Weekly Market Commentary – April 2, 2021
Economics has been great this week, especially Consumer Confidence (109.7 vs 90.4 in February) and Nonfarm Payrolls (916,000 vs 468,000 in February) were surprisingly good which shows the economic recovery in the United States is on track and strong. We continue to be optimistic about the recovery.
There are many concerns about overshooting inflation due to the recovery and the excess liquidity that the Fed and the Treasury Department have been injecting into the economy, but we oppose that idea. We think the recovery of inflation is reasonable but the concern about overshooting is exaggerating. For details, please view our blog post on April 1, ‘Inflation Or Not?’.
UST10Y: The US 10y Treasury has lowered 1 bp this week, but has shot up to as high as 1.774% on Wednesday, March 31. We think the yield on UST10Y would face downward pressure because it has become more attractive now relative to other 10y government bonds such as German 10Y (closed at -0.326%) and UK 10Y Bond (closed at 0.796%). Inflow to the long end of the curve (from 10-year to 30-year) will increase in the upcoming weeks. The rising inflation might push the longer-end yields higher as the economy continues to recover. The yields are likely to recover to pre-COVID levels but we think this force will diminish once we are there because the deflationary force will outplay the inflationary force in the long term. With that being said, we expect the UST10Y yield to calm down next week and continue its upward trend later on.
UST2s10s: The UST2s10s has flattened 3.6 bps, closed at 151 bps this week. We expect this segment of the curve continues to flatten next week, given our expectation of profit-taking actions and a more calm rates market ahead.
UST5s30s: The UST5s30s curve has flattened 8 bps, closed at 144 bps. We expect it to continue to flatten next week for the same reason as the 2s10s flattening.
As the economy recovers, the stock markets continue to push higher. As the Down Jones Industrial Average gained 1.64%, the S&P 500 gained 2.82%, and the NASDAQ Composite gained 3.87% this week. NASDAQ has been under pressure from sector rotation from growth stocks into value stocks and companies best positioned for rising inflation. We expect the NASDAQ will continue to lead the 3 indices next week, given our expectation of more calm rates market ahead.
What to look for next week?
To conclude, we are optimistic about stocks in general, both value and growth, under the condition that the economy continues to recover. But one thing we would like to mention here is managing your risks. As we all heard the hedge fund blew up recently, the fund manager is very skilled until something unexpected happened and blew up his entire fund. In our opinion, managing and controlling your portfolio risk to a level you can tolerate is crucial, underperforming is better than blowing up. Be very cautious about using leverage and companies with high volatility. Please perform your own due diligence for your trades.
Finally, We wish you a peaceful Easter holiday and see you next week!