March 23 2020 Market Commentary

Wall Street closed deeply in the red on Tuesday, as Fed Jerome Powell Chairman said the economic recovery still has a long way to go. Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen repeated that the American economy is recovering from the coronavirus at a hearing before House lawmakers, but that some sectors “remain weak”. Meanwhile, the 10-year Treasury continued to decline and settle near 1.62%, while oil prices plunged more than 6% amid the threat of a third wave of global infections. The Dow Jones shed 308 points or 0.9% to 32,423. The S&P 500 retreated 30 points or 0.8% to 3911. The Nasdaq declined 150 points or 1.1% to 13,228.

The dollar index regained ground on Tuesday, touching a two-week high of 92.30 as a shift in risk appetite has favored safe-haven flows, while the overall outperformance of the US economy relative to the rest of the world supercharged this buying momentum. In the broader scenario, the combination of ultra-easy monetary policy, unprecedented government spending and a successful vaccine rollout prompted investors to bet on a swifter US economic recovery and inflation pressures. Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen repeated again that the American economy is recovering from the coronavirus at a hearing before House lawmakers. The most pronounced buying activity was against risk-sensitive currencies such as the Australian and New Zealand dollars, both hitting multi-month lows against the greenback.

The yield on the benchmark 10-year Treasury note fell for the second day to 1.65% on Tuesday, the lowest on a closing basis in nearly a week and below 14-month highs of 1.75% reached in the previous week. Investors await several Treasury auctions during the week to see if demand remains strong. The offerings include a 7-year note, a 5-year note, a 2-year note and a 52-week bill. A $38 billion sale of benchmark 10-year notes earlier this month drew solid international demand. Yields have been rising since August but gained speed from mid-January as coronavirus vaccination and further fiscal stimulus support prospects of a strong economic recovery but can lead to a spike in inflation and debt levels. Still, the Federal Reserve has been reiterating any spike in inflation is likely to be temporary and pledged to continue the ultra-easy policy for some more time.

Fed Chair Powell reiterated the Fed is committed to using the full range of tools to support the economy and to help assure that the recovery will be as robust as possible, prepared remarks to his testimony on the CARES Act before Congress showed. The recovery has progressed more quickly than generally expected and looks to be strengthening in part due to the unprecedented fiscal and monetary policy actions. Meanwhile, Treasury Secretary Yellen who will also testify noted that while there are signs of recovery, the country is still down nearly 10 million jobs from its pre-pandemic peak.

The Euro traded lower around $1.188 on Tuesday amid a general dollar strength as an uncertain coronavirus outlook, extended lockdown in Germany and tensions with China over sanctions weighed on investor's risk appetite. Meanwhile, bond yields fell across the region while recent data showed the ECB bought €28 billion worth of bonds last week, a 48% increase over the previous week and the biggest weekly amount since December 4th. During its March monetary policy meeting, the ECB said it would conduct emergency bond purchases at a significantly higher pace over the next quarter, aiming to bring government bond yields down and to support the Eurozone economic recovery.

US current account gap widened by $7.6 billion to $188.5 billion in Q4 2020, which is equivalent to 3.5% of the GDP. It is the biggest current account gap since Q2 2007 as the goods deficit widened and the services surplus declined. The goods deficit increased to $253 billion from $248 billion in Q3 led by imports of industrial supplies and materials; automotive vehicles, parts, and engines; and consumer goods. Meanwhile, the services surplus shrank to $53 billion from $56 billion in Q3 as purchases of personal travel and sea freight transport grew. In contrast, the secondary income deficit narrowed ($-36 billion vs $-38 billion), reflecting a decrease in private transfers, mostly fines and penalties, that was partly offset by an increase in general government transfers, primary taxes on income and wealth. Considering full 2020, the current account deficit increased sharply to $647 billion from $480 billion, the highest since 2008 and equivalent to 3.1% of the GDP.

Stocks of crude oil in the United States increased by 2.927 million barrels in the week ended March 19th, 2021, after a 1.047 million fall in the previous week and compared with market expectations of a 0.9 million decline, data from the American Petroleum Institute showed.

Oil prices plunged more than 6% on Tuesday, with WTI crude falling below the $58 a barrel level for the first time in over a month amid a stronger dollar and concerns about a recovery in fuel demand as lockdown measures worsened across Europe. Germany extended its lockdown until April 18th, and France and Poland announced new restrictions measures. Adding to the bearish tone was the announcement of Western sanctions against China, the world’s largest oil importer, over human rights abuses in Xinjiang, with Beijing immediately launching retaliation against Europe. 

Sales of new US single-family homes sank 18.2% to a seasonally adjusted annual rate of 775 thousand in February of 2021, following an upwardly revised 948 thousand in January and well below market forecasts of 875 thousand. It is the lowest reading in 9 months amid adverse weather conditions during the month. In February, new home sales plunged 37.5 to 85 thousand in the Midwest, 16.4% to 194 thousand in the West, 14.7 percent to 458 thousand in the South and 11.6 percent in the Northeast. The median sales price increased to $349,400 from $331,800 a year earlier.

Gold struggled to gain traction on Tuesday and remained stuck near the $1,730/oz region, as investors appeared quite reluctant to open new positions after Federal Reserve Jerome Powell refrained from expressing any concern about the recent pickup in Treasury yields. Investors began pricing in a robust economic recovery and rising inflation fueled by the vaccines’ rollout and unprecedented government spending. In the absence of significant fundamental drivers, the current market environment has benefit the USD, making it more difficult for the precious metal to attract investors.

Silver extended losses to a two-week low of $25.5 an ounce on Tuesday, as a stronger dollar drove flows away from the metal. Putting a floor under prices was some safe-haven buying stemming from surging coronavirus cases across Europe.

LME nickel futures consolidated around the $16,200 per tonne level in late-March, as investors remained cautious amid persistently weak demand in the spot market. Sentiment continued to be dominated by oversupply concerns after China's Tsingshan Holding Group said it would provide domestic markets with an extra 100,000 tonnes of nickel matte. Still, the commodity growing usage in lithium-ion batteries and the accelerated roll-out of electric vehicles should drive prices higher in the long-run.

Prices for iron ore cargoes with a 63.5% iron content for delivery into Tianjin were trading around $156 a tonne, a level not seen since February, amid a deteriorating demand outlook as investors anticipate the chance of further production cuts in Tangshan. China's top steel-producing city has pledged to cut emissions by 50% during heavy pollution days and punish those who fail to implement output restrictions. Putting a floor under prices were persistent doubts about Brazilian shipments and prospects for a robust global economic recovery.

The rubber market has been struggling to find momentum in March, with futures on the Tokyo Commodity Exchange trading around the 260 yen per Kg region for the first time in a month. In the absence of significant fundamental drivers, investors have been quite reluctant to open new positions, but physical demand and wintering have capped much of the downward pressure. In the broader scenario, rubber futures also got punished by falling crude oil prices and some profit-taking on other commodities.

Chicago lumber futures were trading around $930 per thousand board in March, buoyed by robust real estate markets and expectations of a swifter economic rebound fueled by massive government spending and vaccine rollouts. While the stay-at-home lifestyle has encouraged homeowners to expand or remodel their existing dwellings, low mortgage rates exacerbated this home-building spree. Given the above and the fact that supply remains quite scarce, with purchasers struggling to fulfil existing and new buying requirements, prices have room for further upside momentum.

The Baltic Dry Index fell 2.1% to 2,271 on Tuesday, snapping a six-session winning streak, on weaker demand across all vessel segments. The capesize index, which tracks iron ore and coal cargos, declined 3.2% to 2,305; and the panamax index, which measures coal or grain cargos was down 2.5% to 2,983, halting a seven-session rally. Among smaller vessels, the supramax index dropped 7 points to 2,126.

European stock markets pared some losses to close little changed on Tuesday, as investors digest rising COVID-19 cases and new lockdowns across the region while tensions with China weighed on sentiment. Germany extended its lockdown measures until April 18th and postponed reopening plans to try to defuse the third wave of infections as intensive-care beds are filling up again. Meanwhile, the US National Institute of Allergy and Infectious Diseases questioned AstraZeneca Covid-19 vaccine trial data, a day after results from an American trial were released. Finally, the EU, the US, the UK and Canada imposed sanctions on Chinese officials for human rights abuses in Xinjiang. Frankfurt’s DAX 30 edged up and Madrid’s IBEX 35 gained more than 0.5% driven by a rally in Bankinter shares while the London’s FTSE 100, Paris’ CAC 40 and Milan’s FTSE MIB closed lower.

Brazil’s Ibovespa lost 1717 points or 1.5% to 113,262 on Tuesday to extend the previous session’s sharp decline, as a new wave of coronavirus contagions threatens to derail the economic recovery. Hundreds of Brazilian economists, including former finance ministers and central bank presidents, urged the Brazilian government in an open letter to speed up vaccination and adopt tougher restrictions. On Monday, President Jair Bolsonaro reportedly asked the country’s Supreme Court to reverse coronavirus restrictions imposed by several federal states. On the data front, the FGV consumer confidence index in Brazil fell sharply in March to its lowest level since May, as the recovery cools down sharply.

Canada’s main stock index fell for the second session in a row on Tuesday, with the benchmark S&P/TSX composite ending below the 18,700 level for the first time in two weeks, as weakness in commodity prices fueled a selloff in shares of the heavyweight energy and resource sectors. Market sentiment deteriorated in the light of rising coronavirus cases and a sluggish vaccination campaign in Europe, which have prolonged lockdowns and delayed expectations of a global economic rebound. Westport Fuel Systems Inc and MEG Energy Corp were among the biggest laggards on the TSX, down 10.4% and 8.9%, respectively.

The FTSE 100 retreated 27 points, or 0.4% to 6,699 on Tuesday, down from a 0.3% gain in the previous session as tensions with Brussels mounted as the EU is considering restricting exports of Covid vaccines across the English Channel. The US National Institute of Allergy and Infectious Diseases questioned AstraZeneca Covid-19 vaccine trial data, a day after results from an American trial of the AstraZeneca/Oxford vaccine were released on Monday. Travel and airline stocks remained under pressure as the country tightens border control with travel fines of £5,000 for Britons who try to travel abroad before the end of June. Concerns over infections and lockdowns in Europe and tensions with China also weighed on investors' mood. The EU, the US and Canada imposed sanctions on Chinese officials for human rights abuses in Xinjiang. On the data front, the unemployment rate unexpectedly fell to 5% in the three months to January.

The CAC 40 ended 19 points or 0.3% lower at 5950 in choppy trade Tuesday amid mounting concerns over rising coronavirus infections and further lockdowns in Europe while the pace of vaccination remains slow. Germany extended the lockdown until April 18th and ECB Chief Economist Philip Lane said the region is facing a difficult second quarter. On the corporate front, shares of Valeo and Renault were among the worst performers.

The BSE Sensex index climbed 280 points, or 0.6% to 50,051 on Tuesday, boosted by gains in bank shares after the Supreme court rejected requests to waive off interest on loans under moratorium. Also, sentiment improved after US Treasury yields retreated and news that AstraZeneca’s COVID-19 vaccine performed better than expected in a major US trial. On the policy front, India's market regulator on Monday relaxed new valuation norms that were set to affect certain bonds worth more than $12 billion after the government flagged concerns of disruption in debt markets.

The FTSE MIB traded lower on Tuesday, in line with its European peers, amid concerns over a new coronavirus wave in the continent, which could delay plans to ease restrictions. On the vaccination front, the Italian government promised 4.5 million doses until Easter. However, officials worry over the lack of logistical means of some regions to handle the surge in the number of jabs. On the corporate side, the Italian securities market regulator approved the bid from Crédit Agricole Italia for the total shares of Creval at €10.5 per share.

The Shanghai Composite lost 31.93 points or 0.93% to 3411.51 on Tuesday as Western sanctions against China and lingering worries over policy tightening weighed on the market. The US and others including the EU on Monday imposed sanctions on China over Xinjiang's abuse, while Beijing hit back with punitive measures against Europe. On the pandemic front, China reported nine new COVID-19 cases, up from seven a day earlier. In local news, the Chinese government issued draft guidelines to regulate the e-cigarette industry, dealing a major blow to the world’s biggest market for tobacco products, while Reuters said that Chinese internet giant Tencent Holdings is offering concessions in a plan to merge the country’s top two videogame live-streaming sites in order to resolve antitrust concerns. Meantime, the Hang Seng Index fell 390.11 points or 1.35% to 7-week lows of 28495.23.

The Japanese Yen added 0.107 points or 0.1% to 108.731 against the US Dollar on Tuesday, trading off 9-month lows following the BoJ’s move Friday to allow long-term interest rates to fluctuate in a wider band. The bank removed a 6 trillion yen ($55 billion) annual target for buying exchange-traded funds while maintaining a ceiling of 12 trillion yen in a move designed to allow yields to fluctuate more. Local 10-year bond yields eased to 6-week lows of to 0.079% while US 10-year rates retreated further from 14-month highs to 1.665%. Meantime, local media reports said Japan will use JPY 2.17 trillion in reserve funds for fiscal 2020 to financially support businesses and households suffering from the prolonged impact of the COVID-19 pandemic.

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.