Equity markets cheer the Jackson Hole symposium

Week from 23 to 29 August 2021

All eyes were on the Federal Reserve’s Jackson Hole symposium that opened on August 26. Jerome Powell announced Friday that the Federal Reserve could start tapering its bond purchases by the end of the year. Yet he cautioned that there is no imminent change in the Fed's ultra-low-interest rate policy as there is still “much ground to cover” before the U.S. economy can hit full employment. As a result of this soft taper form of guidance, the S&P 500 (+1.52% week-over-week) and Nasdaq (+2.82%) hit new record highs. Still more striking is the performance exhibited by small caps (Russell 2000 up +5.05%).

Elsewhere, major stock indices rose in unison. In Europe, the MSCI EMU was up +0.94%. Even if IHS Markit’s flash composite PMI for the euro zone showed a weaker momentum in August (59.5 vs. 60.2 in July), business activity in the EU remains robust. In Asia, the Shanghai Composite and Nikkei jumped +2.77% and +2.32% respectively. The equity rally was even stronger in emerging markets (MSCI EM up +4.25%), but not enough to recoup the heavy losses suffered last week.

Powell’s dovish comments sent yields on the benchmark 10-year Treasury note down 5bps (at +1.314%) from the peak (+1.368%) touched earlier Thursday. But it was 5bps higher than the closing level as of August 20.

Cyclicals shine, defensives drag

Unlike the previous week, cyclicals led the move higher. The energy sector was the best performer (+7.34%), supported by a bid in oil prices (WTI crude up +10.3%) amid expectations for output disruptions as oil companies were evacuating offshore workers in the Gulf of Mexico ahead of the tropical storm Ida. Financials fared well too (+3.47%), as treasury yields continued to make up ground. Communication services (+2.80% with Facebook shares up 3.69%), consumer discretionary (+2.62% with Amazon shares up 4.68%), materials (+2.59%), industrials (+2.22%) and information technology (+1.43%) followed suit.

By contrast, defensive stocks wiped out last week’s gains. Utility stocks were the poorest performers (-2.11%), followed by consumer staples (-1.36%) and health care (-1.18%). Although Pfizer-BioNtech's Covid-19 vaccine got full U.S. approval, Pfizer shares fell 4.35%.

Emerging debt rebounds, dollar weakens

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, slid after Powell’s speech (-0.87% over the week). A weaker dollar proved a boon to investors in gold (+2%) and emerging debt (+1.75% in local currencies). Investment grade corporate bonds closed mixed (-0.28% in Europe, +0.23% in the U.S.). U.S. high yield bonds jumped +0.71% while their European counterparts were treading water (+0.04%).

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