Pictet North America Advisors

2021 Weekly Views — May 3

Pictet North America Advisors 2021 Weekly Views — May 3
Pictet North America Advisors

2021 Weekly Views — May 3

Pictet North America Advisors 2021 Weekly Views — May 3

Market update

Unimpressed markets


The S&P 500 closed the week at 4,181.17, +0.02% higher. The Dow Jones closed at 33,874.85, -0.50%, with the Nasdaq lower by -0.39%. The volatility index VIX closed the week at 18.61 up from 17.33. The Euro Stoxx 600 slipped -0.38%.

The 10-year UST closed at 1.62% up from 1.56% a week before. The yield curve steepened with the yield spread between the 3-month and 10-year UST at +161bps. Corporate Bond spreads: Investment Grade widened 5bps at 124bps and High Yield tightened 10bps at 394bps. German 10-year Bunds yield closed at -0.20% up from -0.26% a week ago. In Europe, Corporate Investment Grade spreads tightened 1bp at 95bps and High Yield tightened 7bps at 306bps.

The US Dollar Index (DXY) appreciated +0.46% during the week and closed at 91.28. The Euro closed at 1.2020 (-0.64% weekly); the Yen depreciated -1.33%, closing at 109.31 and the Swiss Franc appreciated +0.10%, closing at 0.9131. Gold closed at $1,769.13 depreciating -0.45%. Oil was up with Brent closing at $67.25 (-1.7%) and WTI at $63.58 (+2.3%).

Macroeconomy

Covid-19 update
Europe has now reported to have fully vaccinated 7% of its population, a bigger proportion than the number of Covid cases so far. In France, president Macron outlined a tentative four-stage lockdown easing, starting this week and ending on June 30th. In the US, NYC Mayor is planning to fully reopen the city by 1st of July. New York State will allow people to sit indoors at bars from today. According to the CDC, 54.5% of the adult population has received a first dose of a vaccine (82% for those aged 65+). Meanwhile, a CDC survey found that full vaccination reduced the risk of hospitalization by 94% for those aged 65 and above. According to a Fox News Poll, 22% of Americans still do not plan to get vaccinated. India has reached a new record high in daily infections of 386k and number of deaths reaching 3,500.

Fed meeting
During the regular Fed policy meeting, parameters were left unchanged with fed funds target rate at 0-0.25% and bond purchases running at $120bn per month. The delivery was as expected (dovish) as the Fed noted in its statement the recent strengthening of the US economy, but hinted it was too early to consider tapering bond purchases. Chairman Powell highlighted the need to see more data on vaccination as well as jobs. Powell insisted on the employment hole of 8.4m (rather than the market expectation of another near -1m print next Friday). On inflation, Powell warned to ignore the coming big inflation prints which he said would mostly reflect “base effects” and “bottlenecks” in the economy. He alluded to an internal Fed measure of inflation expectations which show that expectations remain well anchored.

US Q1 GDP
US GDP rose at a 6.4% q-o-q in Q1 which represents an acceleration from 4.3% in Q4 2020. The solid growth was powered by a sharp rise in consumption as households received two sets of cheques from the federal government (one of $600 per adult following December’s spending package, and another worth $1,400 in the wake of the ‘American Rescue Plan’ voted in March). Consumption rose a solid 10.7% q-o-q while inventories subtracted 2.6% from headline growth.

Economic data
In the US, March household income surged 21.1% and Consumer spending grew 4.2%. In Europe, Q1 GDP fell by 0.6% q-o-q after a decline of 0.7% in Q4. April headline inflation came in at 1.6% y-o-y (from 1.3% in March) while core inflation dipped slightly to 0.8%. In China, official and private April Caixin/Markit PMIs pointed in different directions, although both indicated activity picking up. The Caixin index rose to 51.9 from 50.6 in March, while the official index slowed to 51.1.

Highlights

Earnings so far
We are halfway through the Q121 earnings season. Earnings delivery is very strong, supported by the unwinding of Covid dislocations and easy base effects. Despite the elevated projections entering the quarter, a record number of companies are beating consensus estimates in both regions. However, stock price reaction has so far been disappointing, with both misses and beats being penalized. In the US, 86% of S&P500 companies that have reported beat EPS estimates. EPS growth is running at +57% y-o-y, surprising positively by 25%. Discretionary, Financials and Materials are the main growth drivers, while Airlines continue to see contracting EPS. Top-line growth is coming in at +11% y-o-y, surprising positively by 4%. In Europe, of the Stoxx600 companies that have reported so far, 74% beat EPS estimates. EPS growth is coming in at +41% y-o-y, surprising positively by 18%. Delivery for Discretionary stocks is particularly robust, with 8 other sectors also seeing double digit EPS growth. Revenue growth is at +3% y-o-y, surprising positively by 1%.

Big Tech earnings
Alphabet’s net profits surged by 162% y-o-y, while revenue soared 34% to a record $55.3bn. Pandemic factors helped drive up earnings like coronavirus lockdowns, online shopping and YouTube watching. The stock rose 4.2% to $2,400 after the results, while its board authorized the repurchase of up to $50bn of stock. Microsoft announced revenues of $41.7bn, up 19% y-o-y. Results shown strong growth in gaming and the cloud and guided to the upside for next quarter revenues. The stock slipped 2.6% after hours to $255, as Azure growth came in line with analyst estimates. Apple announced EPS of $1.40 beating estimates by $0.42, while revenues jumped nearly 54% to $89.6bn (ahead of $77.3bn consensus). Apple reported double-digit growth across all its product categories, with the iPhone, up 65.5% y-o-y. The company declared a dividend hike of 7% (to $0.22/share) and an increase of $90bn to an existing share repurchase program. The stock climbed 2.5% to $137. Facebook’s total revenue rose 48% to $26.2bn, while net income increased 94% to $9.5bn. Facebook's ad business sales were driven by a 30% increase in average price per ad along with a 12% gain in the number of ads delivered. The stock soared 6%. Amazon’s profits more than tripled to $8.1bn, while revenues topped $100bn for the second straight quarter. Amazon is predicting Q2 sales between $110bn and $116bn (24%-30% growth), exceeding expectations. Almost 50% of operating income came from AWS (cloud services division) while Prime Video's streaming hours were up over 70% y-o-y. Shares gained 2.4% to reach the $3,550 level.

What to watch

Monday: Euro area manufacturing PMIs (Apr.); US manufacturing ISM (Apr.)
Tuesday: UK manufacturing PMIs (Apr.); US trade balance (Mar.); US durable goods (Mar.)
Wednesday: Euro area services PMIs (Apr.); US services ISM (Apr.); US ADP (Apr.)
Thursday: German factory orders (Mar.); UK services PMIs (Apr.); UK BoE decision (May)
Friday: German Industrial production (Mar.); US nonfarm payrolls (Apr.)


Investment team ― Pictet North America Advisors