Market Review 04/2021

In April, global stock indices showed slow growth with low volatility. At the very end of the month, the S&P 500 index reached 4219 points mark, facilitated by expectations of continued supportive monetary and fiscal policies from central banks and governments. Fed officials confirmed they will continue to use all available instruments to support the economy and bond buybacks under the QE program will continue at the current volumes at least.

Europe – the usual “weakest link”

US economy is experiencing a boom in demand owing to the White House’s massive $1.9 trillion pandemic relief package. Also, US private payrolls surged by 742 000 jobs last month – the most in seven months, as companies rushed to boost production. The acceleration in hiring was seen across the board, with leisure and hospitality sector adding 237 000 jobs. Manufacturers hired 55 000 workers and construction sector added another 41 000 jobs.

European and US equity markets

Eurozone factory activity growth surged to a record high in April boosted by increasing demand. French manufacturing growth eased a little from March’s peak as bottlenecks weighed on the recovery, but Italian factory activity grew at its fastest rate on record. The German economy contracted by 1.7% in the first quarter with lockdown in place since November. The Eurozone economy shrank less than expected in the first three months of the year – preliminary data showed a 0.6% quarter-on-quarter contraction for a 1.8% year-on-year fall. This put the single currency area in a technical recession after a 0.7% quarterly GDP fall in the last quarter of 2020.

China’s factory activity and non-manufacturing growth slowed and missed April forecasts as supply bottlenecks and rising costs weighed on production. China’s trade surplus is expected to surpass $28 billion in April, following a surplus of $13.8 billion in March. In order to boost domestic consumption China will launch a series of activities in May, including consumer goods Expo, a car show and other events as well as e-commerce platform sales.

Benchmark 10-year bond yields

Euro finds support, precious metals starting their rally

Last month with US dollar breakout, we pointed at the strong support area of 1.1690-1.1650 for the EUR/USD pair. All that the dollar could do before bouncing off that support area was to hit a 1.1707 point and give back more than 400-points in April. Obviously, 1.16-1.17 region is of critical importance since it keeps higher-highs and higher-lows sequence intact from the lows of 1.07. We keep an eye on 1.2250 resistance level for more upside potential (and possible attack on 1.2500). In case 1.2250 is respected, we expect another attempt to attack 1.16-1.17 support region.

Both gold and silver took back some of the lost ground in April. Attention was off the precious metals complex since crypto assets made headlines last month. Silver bounced off the 24 dollars per troy ounce level, confirming our general idea to accumulate silver in XAG/USD 22-24 area. Overall, silver stays in large consolidation area between USD 21 and 30 per ounce, which was tested twice already. It is very possible that next test attempt will be rejected too, but when it finally goes the silver should easily rally to XAG/USD 40 level. Gold also turned higher and keeps on “accumulating energy”.

Gold price, USD/oz

Inflated commodity prices

Yields and inflation are in focus for the last couple of months. US 10-year Treasury yield managed to decline for the first month this year, reaching 1.62% by the end of April. Meanwhile government yields in Europe continued to rise. We thought it was time to look at what was and is happening to other popular commodities (in addition to precious metals and oil). Results made us a bit uneasy. Most of commodities we checked at least doubled in price over the last 12 months.  Many of those are at their previous highs and might be considered “expensive” (soybean, for example). Some graphs even resemble crypto madness. We found our own 3-year-old chart for prices of wheat, and though “the angle” is not precise, overall price action followed our idea. Sugar looks “nicest” in terms of possible upside potential. Inflation is clearly visible in commodity prices, bond yields so far reacted as they should have reacted, while stock indices are close to record highs with barely any reaction to the inflation scare. Can such a setup stay for much longer?

High Yield bond Indexes

Risk of correctionrises

The risk of a technical correction, when the market is fundamentally overbought increases. A decline closer to the 3900-4000 levels in the S&P 500 would be a perfectly healthy market move; the question is whether we will see this in the very near future or at first the index will climb even higher, for example, to 4400-4450 points region.

Among the negative factors for the market is Joe Biden’s plan to raise taxes for the rich to 39.6%, which could increase the country’s treasury revenues by $ 1 trillion. In addition, on April 30, President of the Federal Reserve Bank of Dallas Robert Kaplan said that the Fed should begin discussions on cutting monthly asset purchases in the amount of $ 120 billion. Kaplan also warned of imbalances in the US financial markets and suggested that the economy would meet the criteria set by the Fed for reducing bond purchases earlier than he expected. Already in early May, the head of the Treasury Janet Yellen hinted that it is worth considering a minimum increase in base rates in the near future, while companies should “help” in the efforts of the state with their tax payments. On the other hand, the Federal Reserve chairman announced that inflation is expected to be transitory and was very careful not to make even the slightest suggestion of a taper of government bond purchases. The message is clear – the Fed is fine with its current monetary policy and does not want to make any sudden moves this year.