April 9 2021 Market and Economic Commentary

 All three main US stock indexes ended the week on a high note, with the Dow Jones and the S&P 500 finishing at record closing levels on the back of a stimulus and vaccine-fuelled improvement in the economic outlook that fed expectations about a swifter economic recovery. Value-linked stocks and other hard-hit sectors benefited the most from the economic recovery, though growth names have found their footing again this week as Treasury yields retreated from more than one-year highs. Dovish Federal Reserve minutes released on Wednesday, which reiterated that the US central bank would keep financial conditions as lenient as possible for the foreseeable future, also kept sentiment elevated. On the data front, the US producer prices increased more than expected in March, recording the biggest annual gain in 9-1/2 years.

European shares booked a sixth consecutive week of gains, their longest weekly winning streak since November 2019, with the DAX 30 adding 0.8% to close at a new all-time high of 15,225. Investors focused on the prospect of a strong economic recovery helped by massive fiscal and monetary support and the rollout of vaccines, while continued to monitor rising COVID-19 infections in Europe and concerns over the AstraZeneca vaccine. On the economic data front, industrial activity in the Eurozone's largest economies, including Germany and France, contracted sharply in February. On Thursday, the ECB meeting accounts showed policymakers discussed a smaller increase in bond purchases under the PEPP and agreed that the central bank did not need to use the envelope in full if favorable financing conditions could be maintained.

The CAC 40 closed just above the flatline at 6,166 on Friday, extending gains beyond levels not seen since October of 2000. It was a choppy session of European markets, as investors weighed concerns over the safety of the AstraZeneca and the J&J vaccines with prospects of a stimulus-led economic recovery. On the vaccination front, the French health regulator said the Moderna and Pfizer vaccines should be used as the second dose for the population below the age of 55 who has received the first dose from AstraZeneca. On the data front, industrial output in France tumbled 4.7% MoM in February, following a downwardly revised 3.2% jump in January and missed expectations of a 0.5% expansion. On the corporate side, Airbus shares rose 0.3% after a surge in deliveries in March boosted the first quarter total to 125 jets, surpassing the 122 units of a year earlier. For the week, the index gained 0.6%.

The FTSE 100 stood at 6,916 on Friday, remaining close to Thursday's 13-month high and booking a 2.6% weekly rise, on hopes of a strong economic recovery. Prime Minister Boris Johnson confirmed this week that the "stage two" of lifting lockdown would take place on April 12th, and announced the launch of a new mass testing programme, aiming to help health officials to track the pandemic. Meanwhile, Britain's plans for restarting international travel fell short of expectations. The government has proposed a traffic light system, with countries falling into red, amber or green categories based on COVID-19 risks; while restrictions such as quarantine and compulsory COVID tests will apply differently depending on which country a passenger arrives from. In addition, airlines and passengers will not find out until early May whether international travel resumes from May 17th.

The Shanghai Composite lost 31.88 points or 0.92% to 3450.68 on Friday, closing 0.95% lower for the week and retracing 4-week highs after robust inflation data sparked concerns that policymakers will dial back ultra-loose monetary policies. China's producer prices rose by 4.4% in March, the most in nearly three years; while consumer prices rose by 0.4% yoy, above forecasts. In the US, meantime, jobless claims report showed a second straight weekly increase earlier on Thursday, bucking the streak of strong economic data from payrolls and job vacancies. Sentiment was also dragged down by reports that the US Commerce Department had added seven Chinese supercomputing entities to the US economic blacklist. Further adding the bearish tone, Beijing blamed Washington on Thursday for tensions over Taiwan after a US warship sailed close to the Chinese-claimed island. In Hong Kong, the Hang Seng Index fell 325.48 points or 1.12% to 28682.59, falling 0.14% on-week.

The Nikkei 225 added 59.08 points or 0.2% to 29768.06 on Friday, following losses of 0.7% while falling 0.2% for the week as risk sentiment was tempered as Japanese government remains set to designate Tokyo and two other prefectures as requiring stronger measures to fight COVID-19 amid a resurgence in infections. The country’s daily cases of the new coronavirus on Thursday topped 3,000 for the second day in a row as fears over the impact on the country's medical system and the economy continue to intensify. Meantime, Powell signaled at the IMF Spring Meetings that the central bank is nowhere near reducing support for the US economy, saying that while economic reopening could result in higher prices temporarily, it will not constitute inflation. In recent data, the consumer confidence index increased by 2.2 points from the previous month to 36.1 in March, the highest since February last year.

The yield on the benchmark 10-year Treasury note was slightly higher at 1.65% on Friday but remained below 14-month highs of 1.78% last month. The bond market is stabilizing as investors continue to digest prospects of a stronger global growth and expectations of a surge in inflation although the Fed played down inflation risks several times. The IMF raised its outlook for global economic growth to 6% from 5.2% this year, citing additional fiscal support. In the US, fresh economic data pointed to a robust recovery although initial jobless claims remain elevated. Also, the Fed is unlikely to taper anytime soon while a new infrastructure plan worth $2.25 trillion was unveiled by President Biden but it will likely face strong GOP opposition as it will be funded by higher corporate taxes.

ECB policymakers discussed a smaller increase in bond purchases under the PEPP and agreed that the central bank did not need to use the envelope in full if favorable financing conditions could be maintained, the accounts of the March's meeting showed. Also, officials noted that that the pick-up in nominal yields reflected almost entirely markets’ reappraisal of the inflation outlook; while it was argued that higher real rates were not necessarily a cause for concern and should not trigger a policy intervention if they reflected higher growth prospects rather than higher real term premia. Last month, the ECB said it would conduct emergency bond purchases at a significantly higher pace over the April-June period, aiming to bring government bond yields down and to support the Eurozone economic recovery.

WTI crude futures remained below $60 per barrel on Friday for the fifth consecutive session, after touching an over two-year high of $67.98 during the second week of March, amid oversupply concerns and fears that extended restrictive measures in Europe, slow vaccine rollouts and rising COVID-19 cases in top consumers India and Brazil could further hit the recovery in fuel demand. Last week, major oil producers agreed to increase output by 350,000 barrels per day in May, 350,000 bpd in June and 400,000 bpd in July. Meanwhile, talks between the US, Iran and other powers aiming to revive the 2015 nuclear deal continue, amid prospects that Tehran may see some sanctions lifted.

Wholesale inventories in the US increased 0.6 percent from a month earlier in February of 2021, after a 1.4 percent rise in January and above a preliminary estimate of a 0.5 percent advance. It was the seventh consecutive month of gains in wholesale inventories. Nondurable goods stocks rose 1.1 percent (vs 1.7 percent in January) and durable goods inventories were up 0.3 percent (vs 1.3 percent in January). On a yearly basis, wholesale inventories advanced 2 percent.

Chicago corn futures rose to above $5.8 a bushel for the first time since July 2013, amid concerns over tightening global supplies due to reduced output and stronger demand from importers led by China. The USDA said in its latest WASDE report that corn supplies will shrink by more than initially thought amid rising demand from the ethanol, livestock feed and export sector. Recent weekly data showed export sales of 757,000 tonnes of old-crop corn, down 5% from the previous week but in line with trade estimates. The USDA said on March 31st farmers plan to sow 91.144 million acres with corn this year, the most since 2016, but missing market expectations of 93.208 million. The report also showed that March 1st stocks of corn totaled 7.70 billion bushels, down 3% year-on-year and compared with market expectations of 7.767 billion. The commodity is up about 20% since the beginning of the year, amid hopes of global economic recovery.

The Baltic Dry Index fell edged down 3 points, or 0.1% to 2,085 on Friday, extending losses for a second straight session. The panamax index which tracks cargoes of about 60,000 tonnes to 70,000 tonnes of coal and steel-making ingredient iron ore was down for the 12th straight session, falling 7.3% to its lowest level since February 15th at 2,003. At the same time, the supramax index lost 6 points to 1,780. Conversely, the capesize index, which tracks iron ore and coal cargos of 150,000-tonnes, jumped 125 points, or 4.5% to an over two-month peak of 2,883. The Baltic Dry Index was up 0.6% in the first week of April, the first weekly gain in three.

Spot gold extended losses to below $1735 an ounce on Friday after touching a 5-week high of $1758 an ounce in the previous session. Still, the yellow metal is on track for a weekly gain, the first rise in 3 weeks, as both the dollar and Treasury yields retreat and initial jobless claims unexpectedly rose for the 2nd week. Also, the Federal Reserve reiterated expectations it would not taper anytime soon and that interest rates would remain low for some time despite a stronger economic outlook. Looking ahead, gold is facing pressure from strong economic data coming from the US and China and an accelerating vaccination rollout while Fed's dovish tone, fiscal stimulus and lockdowns in Europe and in some parts of Asia could boost safe-haven demand for bullion.

Producer prices for final demand in the US rose 1 percent from a month earlier in March 2021, following a 0.5 percent increase in January and easily beating market expectations of a 0.5 percent advance. Cost for goods climbed 1.7 percent, the largest increase since the index began in December 2009, boosted by a 5.9 percent jump in energy prices. Over one-fourth of the goods price increase was traced to an 8.8 percent advance in gasoline prices. The indexes for diesel fuel, residential electric power, industrial chemicals, steel mill products, and processed poultry also moved higher. Meanwhile, cost for services rose 0.7 percent, the third consecutive advance, mainly attributable to margins for final demand trade services. The core index, which excludes foods and energy, was 0.7 percent higher in March, also beating consensus of 0.2 percent. Year-on-year, producer prices jumped 4.2 percent, the biggest increase since September 2011, and the core index increased 3.1 percent.

The dollar index lost significant ground this week, testing the 92 neighbourhood for the first time in more than two weeks, in tandem with US Treasury yields, which retreated further from a more than one-year highs. Worse-than-expected initial jobless claims and a dovish Federal Reserve minutes released on Wednesday, which reiterated that the US central bank would keep financial conditions as lenient as possible for the foreseeable future, were another driver behind this dollar’s weakness. However, the currency has room for further upside momentum as the American economy seems better positioned than others for a strong recovery from the coronavirus pandemic.

The euro depreciated below $1.19 on Friday, not far from last week's five-month low of $1.17, after economic data showed industrial production in Germany and France contracted sharply in February, missing market forecasts of activity growth. Elsewhere, investors tried to focus on the prospect of a strong economic recovery, despite the uncertainty around rising infection rates and the slow rollout of vaccines. EU leaders agreed last month on the need to urgently accelerate the vaccination campaigns, but said they would keep restrictions in place for the time being, including on non-essential travel.

The British pound weakened towards $1.37 on Friday, having touched its lowest level since February 5th earlier in the session, as investors fear that the slowing pace of the COVID vaccinations in the UK could delay the government’s plans to reopen the economy, despite Prime Minister Boris Johnson's recent confirmation that the "stage two" of lifting lockdown would take place next week. The PM has also announced early this week the launch of a new mass testing programme, aiming to help health officials to track the pandemic. Sterling hit a three-year high of $1.41 in late February, at the time making it the best performing G10 currency, supported by expectations that Britain’s economy would reopen quickly after its rapid vaccine rollout.

The Chinese Yuan lost 0.01365 points or 0.21% to near 4-month lows of 6.56896 against the US Dollar on Friday after the onshore rate was set at 6.5409. Sentiment for the risk-sensitive Yuan was dampened by reports that the US Commerce Department added seven Chinese supercomputing entities to the US economic blacklist. Further adding the bearish tone, Beijing blamed Washington on Thursday for tensions over Taiwan after a US warship sailed close to the Chinese-claimed island. Meantime, US jobless claims report showed a second straight weekly increase earlier on Thursday, bucking the streak of strong economic data from payrolls and job vacancies. In local data, China's producer prices rose by 4.4% in March, the most in nearly three years; while consumer prices rose by 0.4% yoy.

The Japanese Yen fell 0.235 points or 0.21% to 109.477 against the US Dollar on Friday, retreating from 2-week highs amid cautious trade as the Japanese government remains set to designate Tokyo and two other prefectures as requiring stronger measures to fight COVID-19 as fears over the impact on the country's medical system and the economy continue to intensify. Local 10-year yields lifted to 0.106% while US 10-year rates were at 1.649%. Meantime, Jerome Powell signaled at the IMF Spring Meetings that the US central bank is nowhere near reducing support for the US economy, saying that while economic reopening could result in higher prices temporarily, it will not constitute inflation, while US Treasury Secretary Janet Yellen urged major economies to inject significant new fiscal support to secure a robust recovery. In recent data, the consumer confidence index increased by 2.2 points from the previous month to 36.1 in March, the highest since February last year.

Industrial production in Germany unexpectedly contracted by 1.6 percent month-over-month in February of 2021, following a downwardly revised 2 percent drop in the previous month and compared to market forecasts of a 1.5 percent increase. The country remained under a nationwide coronavirus lockdown in February. Output fell for capital (-3.2 percent) and intermediate (-1 percent) goods while consumer goods edged up 0.2 percent. Also, energy (-1 percent) and construction (-1.3 percent) were lower. Compared with February 2020, which was the month before restrictions were imposed due to the coronavirus pandemic, industrial production decreased by 6.4 percent. “The improvement in business confidence and positive trend in orders signal a positive outlook in industry. Nevertheless, the future course of the pandemic poses uncertainties”, the German economy minister said.

China's producer prices rose by 4.4 percent year-on-year in March 2021, accelerating from a 1.7 percent gain in the prior month and well above market expectations of a 3.5 percent rise. This was the third straight month of increase in factory gate prices and the steepest pace since July 2018, as growth in the economy continued to gather momentum. Prices of means of production rose much faster (5.8% vs 2.3% in February), boosted by extraction (12.3% vs 6.8%), processing (3.4% vs 1.7%), and raw materials (10.1% vs 2.9%). At the same time, prices of consumer goods went up 0.1% after declining 0.2% in February, led by food (2% vs 1.6%), while both clothing (-0.8% vs -1.3%) and consumer durables (-1.4% vs -1.8%) fell less, and prices of daily use goods were flat (vs-0.1% in February). On a monthly basis, producer prices went up 0.8 percent.

The consumer price index in China rose by 0.4% yoy in March 2021, after a 0.2% drop a month earlier and compared with market consensus of a 0.3% gain. This was the highest reading since October 2020, amid a sharp rebound in cost of for non-food goods (0.7% vs -0.2% in February), driven by transportation & communication (2.7% vs -1.9%); clothing (0.1% vs -0.5%); rent, fuel & utilities (0.2% vs -0.3%). At the same time, cost of household goods and services was flat after falling 0.2% in February, while prices of other goods and services fell further (-1.5% vs -0.8%). Food prices dropped 0.7%, the second straight fall, with prices of pork declining faster (-18.4% vs -14.9%). On a monthly basis, consumer prices went down 0.5% in March, the first decline in four months, following a 0.6% rise in February.

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, IBD 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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