March 26 2021 Market Commentary

 

Len Martinez PhD CPA - President Bull Valley Advisors

"INVESTING IN VALUE STOCKS WITH POSITIVE PRICE MOMENTUM"

Wall Street closed in the green on Friday as stocks related to an economic reopening performed better again. Also, bank shares rose after the Federal Reserve announced that restrictions on bank holding company dividends and share repurchases currently in place will end for most firms after 30 June 2021. On the macro front, PCE figures showed that personal income fell less than expected, whereas spending declined at a faster pace and prices point to tame inflation. Meanwhile, the 10-year Treasury yield rose to 1.665%. The Dow Jones gained 453 points or 1.4% to 33,072. The S&P 500 increased 65 points or 1.7% to 3975, another record close. The Nasdaq added 161 points or 1.2% to 13,139. During the week, the Dow Jones climbed 1.4% and the S&P 1.6%, whereas the Nasdaq dropped 0.6%.

All eyes turn to the US employment report next week, which will probably add to signs of a gradual job recovery, as well as worldwide manufacturing PMI surveys and an OPEC+ meeting that is expected to offer guidance into the coalition's production plan from May. Elsewhere, key data to watch for include US construction spending; UK and Russia Q4 GDP updates; Eurozone inflation and business morale; Japan's tankan survey, industrial production and retail sales; Australia, India and Turkey foreign trade figures.

The US dollar index traded above 92.7 against a basket of currencies on Friday, not far from a four-month high of 92.92 hit in the previous session and on course for a 0.8% weekly gain as better-than-expected weekly jobless claims numbers and upwardly revised GDP figures reinforced the view of a robust US economic bounce. Meantime fresh PCE figures painted a mixed picture: personal income fell slightly less than expected while spending declined at a faster pace and prices pointed to tame inflation. Beyond these upbeat numbers, the swift rollout of coronavirus vaccines combined with ultra-easy monetary policy and unprecedented government spending has given investors more confidence in the path to economic recovery. 

The yield on the benchmark 10-year Treasury erased some gains to around 1.64% on Friday, but remaining close to levels not seen in over a year, after data showed consumer spending fell more than expected in February and personal income tumbled the most on record. The PCE price index edged up 0.1% as expected. Several auctions have been in the spotlight during the week. Both the 2-year and 5-year auctions saw solid demand while demand for the 7-year auction was below the recent average. Yields have been rising since August but the upturn momentum 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, Fed Chair has been reiterating any spike in inflation would likely be temporary and showed no concerns over the recent rise in bond yields. 

WTI oil prices increased 3.9% to $60.82 per barrel and Brent crude increased 4.1% to $64.48 per barrel over concerns that the Suez Canal blockage may last weeks and tighten supply. On Thursday, officials stopped all ships entering the shipping lane and a salvage company said the vessel may take weeks to free. Despite Friday’s rebound, oil prices declined during the week and booked their third consecutive weekly loss, with both benchmarks dropping nearly 3% over demand concerns stemming from rising coronavirus cases in multiple regions of the world.

Spot gold prices increased 0.4% to $1,731.3 per ounce, but the metal declined 0.7% in the week and booked its first weekly loss in three. On the macro front, the USD increased after PCE figures showed that personal income fell less than expected, whereas spending declined at a faster pace and prices point to tame inflation. Meanwhile, the 10-year Treasury yield rose to 1.665%. 

Silver held above the $25 an ounce level on Friday but was on course for an over 4% weekly drop as investors continued to move into the dollar index in the light of growing concerns over surging coronavirus cases across Europe. Meantime, Treasury yields rose again in response to a weak 7-year auction on Thursday. 

LME copper futures jumped almost 2% to trade above $4 a pound on hopes of global economic recovery amid strong labour and GDP data for the US and President Biden's plans to accelerate the vaccination programme. However, a stronger dollar, sanctions between China and the West, and new coronavirus lockdowns in Europe capped gains. Although copper futures remain below a decade-high of $4.3 per pound reached in late February, the metal is still up more than 15% so far this year as China, the top copper consumer, consolidated its recovery from the coronavirus blow. The commodity, considered an economic barometer, has been in a massive rally from its March 2020 multi-year low, catching attention from governments of Chile, Peru and Zambia which are considering further taxes on mining companies to help rebalancing public finances, according to Bloomberg. 

The coal futures remained above $90 per tonne, a level not seen 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.

Chicago wheat futures traded around $6.1 per bushel at the end of March, having touched on Friday its lowest level since December 28th, amid a stronger dollar and favorable weather across major producing regions including the US and Russia. Production prospects in the two major exporting nations were boosted by forecasts indicating moisture this month. Also, Russian agricultural consultancy IKAR said on Thursday it had increased its forecast for the country's wheat crop in 2021 to 79.8 million tones, up from 78 million tones previously projected. Elsewhere, traders looked ahead to US planting estimates next week.

Personal income in the US declined 7.1 percent month-over-month in February of 2021, down from an upwardly revised 10.1 percent jump in January and compared to market expectations of a 7.3 percent drop. It is the biggest fall on record reflecting a decrease in government social benefits to persons. Within government social benefits, “other” social benefits, specifically the economic impact payments to households, decreased. The CRRSA Act authorized a round of direct economic impact payments that were mostly distributed in January.

Personal spending in the United States declined 1.0 percent from a month earlier in February 2021, following an upwardly revised 3.4 percent growth in January and compared with market consensus of a 0.7 percent drop. It was the largest decline in consumer spending since the April 2020 record slump as the cold weather weighed on demand and the boost from a second round of stimulus checks faded. Consumption of durable goods slumped 4.7 percent (vs 11.9 percent in January) and that of non-durable goods dropped 2.0 percent (vs 6.5 percent in January). Meanwhile, spending on services was up 0.1 percent (vs 0.9 percent in January). Real PCE fell 1.2 percent in February, due to decreases in spending for both goods and services.

The goods deficit in the US widened to a record high of $86.7 billion in February of 2021 from $84.6 billion in January. Exports of goods were $130.1 billion, $5.1 billion less than January exports. Biggest decreases were seen in sales of capital goods (-5.9 percent), autos (-5.9 percent), consumer goods (-5.7 percent) and food and beverages (-5.4 percent). Imports of goods were $216.9 billion, $3.0 billion less than in the previous month, dragged down by a 10.7 percent slump in purchases of autos.

The University of Michigan's consumer sentiment for the US was revised higher to a one-year high of 84.9 in March of 2021, up from a preliminary estimate of 83 and above market forecasts of 83.6. It was also the largest increase in consumer morale since May 2013, as households welcomed the third disbursement of relief checks and a better than anticipated vaccination progress. Meanwhile, expectations were revised higher to 79.7 from 77.5 and compared to February’s 70.7. The current conditions gauge rose to 93, above a preliminary of 91.5 and up from February’s 86.2. Inflation expectations for the year ahead decreased to 3.1% from 3.3% in the previous month, matching initial figures; while the 5-year outlook rose to 2.8% from 2.7%, above preliminary figures of 2.7%. "The data clearly point toward robust increases in consumer spending."

Euope's major stock markets held onto early gains on Friday, with Frankfurt's DAX 30 closing up 0.9% at 14,749 and other major bourses gaining between 0.7% and 1.1%, as investors focused on the prospect of a global economic recovery, despite the uncertainty around rising infection rates and the slow rollout of vaccines. On the economic data front, German business morale improved in March to its highest level since June 2019, easily beating market expectations. EU leaders met this week to discuss the COVID-19 epidemiological situation, and have agreed to tighten the criteria to authorize the export of EU-made coronavirus vaccines, aiming to secure the bloc's supplies. However, they could not get a deal over vaccine distribution and demand from some countries for additional Pfizer/BioNTech vaccines. For the week, the DAX added 0.9%.

The CAC 40 added 0.6% to a 1-week high of 5,989 on Friday, after being little changed in the previous two sessions booted by expectations of a global economic rebound and upbeat business morale data out of Germany. Still, rising coronavirus cases in the continent continued to undermine the mood. France extended partial lockdowns to three more areas of the country and German chancellor Angela Merkel signaled that she would declare France a high-risk Covid area. For the week, the CAC 40 edged down 0.2%.

The FTSE 100 added more than 60 points or 1% to close at 6,741 on Friday, recovering from the previous session's three-week low, with mining and oil & gas stocks among the best performers helped by higher commodity prices. Investors across the globe focused on the prospect of a strong economic recovery, despite worries about surging coronavirus cases in Europe. In addition, economic data showed Britain's retail trade rose firmly in February even as non-essential shops remained in a coronavirus lockdowns. On the corporate front, British insurer Aviva gained after it sold its Polish operations to Germany's Allianz for €2.5 billion in cash. For the week, the FTSE 100 gained 0.5%.

The Shanghai Composite added 54.73 points or 1.63% to 3418.33 on Friday, snapping 3 sessions of consecutive losses and retracing 13-week lows while gaining 0.46% for the week, after the World Bank said China is set to lead the recovery of East Asian and Pacific economies this year, growing by 8.1% in 2021, compared with 2.3% in 2020. On the policy front, China’s central bank on Thursday said it would deepen exchange rate reform and increase yuan exchange rate flexibility. Shares of national sports brands rose as the Chinese government joined mainland consumers in pressing global fashion brands to reverse the Xinjiang cotton boycott and “correct their mistakes.” Meantime, the Hang Seng Index further retraced 10-week lows, adding 480.24 points or 1.72% to 28379.85.

The Nikkei 225 added 446.82 points or 1.56% to 29176.7 on Friday, extending gains of 1.14% in the previous session, lifting from 7-week lows while closing 2% lower for the week. Sentiment remained positive amid bargain hunting and hopes for a solid US economic recovery supported by accelerating COVID-19 vaccinations, with President Joe Biden pledging to double his administration’s vaccination rollout plan. Investors also welcomed official US data showing the number of workers filing for unemployment benefits fell last week to its lowest level before the pandemic. On the coronavirus front, Tokyo confirmed 394 new infections on Thursday, after Japan lifted its state of emergency in the capital and three surrounding prefectures on Monday. In local data, core consumer prices in Japan’s capital city Tokyo continued to fall in March but slowed their annual pace of decline for a third consecutive month, indicating that a rebound in domestic demand will help Japan avert deflation.

Thank you and please stay tuned for more upcoming reports.

Len Martinez PhD CPA is President of Bull Valley Advisors. Len publishes the "Bull Valley Advisor", a Stock Market newsletter for Institutional Investors, featuring his BVA Value Momentum Portfolio Strategy.

Information in this report and 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.

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