowed banks to hold less capital against Treasury and other holdings. JPMorgan, Wells Fargo, and Bank of America slid more than 3% following the policy announcement. The Dow Jones close 234 points or 0.7% lower to 32,628, while the S&P 500 shed 3 points or 0.1% to 3913. In contrast, the Nasdaq gained 99 points or 0.8% to 13,215. During the week, the Dow Jones retreated 0.4%, the S&P 500 dropped 0.7% and the Nasdaq fell 0.3%.

Next week, flash PMI surveys for the US, UK, Eurozone, Japan and Australia will give an insight about the state of the global economic recovery, while central banks in China, Philippines, Thailand, Switzerland, Mexico and South Africa will be deciding on monetary policy. Other important releases to follow include US final Q4 GDP, durable goods orders, and personal income and outlays; UK unemployment, retail trade and inflation data; and Eurozone and South Korea consumer morale.

The yield on the benchmark US 10-year Treasury note hovered at 1.7% on Friday after touching 1.67% early in the session, after the Fed announced that the temporary change to the supplementary leverage ratio for banks will expire as scheduled on March 31st. The initial change in SLR was announced on April 1st 2020 and allowed banks to exclude Treasuries and deposits with Fed banks from the calculation of the leverage ratio. Yields have been on an upward trajectory since August but the jump accelerated from mid-January as coronavirus vaccination and further fiscal stimulus support prospects of a strong economic recovery although traders worry that a rebound could lead to a spike in inflation and debt levels. Fed Chair Powell has been reiterating any spike in inflation would be temporary and that markets should not worry over the bond sell-off while pledging the Fed will maintain its ultra easy policy for some time. Still, such comments have been failing to calm investors' nerves.

The dollar index strengthened slightly to 92 on Friday after the Federal Reserve announced it will let the leverage ratio for big banks expire March 31st. Treasury yields briefly spiked after the announcement before trading around 14-month highs. A rosier economic outlook and concerns over runaway inflation prompted a bond sell-off in recent weeks while Fed Chair Powell reiterated the central bank's view on maintaining its current ultra-accommodative policy for the foreseeable future. Given the above and the fact that Powell appeared comfortable about the sharp moves in rates, the US currency has room for further upside momentum.

Gold spot prices increased 0.7% to trade at $1744 per ounce, as lockdowns in Europe, a weaker USD, and unchanged yields drove demand for the bullion. Also, the first high-level US-China meeting of the Biden administration got off to a rough start on Thursday, as both sides leveled sharp rebukes of the others’ policies. During the week, higher inflation expectations nudged gold higher, gaining 1.4% to book the second straight advance.

Silver cut some gains but held above $26 an ounce on Friday, amid a slight rebound in the US dollar and a brief spike in Treasury yields after the Federal Reserve announced it will let the leverage ratio for big banks expire March 31st. On the week, silver is up around 0.7% as traders assess prospects of stronger economic growth and rising inflation. The Federal Reserve signaled no interest rate hikes until after 2023 despite stronger growth and a temporary jump in inflation amid the successful vaccine rollout and fiscal stimulus.

WTI crude oil prices gained 2.4% to $61.44 per barrel on Friday while Brent prices advanced 1.8% to trade at $64.43 per barrel, rebounding modestly but still booking their worst week since October. On Thursday, prices dropped more than 7% as a new wave of coronavirus infections across Europe dampened expectations of any imminent recovery in fuel demand. Several economies reimposed lockdowns and vaccination programs were slowed by concerts over potential side effects. Meanwhile, US drillers added nine oil rigs in the week, the biggest increase since January. During the week, prices dropped nearly 6%.

The coal market extended its upward momentum, with futures climbing above the $90 per tonne level for the first time since March 2019, as top consumer China is expected to face shortages in imports of coking coal from major supplier Mongolia after fresh Covid-19 restrictions were reintroduced at the Ganqimadodu border, the gateway for Mongolia coking coal to China, on March 16th. Coal prices are up almost 80% from a nearly 4-year low of $50.45/tonne hit in August, supported by government policies, particularly China’s ban on Australian coal imports and supply issues after producers cut on output as prices weakened during the height of the lockdowns across Asia.

The Baltic Dry Index rose 3% to 2,281 on Friday, its highest since September 2019 and extending gains for a fifth session. The panamax index, which measures coal or grain cargos climbed 5.4% to its highest since September of 2010 at 2,975; and the capesize index, which tracks iron ore and coal cargo, advanced 3% to its highest since January 26th at 2,344. Among smaller vessels, the supramax index edged up 8 points to a fresh record high of 2,122. The Baltic Dry Index surged 16% in the third week of March, extending gains for a third straight week.

Brazil’s Ibovespa gained 1386 points or 1.2% to 116,222, as equity markets recovered amid steady 10-year Treasury yields at 1.72%. On the domestic side, state-controlled Banco do Brasil announced on Thursday its CEO Andre Brandao has resigned and is expected to leave his post on April 1, after crashing earlier this year with President Jair Bolsonaro over an austerity drive. On the pandemic side, the mayor of the Brazilian city of Rio de Janeiro, Eduardo Paes, announced today the closure of beaches over the weekend in an attempt to stem the spread of the COVID-19 pandemic, as the number of hospitalizations reach records. During the week, the Ibovespa advanced 1.7%. .

Canada’s TSX gained 17 points or 0.1% to 18,853 on Friday and capped a flattish week, as equity markets continued to monitor rising bond yields amid gradual economic recoveries and slow vaccine rollouts. On the pandemic side, the US government announced that 1.5 million doses of its AstraZeneca vaccine will be sent to Canada and 2.5 million to Mexico, adopting a partial regional approach. On the macro side, latest figures showed retail trade shrank for the second month in January due to coronavirus restrictions but preliminary estimates point to a 4% rebound in February. Meanwhile, oil prices rebounded 2.8% to $61.7 per barrel after plunging as much as 9% in the previous session, but still booked its worst week since October.  

European stocks held onto early losses on Friday, with the Frankfurt's DAX 30 ending 0.9% lower at 14,650, as investors continued to monitor the risk of a surge in inflation and higher yields, and worsening news on the pandemic front. France has announced a new four-week lockdown in regions badly hit by the pandemic, including the Ile-de-France region around Paris; while Britain said Thursday that its vaccine rollout would be slower than expected in the coming weeks due to supply delays. Elsewhere, the Bank of Japan said it would allow more fluctuation in 10-year bond yields, edging away from aggressive monetary stimulus towards a more “sustainable” policy. For the week, the DAX 30 gained 1%.

The FTSE 100 lost 1% to end at 6,709 on Friday, as investors continued to monitor high bond yields and the prospect of rising inflation, while negative news on the coronavirus front added to concerns. Britain said on Thursday that its vaccine rollout would be slower than expected in the coming weeks due to supply delays; while France announced new regional lockdowns starting on Friday. On the economic data front, the UK government borrowed £19.1 billion last month, the highest February borrowing since monthly records began in 1993. The country's consumer morale came in stronger than expected in March at the highest level in a year. Elsewhere, the Bank of Japan said it would allow more fluctuation in 10-year bond yields, as it edges away from aggressive monetary stimulus towards a more “sustainable” policy. For the week, the FTSE 100 fell 0.8%.

The CAC 40 declined 65 points, or 1.1% to 5,998 on Friday, down from yesterday's 13-month high, amid growing concerns about rising COVID-19 cases and the negative impact of restrictive measures and vaccine delays on France's economic recovery. The French government has announced Thursday a new four-week lockdown in regions badly hit by COVID-19, including the Ile-de-France region around Paris. The CAC 40 edged down 0.8% in the last week. 

The Nikkei 225 fell 424.7 points or 1.41% to 29792.05 on Friday; closing slightly lower on-week as a continued a surge in US bond yields sapped appetite for riskier assets. US 10-year rates hit fresh 14-month highs of 1.691%, while local 10-year bond yields lifted to 0.111% as the Bank of Japan on Friday widened the band at which it allows long-term interest rates to move around its target, as part of a raft of measures to make its ultra-easy policy more sustainable amid a prolonged battle to fire up inflation. The BoJ also noted that it would buy ETFs only when necessary, instead of at a set pace. On the data front, Japan's consumer prices declined at a slower pace in February; while core consumer prices marked the seventh straight month of annual falls.

The KOSPI lost 26.48 points or 0.86% to 3039.53 on Friday, closing 0.58% lower for the week as prospects of robust economic recovery in the US sparked post-pandemic inflation fears. Local 10-year bond yields lifted to 28-month highs of 2.191% while US 10-year rates hit fresh 14-month highs of 1.701%. On the coronavirus front, the KDCA reported 463 more COVID-19 cases as sporadic cluster infections persisted in the greater Seoul area amid increased travel and loosened vigilance against the pandemic. Sentiment was also affected as the US and China leveled sharp rebukes of each others' policies in the first high-level, in-person talks of the Biden administration on Thursday, with deeply strained relations of the two global rivals on rare public display during the meeting's opening session in Alaska.  

The BSE SENSEX was down 151 points or 0.3% to 49,032 in early deals on Friday after Wall Street closed in the red overnight after the benchmark US 10-year yield spiked to 1.754% for the first time since January 2020, even as the Fed repeated its pledge to keep interest rates near zero for some time. Market sentiment was also dented by reports that India on Thursday saw its highest of daily new COVID-19 infections in over three months and that rising virus cases in Europe had pummeled oil prices. On the data front, the number of Americans filing new claims for jobless benefits unexpectedly rose last week. In business news, Kalyan Jewellers’ initial public offering reportedly was oversubscribed by just 1.28 times on Thursday, suggesting tepid interest among investors. The jeweler, backed by US private equity firm Warburg Pincus, last week said it aimed to raise INR 11.75 billion through the IPO. Larsen & Toubro Ltd and Bajaj Finance Ltd shed 2.3%, each. 

Thank you and please stay tuned for more upcoming reports.

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Len Martinez is a Financial Consultant. Information in the "Bull Valley Advisor” newsletter should not be considered as investment advice or an offer to buy or sell securities. Data is derived from sources considered to be reliable including Morningstar, StockCharts.com, YAHOO Finance, FINVIZ, TipRanks, Investing.com, ECRI, OECD, gurufocus, Crestmont Research, Trading Economics and S2O. Results are not guaranteed. Len Martinez is not an RIA. The data is shown for informational purposes and should not be considered investment advice or an offer to buy or sell securities.