S&P 500 & Nasdaq at all-time highs

Week from 21 to 27 June 2021

Last week’s selloff proved to be short-lived. Fears of a taper tantrum after James Bullard’s interview have vanished as a wave of economic optimism lifted stocks to record highs. First, President Joe Biden announced a $579 billion infrastructure deal with a group of Democratic and Republican senators. Second, the latest data on underlying inflation eased worries about monetary policy tightening in the short run.

The core PCE rose 3.4% year-over-year in May. This is the fastest increase since the early 90s, far above the Fed's 2% flexible target but in line with Wall Street estimates. Moreover, Jerome Powell reiterated that the rapid pace of inflation will fade. So, stock markets did not react negatively to the news. They even posted solid gains, offsetting the losses suffered on the previous Friday. At the same time, yields on U.S. Treasuries were rising to levels seen earlier this month.

Equity markets back in risk-on mode 

The S&P 500 ended the week at record high (4,280.70, up +2.74% week-over-week), breaking a major resistance (4,250). The NASDAQ Composite followed suit (+2.35% at 14,360.39). The Dow Jones Industrial Average jumped 3.44%, or 1,143.76 points. The CBOE Volatility Index hit its lowest level (15.62) since the start of the COVID-19 pandemic.

All the S&P sectors finished in positive territory. Energy led the broader market higher, up 6.66% after a larger-than-anticipated drawdown in U.S. crude and gasoline stocks (WTI crude up 3.36% to $74.05 a barrel). Furthermore, Ebrahim Raisi (president-elect of Iran) told reporters that his country would not “negotiate for the sake of negotiations” and ruled out any meeting with President Joe Biden.

Financials were among the top gainers (+5.28%) as U.S. yields rebounded from lows. The Fed announced the largest banks had easily cleared stress tests. Consequently, it plans to lift temporary restrictions on dividend payments and share buybacks on 30 June. Most bank stocks cheered the news. Wells Fargo was up 11.09%, BoAML rose 7.32%, and JPMorgan Chase gained 4.14%. By contrast, defensive sectors such as real estate (+1.30%) and utilities (+0.66%) were the poorest performers of the week.

All major APAC and European equity indices also closed higher (MSCI EMU: +1.20%, Shanghai Composite: +2.34%, NIKKEI: +0.35%, KOSPI: +1.07%, NIFTY 50: +1.13%).

Yields rise, Dollar Index stalls, Gold rebounds, Bitcoin slumps

The yield on 10-year T-notes climbed to +1.53% after falling to its lowest level since early March (+1.44% on 18 June). Same trend in Europe where the 10-year German bond yield continued to rise from -0.20% to -0.16%. The French OAT yield moved higher from +0.15% to +0.20%.

Against this backdrop, investment grade corporate bond prices declined (-0.19% in Europe, -0.20% in the U.S.). High-yield bonds were mixed (-0.04% in Europe, +0.39% in the U.S.). Emerging debt partly recovered (+0.70% in local currencies) from the severe loss experienced last week. The greenback traded lower against the major currencies (dollar index down -0.44% at 91.82). In commodities, gold futures snapped a three-week losing streak, but still remained near the lowest threshold since early May ($1,777.80/Oz Friday’s close, +0.5% week-over-week). Lastly, the price of Bitcoin dropped again (-7%), hit by more stringent Chinese and Korean measures to regulate the cryptocurrency market.

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