Market Review 03/2021

A year ago, the stock market was ruled by fear, now greed is firmly rooted in it. S&P 500 index added another 4.2% in March, although the month began with a decline. It became almost obvious that the market is aiming at setting new records and breaking the 4000-point mark, which the index did at the very beginning of April.At the end of March, the White House presented $ 2 trillion Infrastructure Plan, as well as tax plan to offset government spending, and this is only part of what Joe Biden intends to implement. The spending plan is for 8 years and can be increased to $ 4 trillion. In turn, the increase in taxes (primarily in corporate tax from 21% to 28%) should compensate for these outlays.

Some positive news on world’s biggest economies

In March US manufacturing activity soared to its highest level since December 1983 due to strong growth in new orders, while US private employers hired the biggest number of workers in six months as vaccination continued pushing the economy towards a broader reopening. Private payrolls surged by 517 000 jobs this month after rising 176 000 in February. In addition, US consumer confidence raced in March to its highest level since the start of the Covid-19 pandemic. Altogether, with the White House’s massive $1.9 trillion pandemic relief package, it is quite reasonable to expect that in 2021 the economy will experience its best performance in nearly four decades.

Eurozone monthly factory activity growth increased at its fastest pace in nearly 24-year history, however supply chain disruptions and renewed lockdown measures across Europe may limit it quite soon. Economic sentiment surged more than expected in March – the European Commission’s monthly survey showed economic sentiment in 19 countries sharing euro increasing to 101 in March from 93.4 in February.

Chinese manufacturing activity expanded at the fastest pace in three months in March due to increasing overseas demand. The People’s Bank of China has estimated that if the economy shows the yearly growth rate just under 6% for the next 5 years it will not fuel inflation. At the same time, the statistics department of the Bank projected the growth rate to be at 5%-5.7% in the period covering the government’s latest five-year plan through 2025. The PBOC’s paper points out that traditional large-scale fiscal and monetary stimulus policy will not be able to lift real GDP growth above the potential GDP – such stimulus would only lead to inflation.

European and US equity markets

US dollar breaks out More

In early January we were writing “… now EUR/USD 1.2500 mark seems to be just a matter of time. Any dip into 1.1800-1.2000 zone looks like an easy “buy” opportunity. Dollar index however looks more suspicious (so do USD/CHF, USD/CAD and USD/JPY pairs) as it might produce a short-term dip with a steep reversal”. Well, dollar index managed to bottom before we were able to get to that 1.25 mark in EUR/USD pair. Now, with first breaking below 1.18 and falling to almost 1.17 level we expect euro to get much stronger support at around 1.1690-1.1650 area, as it should provide a certain floor for a few weeks at least. However, should EUR/USD manage to close below 1.1640 mark on a weekly basis the risk of a much deeper slide might be on the cards.

Benchmark 10-year bond yields

Precious metals give another buying opportunity

Both gold and silver were cheaper in March. Participants explained it by rising dollar yields and the “popularity” of the precious metals trade.  Despite all recent inflation talks, prices showed skepticism. Nevertheless, as we keep saying, patience is warranted and especially in this asset class. With long positions of the speculators now reduced, silver below 24 dollars per ounce and gold below 1700, give a good opportunity to start building / increasing positions in precious metals while keeping in mind that further price drop towards very important XAG/USD 20-21 levels in silver and closer to 1550-1600 in XAU/USD might come first. One way or another this task is rather academic, as we consider any further weakness as even better buying opportunity.

Gold price, USD/oz

Yields in focus

In March, the trend of previous months continued in sovereign yields. The trend was more pronounced in the US Treasuries as well as dollar-denominated corporate bonds. The potential inflation bubble is growing with nationwide benefit programs being announced one after another with pomp and rejoicing. The $ 1.9 trillion support program for residents and businesses, which was adopted a month ago, was followed by the Infrastructure Plan with projected costs estimated at $ 2-3 trillion. This raises a question of where this money will come from, given the budget deficit of the US running over a trillion dollars a year for a couple of years already.

This has put a lot of pressure on US debt holders, who have mostly tried to decrease their positions in treasuries. Accordingly, at the end of the month, the yield on US 10-year government securities fluctuated around the 1.75% mark, the highest level in 2 years, and rose by another 35 basis points over the month. In Europe, on the other hand, negative rates continue to dominate, with German 10-year bonds bearing an interest rate of -0.29%, which is even slightly lower than a month ago.

High Yield bond Indexes

Fed stays silent

Fed did not even mention the yield curve during their latest meeting thus letting the market to sort things out itself. Charts clearly warn us that some deeper setback in 10-year yields is around the corner. On the other hand, a 1.80-2.1% area seems like a strong resistance level. A healthy correction into 1.35-1.55% area looks logical to us. At the same time, we remain “inflation-biased” and consider this possible drop in yield as corrective before a larger uptrend in yields resumes.

With everyone talking about US yields and inflation fears, Europe is somewhat ignored, so we need to inform our readers about the situation in our part of the world. German 10-year Bund lost more than 4% in value since the beginning of the year, however the direction is not clear at all, as price keeps moving sideways. In order to keep bullish Bund scenario alive price must not go much below 167 mark. Same but somewhat different situation we see in French 10-year bond yields. We are watching the 0.10% yield mark carefully as it can signal a start to a massive trend change. Both German and French yields stand at important crossroads and even if nothing dramatic has happened yet, charts demand us to pay close attention.