U.S. large cap stocks hit records with signs of reflation trade reversal

Week from 5 to 11 April 2021

Weeks go by and look the same. We come to the same conclusions that those drawn a week ago. Ahead of the start of Q1 2021 earnings season, U.S. large cap stocks extended the Wall Street rally as mega cap tech giants racked up gains. Apple jumped +8.13%, Facebook rose +4.62%. Google was up +6.93% and Microsoft gained +5.57%. Yet, U.S. jobless claims soared again last week: +744,000 compared with expectations for a drop to 680,000. This may be why the FOMC minutes revealed earlier in the week that the U.S. monetary policy will remain accommodative for a long time.

Cyclical Rotation Continues to Weaken

Large cap indexes swept to new highs as investors eyed the upcoming earnings season for further signs of a global economic recovery. The Dow Jones Industrial Average gained 647.39 points, or +1.95% week-over-week, to 33,800.60. The S&P 500 was up +2.71% at 4,128.80 while the Nasdaq Composite Index added 420.08 points, or +3.12%, to 13,900.19. The VIX index is now well below its long-run average at 16.69. Small cap stocks bucked the trend. Once again, the Russell 2000 breakout was under pressure (-0.46%).

As regards the S&P sectors, tech led the pack (+4.66%) after President Biden softened his tax plan. Consumer discretionary (+4.23%) and communication services (+3.17%) were not far behind. By contrast value-led stocks struggled to hold onto gains. Real estate edged up +0.51% while utilities stocks rose +1.32%. Energy (down -4.05% week-to-date) was the exception to the broader market rally. Oil prices indeed fell (WTI crude down -3.47%) after major oil producers agreed to ease production cuts. Yet data showed weekly U.S. crude inventories had fallen more than expected last week.

Major European equity indices closed higher (FTSE: +2.65%, DAX 30: +0.84%, CAC 40: +1.09%). APAC markets closed mixed. The Nikkei 225 slid -0.29% and the Shanghai Composite was down -0.97% after last week’s rally. But Australian stocks jumped with the S&P ASX 200 up +2.44%. South Korea's KOSPI added +0.61%.

Treasury Yields Ebb Lower

The U.S. 10-year Treasury yield slipped from +1.72% to +1.66% after spiking to around +1.74% on Monday. The FOMC kept its benchmark rate in a range of 0% to 0.25% and pledged to maintain bond purchases at a $120 billion monthly pace. Most credit markets continued to stay bullish. Corporate investment grade bonds rose +0.55% in the U.S. but remained flat in Europe. High-yield bonds (+0.34% in Europe, +0.53% in the U.S.) extended last week’s gains. Emerging debt rebounded in unison (+1.08% in local currencies).

Elsewhere, gold futures recovered from the losses suffered during the last two weeks (+0.9% at $1,744.8/oz) thanks to the recent weakness in bond yields and the greenback (EUR-USD up +1.08%).

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