March 24 2020 Market Commentary

Wall Street closed in the red on Wednesday amid a sharp decline in tech shares, as the market rotation out of growth names continued. On the pandemic side, the WHO warned that many regions are seeing rises in COVID-19 contagions, with Germany, France, Chile and Brasil enforcing stricter lockdowns. On the macro side, oil prices rebounded 6% and boosted share prices in the energy sector, while the 10-year Treasury yield held steady at around 1.64%. The Dow Jones lost 2 points or less than 0.1% to 32,421. The S&P 500 shed 21 points or 0.6% to 3889. The Nasdaq 266 points or 2% to 12,962.

The yield on the benchmark 10-year Treasury note edged higher to 1.64% on Wednesday after touching 1.59% early in the session as investors digest Fed Chair comments during his second appearance before Congress this week. Powell persistently played down inflation risks and higher yields and reiterated the US economic recovery is strengthening but remains far from complete. The 10-year yield remains below 14-month highs of 1.75% reached in the previous week. Meanwhile, traders await several Treasury auctions during the week to see if demand remains strong. The 2-year auction saw solid demand but foreign buyers declined while a sale of benchmark 10-year notes earlier in the month drew solid international demand. Other offerings this week include 7-year and 5-year notes.

Oil prices jumped more than 5% on Wednesday, after falling to an over one-month low in the previous session on supply concerns after container ship ran aground and blocked the Suez Canal and several attempts to refloat it have failed. However, sentiment remains bearish amid rising US crude inventories and growing concerns about demand recovery in the wake of new pandemic curbs in Europe. WTI crude is down more than 12% since hitting its highest since October 2018 at $67.98 on March 8th, as a new wave of coronavirus infections across Europe dampened expectations of an imminent recovery in fuel demand. Latest EIA data showed stocks of crude oil in the US rose by 1.912 million barrels in the week ended March 19th, the fifth consecutive week of increases. In the New York morning trading, WTI was trading around $60.9 a barrel and Brent about $64 a barrel.

The IHS Markit US Composite PMI posted 59.1 in March of 2021, down slightly from 59.5 in February, to signal the second-fastest private sector upturn for six years, a preliminary estimate showed. Although capacity pressures stemming from extensive supply shortages constrained manufacturing output growth to the slowest for five months, goods producers reported the sharpest rise in new orders since June 2014. Service providers meanwhile recorded the steepest increase in new business for almost three years amid stronger client demand and looser coronavirus disease 2019 restrictions. The combined increase in manufacturing and service sector new orders was the strongest since September 2014. Business confidence picked up in March, running at a level rarely exceeded over the past seven years.

The IHS Markit Flash US Manufacturing PMI edged up to 59 in March of 2021 from 58.6 in February, slightly below market forecasts of 59.3. The improvement in operating conditions was the second-fastest since April 2010 amid stronger client demand, but data also highlighted the most severe supply chain disruption on record. Sustained deteriorations in vendor performance noticeably impacted manufacturing production capacity, due to a lack of raw materials to fulfil new orders. The upturn in new business accelerated to the sharpest since June 2014 while job creation eased slightly. Amid substantial supplier shortages and input delays, manufacturing firms registered the fastest rise in input costs for a decade and the rate of charge inflation the sharpest on record. Finally, business confidence remained historically upbeat, as firms expect output to rise over the coming year amid stronger new order inflows and hopes of an end to the pandemic.

The IHS Markit US Services PMI rose to 60 in March of 2021 from 58.8 in February and in line with market expectations, a preliminary estimate showed. The latest reading pointed to the strongest expansion in the service sector since July 2014. New orders rose sharply amid stronger client demand and the loosening of COVID-19 restrictions in some states. Moreover, the increase in total new sales was supported by a renewed expansion in new export orders. The rate of input price inflation was the sharpest since data collection began in late-2009. Firms were able to partially pass higher costs through to clients, however, as selling prices rose at the fastest pace on record. Greater new business led firms to expand employment in March, and at the quickest pace since December 2020. Business confidence picked up as service providers were buoyed by stronger client demand and hopes of a return to normal business operations amid expectations that COVID-19 restrictions will loosen throughout 2021.

Mortgage applications in the US fell 2.5 percent in the week ended March 19th, 2021, the third consecutive decline, mainly due to a 5.1 percent fall in home refinancing as higher mortgage rates started to dent the market. Meanwhile, applications to purchase a home rose 2.6%. “Purchase applications were strong over the week, driven both by households seeking more living space and younger households looking to enter homeownership,” said Joel Kan, an MBA economist. “The average purchase loan balance increased again, both by quickening home-price growth and a rise in higher-balance conventional applications”. The average interest rate for 30-year fixed-rate mortgages increased to 3.36% from 3.28%, the highest since the beginning of June.

Gold edged up to $1,730 an ounce on Wednesday, as Treasury yields continue to retreat and concerns about a slower global economic recovery amid rising coronavirus and restrictions in many countries lifted demand for the safe-haven metal. However, bullion’s attraction is still limited by a stronger dollar. Federal Reserve Jerome Powell played down the risk that a rise in prices this year would spur unwanted inflation while US Treasury Secretary Janet Yellen said future tax hikes will be needed to pay for infrastructure projects and other public investments.

Silver traded higher above $25 an ounce on Wednesday, despite a stronger dollar and falling Treasury yields, as investors remain concerned over slower global growth amid rising coronavirus infections and renewed restrictions in many countries. 

LME copper futures were trading around $4.0 per pound, a level not seen in two weeks, as a stronger dollar, sanctions between China and the West and new coronavirus lockdowns in Europe rattled sentiment. Investors grew concerned about a surge in COVID-19 cases and a sluggish vaccination campaign in Europe, which led to fresh lockdowns and delayed expectations of a global economic rebound. Still, upbeat data from top metals consumer China has capped much of the downward momentum. The Chinese factory and retail sector activity surged in the first two months of 2021, easily beating market expectations, as the economy consolidated its recovery from the coronavirus blow. The commodity, considered an economic barometer, has been in a massive rally from its March’s multi-year lows on the back of unprecedented measures from central banks and governments to shore up economic growth.

Shanghai steel futures were trading around the 4,700 yuan a tonne level in the aftermath of production curbs after top steelmaking city Tangshan pledged to cut emissions by 50% during days of heavy pollution. Still, the fundamentals have not changed, with strong domestic demand, mainly due to China’s massive spending on infrastructure construction, expected to push prices higher. China’s property and infrastructure investment surged 38.3% and 36.6%, respectively, in the first two months of 2021 as the economy consolidated its recovery from the coronavirus blow.

The Baltic Dry Index fell 3.4% to 2,194 on Wednesday, its lowest since March 17th and extending losses for a second session. The panamax index, which measures coal or grain cargos slumped 4.2% to 2,858; and the capesize index, which tracks iron ore and coal cargos declined 3.9% to 2,215. Among smaller vessels, the supramax index fell 42 points to 2,084.  

European stocks cut losses to close mostly higher on Wednesday, amid strong preliminary PMIs data and as Germany cancel a 5-day hard lockdown over Easter. Manufacturing output growth hit a record high in both the Euro Area and Germany; and France’s factory sector expanded the most since January 2018. Also, services activity unexpectedly returned to growth in Germany and fell less than expected in both the Eurozone and France. Meantime, investors remained concerned that rising coronavirus infections and lockdowns could delay an already tepid economic recovery in the continent despite strong preliminary PMIs data. The Netherlands joined Germany, France and many other countries on the continent and extended the curfew by 3 more weeks. Frankfurt’s DAX 30 edged down while other major indices gained between 0.1% and 0.7%.

The Shanghai Composite fell 44.45 points or 1.3% to 3367.06 on Wednesday, nearing fresh 4-month lows amid concerns of potential rate hike and policy tightening globally while elevated US Treasury yields also dampened risk appetite. In addition, an increase in Covid-19 cases reignited concerns about global recovery. On the diplomatic front, China on Tuesday threatened retaliation against the US over sanctions that targeted Beijing’s human rights abuses in Xinjiang. In Hong Kong, the Hang Seng Index fell 656.19 points or 2.3%, extending to 10-week lows of 27841.19. Among individual stocks, Kuaishou Technology slumped 12.48% after the company’s losses widened to US$2.9 billion due to higher operating expenses, while Tencent fell 1.59%, ahead of its earnings report.

The Nikkei 225 was down 590.4 points or 2.04% to 28405.52 on Wednesday, falling for the 4th consecutive session amid growing concerns about the pace of the global economic recovery after the return of coronavirus lockdowns in Europe and declining oil prices dented risk appetite. Meantime, the Bank of Japan minutes showed that policymakers agreed to ease without hesitation if needed with eyes on a pandemic fallout on the economy. Governor Haruhiko Kuroda also noted that the central bank had no plan now to start selling its massive holdings of exchange-traded funds after removing its $55bn annual target for ETF purchases and halting the purchases of Nikkei 225 ETFs for the first time in a decade. On the data front, Japan manufacturing PMI in March rose to a 27-month high, while the service sector grew the most in 3 months.

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.