The S&P 500 crossing the 4000 markers sent a sonic boom worldwide to usher in a great Good Friday and another OPEC+ innovative surprise
The US equity market opened in the second quarter with a sonic boom ushering in a great Good Friday.
The closed above the 4,000 level for the first time, with tech stocks as top performers (see tech sector view below). The advance comes after President Biden unveiled his shiny $2 trillion infrastructure package as enthusiasm around the spending plan helped offset the disappointing initial jobless claims data that showed 719,000 Americans filed first-time jobless benefits in the week ended March 27
The US infrastructure glossy catalogue of Biden’s great economic adventures intended to create millions of jobs in the short run while strengthening Americas competitive domestic and foreign ambitions, in the long run, is proving too challenging to ignore despite the corporate tax implications, which, for now, investors are willing to look through. Indeed, at this stage of the game, corporate tax hikes’ redistributive nature doesn’t seem to be a significant concern in the general Central Street investment community.
As we enter a Q2, optimism abounds as unquestionably spring is in the air with the macro focus squarely on the US and the Biden administration infrastructure plan. Its growth sportive impacts merge with optimism around the reopening theme. At the same time, pressure remains on Europe amid lockdowns—but for now, European asset markets are happy to look through this.
Vaccine rollouts remain the game’s name and drive the narrative even with the EU lagging, as investors view this delay in the context that the catch up is but a function of time.
The bullish cocktail of fiscal stimulus and the anticipated pent up consumer spending will propel economic growth to new heights. Stimulus checks already in the retail “feed -through- loop” are showing up in critical economic gauges like consumer confidence and the keenly watched US ISM data where stocks made the most of soaring business activity with the US the manufacturing sector growing at its most robust pace since the 1980s and outstripping market estimates by a wide margin. Pretty impressive stuff indeed.
With business activity soaring, jobs growth should soon follow up via the positive payrolls feedback loop.
Still, whatever suggestion there was about “everything being in the price” might not necessarily be the case. And by the looks of today’s price action, there is still potentially a long catalyst runway courtesy of the reopening and vaccine narrative. Not to mention the arrival of those stimulus checks should feed directly into corporate profits, which is not necessarily reflected in earnings yet.
Tech Sector View
The tech sector was severely hurt in the big internal US equity market rotation. The tech-heavy fell some 7% from a mid-February peak, versus a flat performance by the S&P 500. But tech will recover. There has already been a sharp pick up in buying tech options. The vaccine-led travel recovery bodes well for the sector. US internet stocks, such as Google (NASDAQ:) and Facebook (NASDAQ:), have massive clout in the media world and are in turn geared to travel and leisure advertising markets, which should rebound as mobile restrictions come off. This week, Atlanta Fed President Bostic noted that leisure and hospitality firms are beginning to see bookings comparable to or above.
Google and Facebook, both trade at compelling multiples to growth, have more recently lagged SMID cap peers, and investors may see fears on regulatory as overdone.
Suppose you’re a US policymaker that just set your stall out, and you want to drive up R&D to combat China’s surge, boost online sales penetration significantly off an already high base, and see consumption grow as a proportion of the economy. In that case, you’re going to need the most prominent internet names in the game like Google and Facebook to come along for the ride.
Why the short-term rates re-think?
With the bond markets priced to “bear”, any US data miss regardless of the tier will elicit an outsized move. And the disappointment around the US initial claims provided the yields suppressant impulse, which was then viewed positively for markets as it offset some near-term inflationary concerns.
shot higher despite the OPEC+ decision to gradually increase production even after revising 2021 global oil demand lower. Gasoil cracks, an indicator for industrial activity, have languished at around $4 a barrel on the demand side. Still, there is evidence that gasoline demand has returned, visible in the gasoline crack. With higher gasoline demand, refining margins have returned to a very healthy $20 a barrel and more.
The group reached an agreement to adjust production levels up in May, June and July, and has come up with an innovative way to avoid the adverse reaction in oil prices this anti-consensus decision might have provoked: they have not disclosed the volume of the planned adjustments (except to reiterate previous guidance that monthly increases will not exceed 500kb/d).
A drip-feed rather than a gusher seems sufficient to have assuaged oil traders concerns that were worried about the power of spare capacity in the context that a lot more barrels could have come back to markets. In a sense, excess capacity concerns have shifted from a major to a minor headwind. But ultimately, with OPEC+ showing the nerve to increase barrels into peak US driving season, it signalled a decisive vote of confidence to the US vaccine rollout and the catch-up expectations in some of the harder hit pockets of the world.
But rounding out an overall feel-good session with risk assets soaring to the beat of the Biden infrastructure plan, coupled with a subtle repricing of the rates curve lower as near-term inflationary concerns diminish, the US dollar weakness has provided yet another level of support for oil prices.
With risk sentiment on full tap, the gave way to gushy global risk sentiment. And for all the concerns about a slow vaccination rollout, the area manufacturing sector looks especially strong, particularly in the EUR area industrial heartland. And with currency risk-taking picking up interest as the froth came off US yields, EURO and the rest of G-10 shifted higher.
Asia FX should have a bit more breathing room today, but with few active institutional traders in the house, it might be a quiet day with the Asia FX street still licking their wounds from a softer PMI drop as China hands the reflation baton to G-10.
The softer US yields and the recovery bounce on oil prices overnight should help soften the ringgit’s hard landing this week,
But caution lies ahead of , which could be a FOREX barnstormer on either a big beat or miss giving the expected drop off in liquidity as crossing spreads will likely come at a premium.
Still, I think short euro positioning isn’t that big, with most inter-day dollar bulls sitting tight committed to only selling rallies closer to 1.1800 if so inclined. And not to mention, many positions got squared into month-end where a good chunk of the pros gave up dollar longer for sterling longs on the month-end rebalancing signal.
Keeping in mind UST’s will be hugely sensitive to payroll surprise; they were even hypersensitive to the ADP miss. But even more so tonight, where shifts in price can be amplified on a holiday-shortened trading session with the bond market closing at Noon EST.
traders who were leaning that Gold was poised to benefit from any near-term correction in rates and a dollar weakness resumption ahead were rewarded as both happened overnight.
The next phase of the reflation trade amid Fed speak green shoots
The next phase of the reflation will consist of three parts:
- Data needs to confirm what markets have been pricing up until now
- Central banks will increasingly start to prepare for normalization, and
- the commodities cycle is growing longer in the tooth.
- Mar. 23: Fed’s Kaplan says, “as we [move beyond the pandemic] and meet the first test of substantial further progress toward our dual mandate goals, I will be an advocate of removing some of this extraordinary accommodation starting with bond purchases.”
- Mar. 24: Fed’s Bostic says he will start discussing with his staff how would tapering look like
- Mar. 30: Fed’s Barkin says that inflation expectations are closing in our target of 2%