Oil and stocks up, rates down

Week from 31 May to 6 June 2021

All major U.S. and European equity indexes closed higher as the latest employment report tempered rate hike fears. The U.S. economy added 559,000 jobs in May. This is a significant increase from the upwardly revised 278,000 in April but it falls short of consensus forecasts of 650,000. This weaker-than-expected non-farm payrolls number pushed Treasury yields down. There now seems to be a stronger rationale for maintaining the Fed’s support at current levels in the coming months. The U.S. central bank buys about $120 billion per month in Treasury securities and mortgage-backed securities. The yield on 10-year T-notes closed at +1.56% while the 10-year German bond yield slid from -0.18% to -0.21%.

Oil prices rose (WTI up 4.98% at $69.62 a barrel), trading close to a thirty-month high as U.S. crude stockpiles fell more than double (5.08 million barrels last week) the amount expected (2.443 million barrels). Moreover OPEC+ still agrees to gradually ease fuel supply curbs, thereby showing confidence in improving oil demand.

Market’s Resilience Despite High Valuation Levels, Meme Stocks Roller Coaster Ride

The S&P 500 was up 0.61% week-over-week at 4,229.89 (only 0.06% below its all-time high). The Nasdaq Composite gained 0.48% and the Dow Jones Industrial Average rose 0.66%, or 227 points. Small cap stocks performed in line with their large-cap counterparts (Russell 2000 up +0.77%). Among the S&P sectors, stocks tracking the Covid-19 economic recovery shined again. The best example was energy which jumped 6.68% as WTI oil prices hit their highest level since October 2018.

In the same vein, financials fared well (+1.12%). Information technology also gained 1.18% as semiconductor stocks soared (Nvidia up 8.21%) and megacap tech stocks (Apple up 1.03%, Google up 1.67%) outperformed the broad market, even though G7 nations reached a landmark deal on Saturday to tax multinationals (global corporate tax rate of at least 15%). The biggest drags on the benchmark S&P 500 were health care (-1.15%) and consumer discretionary (-0.99%). The largest constituents of this sub-index ended below the flatline (Amazon: -0.52%, Tesla: -4.19%, Home Depot: -1.45% dividend included, McDonald's Corp: -0.22%, Nike: -1.99%).

In the meantime, the so-called meme stocks continued their roller coaster ride. As an illustration, AMC Entertainment Holdings Inc tapped the market for more cash for the second time. Yet the stock skyrocketed again (+83% WTD at $47.91), after reaching a record close of $62.55 on Wednesday.

Major European equity indexes also finished in positive territory (MSCI EMU: +0.59%) as economic indicators pointed to an ongoing recovery. The IHS Markit France Manufacturing PMI rose to 59.4 in May from 58.9 in April, hitting the highest level since September 2000.

Asian markets closed mixed. Japan’s Nikkei fell 0.71% after data showed companies had reduced investments on plant and equipment for the fourth quarter in a row. In China, the Shanghai Composite lowered 0.25% as the factory activity slowed in May due to raw material costs. By contrast, Korea's benchmark index (Kospi) gained 1.61% after the country's exports jumped 45.6% year-over-year in May. This is the seventh straight month of increase in outbound shipments and the sharpest expansion in 32 years. Taiwan stocks followed suit (+1.64%).

Treasury Yields Pull Back, But Gold Stalls Below $1,900/Oz

Treasury yields declined across long maturities thanks to a decrease in inflationary expectations. Investment grade corporate bonds extended their two-week winning streak (+0.16% in the U.S., +0.17% in Europe). High-yield bonds moved in unison throughout the week (+0.32% in Europe, +0.30% in the U.S.) and emerging debt did even better (+0.82% in local currencies).

Gold plunged to $1,870/Oz (spot rate) on Thursday before bouncing back on Friday ($1,891.59/Oz). The yellow metal fell 0.84% over the week in spite of a languishing dollar but has not lost its luster.

Bitcoin & Elon Musk’s Latest Tweet

Bitcoin failed again to recover from the huge losses incurred after China imposed curbs on cryptocurrencies in May. The biggest blow came from Elon Musk’s latest tweet on Friday. It suggests that the Tesla tycoon has fallen out of love with the most popular cryptocurrency. Though crypto specialists have not understood the motives behind his tweet, it erased almost all the gains made earlier this week.

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