Stock market uptrend resumes despite inflation

Week from 24 to 30 May 2021

Major stock indexes climbed all week long as investors continued to favour technology stocks, fostered by falling U.S. bond yields. The yield on 10-year Treasury notes thus closed at +1.58%. This shift could suggest that the jump in inflation will be transitory, as reiterated by the Federal Reserve. That said, the latest inflation measure (PCE core price index), which strips out the volatile food and energy components, rose 0.7% in April after a 0.4% increase in March. It is up 3.1% over the year, far from the Fed’s 2% target. In a nutshell, this is the fastest annual pace since July 1992!

Such news could have had negative effects on stocks. Yet investors shrugged off this pickup in inflation. Their focus was on President Biden’s $6 trillion budget proposal for 2022 which aims at boosting funding for infrastructure, healthcare and education.

Fearless Markets Ahead of the Memorial Day Weekend 

Risk appetite shows no sign of slowing as evidenced by the FIGS IPO, an apparel company for healthcare workers (up +55% in two days).

After experiencing a roller coaster ride last week, the S&P 500 rose +1.16% while the VIX index nosedived by almost 20%, below its long-run average. The Dow Jones Industrial Average added +0.94%, or 321.66 points, snapping its two-week losing streak. The Nasdaq Composite climbed +2.06% on rising technology stocks. Small cap stocks outperformed their large-cap counterparts (Russell 2000 up +2.42%).

Within the S&P sectors, the semiconductor industry pushed technology higher (+1.58%) with NVIDIA (+8.36%) and Micron Technology (+4.24%) among the biggest gainers. Consumer stocks benefitted from the reopening trade (consumer discretionary up +2.23%). The same was true of industrials (+1.92%) led by General Electric (+6.27%) and Boeing (+5.20%) in the wake of Airbus (+10.31%). The later continues to expect the commercial aircraft market to recover to pre-COVID levels between 2023 and 2025. From this perspective, the European company plans to ramp up its A320 aircraft family production rate to 64 per month by Q2 2023. Communication Services (+2.46%) were the best performer through the week as Google (+2.83%) and Facebook (+3.95%) still advanced. On the flip side, utilities (-1.58%), healthcare (-0.67%) and consumer staples (-0.39%) lagged behind.

Most major European equity indexes closed higher (CAC40: +1.53% boosted by Airbus and LVMH - the world's largest luxury goods conglomerate: up +4.50% -, MSCI EMU: +1.14%). In Asia, the Shanghai Composite jumped +3.28%, hitting a 3-month high on financial services and consumer gains. China's economic recovery is not losing momentum. In the same way, Japan's Nikkei gained +2.94%, thanks to heavyweight technology stocks. Indian stocks followed suit (NIFTY: +1.71%), but the Taiwan Index did still better (+3.49%) tracking the rally on tech stocks.    

Retreat in Treasury Yields, Gold above $1,900/Oz

Treasury yields slipped (30-year T-Note from +2.33% to +2.26%) after some Fed officials affirmed their support to maintain easy monetary policy and aid economic recovery. Same trend in Europe with the 10-year German Bund yield at -0.18% (vs -0.13% a week ago) as fear over runaway inflation was easing.

Investment grade corporate bonds took advantage of this improvement in market sentiment (+0.27% in Europe, +0.42% in the U.S.). High-yield bonds fared well too (+0.28% in Europe, +0.35% in the U.S.) while emerging debt led the pack (+0.77% in local currencies).

Lastly, gold extended its three-week winning streak (spot price at $1,903.77/Oz, +1.20% week-over-week), while the dollar held near a fourth-month low (EUR-USD at 1.2182).

Bitcoin Fails to Rebound  

After shaking out many overleveraged traders last week, BTC USD attempted to rebound Monday but the move quickly fizzled out. Once again, it finished the week around $36,000. Roubini’s scathing and unequivocal commentary did not help it recover from its huge losses: cryptos “have no income or utility, so there’s just no way to arrive at a fundamental value. Bitcoin isn’t even a reliable hedge for risk-off events.”

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