Pictet North America Advisors

2021 Weekly Views — February 1

Pictet North America Advisors 2021 Weekly Views — February 1
Pictet North America Advisors

2021 Weekly Views — February 1

Pictet North America Advisors 2021 Weekly Views — February 1

Market update

Volatility spike

The S&P 500 closed the week at 3,714.24, -3.31% lower. The Dow Jones closed at 29,982.62, -3.27%, with the Nasdaq down by -3.49%. The volatility index VIX closed the week at 33.09 up from 21.91. The Euro Stoxx 600 slipped -3.11%.

The 10-year UST closed at 1.06% down from 1.08% a week before. The yield curve slightly steepened with the yield spread between the 3-month and 10-year UST at +101bps. Corporate Bond spreads: Investment Grade widened 5bps at 126bps and High Yield widened 12bps to 444bps. German 10-year Bunds yield closed at -0.52% down from -0.51% a week ago. In Europe, Corporate Investment Grade spreads widened 6bps to 104bps and High Yield widened 21bps at 357bps.

The US Dollar Index (DXY) appreciated +0.38% during the week and closed at 90.58. The Euro closed at 1.2136 (-0.29% weekly); the Yen depreciated -0.87%, closing at 104.68 and the Swiss Franc depreciated -0.53%, closing at 0.8903. Gold closed at $1,847.65 depreciating -0.43%. Oil was mixed with Brent closing at $55.88 (+0.8%) and WTI at $52.20 (-0.1%).

Macroeconomy

Covid-19 update
California ended its state-wide lockdown and replaced it by a more flexible county-by-county plan as new infections slowed. The Brazilian variant was found in Minnesota and 300 cases of the British variant were found in 24 different states. Cumulative vaccination (first dose) now stands at 7.1% of the total US population (versus 11.3% in the UK, and 2.4% in Germany). In the UK, the government pushed back the end of its “national lockdown” for schools until March, most shops until April, and pubs and restaurants until May. In the vaccine distribution front, there are now issues between the UK and the European Union regarding sharing doses of the vaccine. AstraZeneca announced that 40m doses will be supplied to the European Union by the end of March which is only half what the company had originally aimed for. Johnson and Johnson published the results of its vaccine candidate Phase-3 trial with a 66% effectiveness overall in preventing moderate to severe Covid-19 and 85% effectiveness in preventing severe disease. The single-dose vaccine candidate is estimated to remain stable for two years at -20°C (-4°F), at least three months of which can be at temperatures of 2-8°C (36°F–46°F). Also Novavax published Phase-3 results and said its UK trial produced efficacy of 89.3% but that number fell to only 60% in South Africa. Moderna and Pfizer both said that their vaccines are also less effective against the South Africa strain.

FOMC meeting
On Wednesday, the Federal Reserve held its FOMC (Federal Open Market Committee) meeting and the corresponding Press conference by Fed Chairman Jerome Powell. The Fed left its policy parameters unchanged as expected with the Fed funds rate in the 0%-0.25% range and the monthly purchase of debt at $120bn. Economic activity was described as having "moderated in recent months", and "progress on vaccinations" explicitly cited as key to economic recovery. Jerome Powell emphasized that tapering talk is “premature”.
US economic data
According to the first estimate of GDP, the US economy grew at an annual rate of 4.0% in Q4 20—down from 7.4% in the previous quarter, leaving US GDP down 3.5% in 2020 year over year. The paltry 0.2% increase in new orders in December (the smallest monthly increase since August) was another sign of a certain loss of momentum in the US economy.

Global economic data
The International Monetary Fund upgraded its forecast for global growth this year to 5.5%, up from its previous forecast of 5.2%. The IMF believes that by 2022 China and the US will have recovered most of the growth missed on account of the coronavirus, while Europe and emerging markets will lag. In Europe, German GDP declined by a smaller-than-expected 5.0% in 2020, better than France, where GDP fell 8.3%. Q4 figures for France, Germany and Spain were better than forecast. German headline HICP inflation rose to 1.6% y-o-y from -0.7% y-o-y in December. Several technical factors contributed to this pick-up, notably the reversal of the temporary German VAT cut and the introduction of a carbon tax.

Highlights

Earnings season
In the US, roughly 37% of the S&P 500 companies reported Q4 earnings so far. With 82% of companies reporting better than expected results by a large 19% beat, earnings growth is being positive for 64% of companies with an average growth of +3.80% compared to Q4 2019 despite flat sales growth. Some of the highlights from last week are the following. Apple posted results ahead of expectations with revenues at $111.4bn, up 21% y-o-y, and iPhone sales roughly 10% ahead of forecast. Facebook reported advertising revenues up 31% with total revenues increasing to $28.07bn and above consensus estimates of $26.4bn. For this week, some of the highlights will be Amazon, Electronic Arts, Alphabet, Pfizer, Exxon Mobil, Align Technology, Biogen, Qualcomm, Cigna or Ford Motor.

Retail flows
Last week, GameStop became the biggest stock on the Russell 2000 index hitting a market cap of $35.7bn at the peak. It happened after groups of retail investors who communicate through social media platforms such as Reddit, decided to use leverage and options to pile into stocks of companies heavily shorted, notably by hedge funds. Retail investing volumes increased last year as companies like Robinhood sought to liberalize financial markets through smart-phone apps at the same time as Covid confined much of the world to their homes. As some brokerage firms halted trading on some of these stocks, Robinhood is now pressured to respond to retail investors as well as lawmakers. The California based broker has recently raised $1bn from investors and tapped credit lines to meet its capital and clearing requirements. The US Securities and Exchange commission has announced on Friday that it will review the trading restrictions imposed by online brokers before releasing any further declaration. As a result, on January 27th stock-market volatility posted its biggest net daily jump since March 2020 after one of the steepest one-day sell-offs on the S&P 500 in months. The volatility spike resulted from a combination of mixed tech earnings and a surge in bullish call-option trades on heavily shorted stocks by highly motivated retail investors. Hedge funds that had shorted the targeted companies were forced to sell other securities to raise cash.

What to watch

Monday: Italy, France & Germany Markit Manuf. PMI (Jan.); US Markit Manuf. PMI (Jan.)
Tuesday:  France & Italy CPI (Jan.); Italy GDP (Q4); Euro zone GDP (Q4)
Wednesday:  Euro zone Services & Comp. PMI (Jan.); Euro zone CPI (Jan.); US ADP (Jan.); US Markit PMI (Jan.)
Thursday:  US Factory Orders (Dec.)
Friday:  Germany Factory Orders (Dec); US NFP & Unempl. (Jan.); US Trade balance (Dec.)

Investment team ― Pictet North America Advisors