Stock Markets

The bottoming out of the stock market due to the pandemic shutdown marked its first anniversary on March 23. The plunge marked the shortest bear market in history; ever since, the markets including stocks, long-term bond yields, and commodities have rebounded decisively. Driving its continued uptrend are the prospects of a successful vaccine deployment program and the impending return to normalcy. The Dow briefly traded above the 33,000-level last week as a result of three major forces: the graduate reopening of the economy, fiscal spending at historic levels, and broad accommodation by the central bank. The bull market is likely to continue onto its second year, as policymakers affirmed that they foresee no interest rate hikes until 2023 and that the upward trend of the inflation rate will be short-lived. A disciplined strategy and investing for the long-term is bound to be rewarded during the bull run’s second year.

U.S. Economy

The economy faces a bright future as full recovery is anticipated following the successful roll-out of the covid vaccine. Until the present, however, recovery has impacted only selected sectors while others continue to lag. At the current pace and with the prospect of an accelerated vaccine distribution scenario, the economy’s reopening may bring it to exceed its 2019 peak at the second quarter’s end. By the middle of 2022, the country would have returned to its pre-pandemic status and be poised to resume its interrupted expansion before the pandemic.

• Unemployment is expected to decline as the economy gradually reopens, but there will remain significant slack in the labor market resulting from the exodus of people from the labor force. The services sector of the economy, which accounts for 70% of employment, will remain soft as this will be the last sector of the economy to fully reopen. Eventually, consumer spending in services will drive employment in this sector, further fueling the next leg of the economic recovery.
• The easing of pandemic restrictions and pick-up in job openings are expected to result in the improvement of the level of consumer confidence. Also, there is more than $2 trillion of excess savings households have currently accumulated after multiple government check issuances, indicative of a pent-up demand that may be released with the eventual return to normalcy. Consumer spending accounts for 70% of the U.S. GDP which is poised to accelerate at its fastest pace since 1984.

Metals and Mining

Gold rose during the week’s trading, touching a monthly high of $1,764 per ounce and reversing three weeks of steady losses that brought the price down to slightly above $1,700. Furthering the metal’s rise was the slight decline in the US dollar and treasury yields, encouraging a flight to value. On March 19, Friday, the US central bank declared that it was unlikely to extend last year’s alteration to the supplementary leverage ratio. This change was adopted in April 2020 to address the pandemic’s impact by allowing banks their holding capital against treasuries and receipts.  This dovish stance signaled that it was unlikely that the Feds would take aggressive action in monetary policy, giving enough impetus for gold to move up from the $1,722 price range. Aside from this, the anticipation for stimulus spending and economic growth have spurred the price of gold higher. Gold ended the week trading at $1,735,69.

Silver also rallied after two weeks of market softness, reaching an intraweek high of $26,60 per ounce as of Wednesday. It then corrected to just below $26 per ounce on Thursday. By week’s end, the Fed’s announcement spurred silver to rise to $26.20. It traded at P26.17 by Friday. Platinum, on the other hand, shed 3.7% for the week, with prices descending to their early February levels, a breakdown from its month-long support of $1,200 per ounce. Palladium reversed course to rally to $2,644 from its price of $2,292 per ounce on Monday. The 15% increase resulted from supply challenges following the flooding of two mines under Nornickel. As of Friday, Platinum was selling at $1,179 while Palladium was trading at $2,539 per ounce.

Base metal prices descended for the week, with copper dropping below $9,000 by midweek after starting Monday at $9,147.50 per tonne. This is a steep drop from its price of $9,614 earlier this month. By week’s end, copper returned to just above $9,000. Zinc declined slightly to $2,801 from $2,815 per tonne, while lead closed the week at $1,896, declining 2% from its Monday trade at $1,936 per tonne.

Energy and Oil

Crude oil ended weeks of steady increase with the largest single-day loss since April of last year. It plunged 7% on Thursday, largely due to several bearish factors among which are a stronger dollar, profit-taking by long speculators, and the dashed hopes that the vaccines will quickly end the lockdowns in Europe. Distribution delays and increased hesitancy about the vaccines’ acceptability leading to a longer European vaccine campaign may set back oil demand for this year by 1 million barrels per day (m/bd).

China is increasingly relying on Iran and Venezuela for its oil supply. It is expected to import 918,000 bpd of oil from Iran in March, the greatest volume since the U.S. applied sanctions two years ago. The result served as a disincentive for Iran to negotiate with the U.S. As for the latter, the refining capacity of the U.S. has not yet been fully restored, holding at about 80%, a level last seen before February’s Texas grid crisis. It is estimated that 1.2 mb/d of refining capacity remains offline due to ongoing repairs and spring maintenance.

Natural Gas

For the report week March 19 to March 17, natural gas spot prices were mixed, with the Hendry Hub sport price falling from $2.60 per million British thermal units (MMBtu). It ended the week at $2.51/MMBtu. The price of the April 2021 contract decreased at the New York Mercantile Exchange (NYMEX), losing $0.16/MMBtu to end at $2.528/MMBtu from $2.692/MMBtu.  For the week ending March 12, the net withdrawals from working gas summed up to 11 Bcf. Working natural gas stocks amounted to 1.782 Bcf. This represents a 12% reduction year-on-year. It is also 5% below the five-year (2016-2021) average for this week.

World Markets

European shares were little changed from last week, due to concerns surrounding the resurgence of coronavirus infections in certain European countries. Central bank dovish policies intended to support the recovering economy did little to encourage investor buying, thus limiting the bourse’s upside. The pan-European STOXX Europe 600 Index closed the week mostly unchanged while major indexes were mixed. Italy’s FTSE MIB Index rose 0.36% and Germany’s Xetra DAX Index advanced 0,82%. At the other end, France’s CAC 40 Index dropped 0.80% while the UK’s FTSE 100 Index fell 0,61%.

Correspondingly, Core eurozone bond yields climbed slightly as Germany’s 10-year bond yield rose midweek in line with U.S. Treasuries, mostly due to an anticipated higher inflation rate. Yields gave way slightly on Friday, weighed by concerns about Europe’s rising coronavirus infections. The core markets set the pace for peripheral eurozone yields. UK gilt yields climbed on the back of the optimism set by the Bank of England’s economic outlook and its decision to maintain interest rates unchanged.  Policymakers at the BOE voted unanimously to retain the benchmark interest rate at its all-time low of 0.1% as well as to proceed with the bond-buying program.

In Japan, stock markets were also mixed over the week as the Bank of Japan announced that it will limit purchases of exchange-traded funds (ETFs) to those linked to the TOPIX. This drove a 3.13% gain in that index while the Nikkei 225 Stock Average underperformed, sliding by 0.25%. The yen rose slightly to close just below JPY109 to the dollar, and the 10-year Japanese government bond yield ended at 0.11% for the week. Prime Minister Yoshihide Suga formally announced the end of the coronavirus state of emergency in Tokyo and three other prefectures on March 21, citing the significant decline in infections and the drop in hospital bed occupancy.

In China, the Shanghai Composite Index fell 1.4% while the large-cap CSI 300 Index slipped 2.7%. Negative headlines concerning the first day of diplomatic talks between China and the U.S. caused stocks to underperform the rest of Asia. Following the release of strong economic data for January and February, the yield on China’s sovereign 10-year bond rose, but the gains were given back on Friday, ending the week unchanged from last week at 3.26%. On the economy, the National Bureau of Statistics announced that retail sales for January and February rose 33.8% year-on-year. The strong performance was attributed to last year’s pandemic lockdowns.    

The Week Ahead

Among the important economic data expected this week are the Final GDP growth figure, the PMI composite, and PCE deflator.

Key Topics to Watch

• Existing home sales (SAAR)
• Current account deficit
• New home sales (SAAR)
• Durable goods orders
• Core capital goods orders
• Markit manufacturing PMI (preliminary)
• Markit services PMI (preliminary)
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Gross domestic product (SAAR)
• Personal income
• Consumer spending
• Core inflation
• Trade in goods, advance report
• Consumer sentiment index (final)

Markets Index Wrap Up

Stock Markets

The market ascended to a record high in the past week on the back of renewed optimism over an impending economic recovery. The week’s developments did much to calm investor fears. A moderate inflation report and a slowdown of the upward movement in interest rates fueled the market rally, but the big news was the President’s signing of the $1.9 trillion American Rescue Plan (ARP), also known as the covid stimulus bill.  The passage of the long-awaited fiscal stimulus lifted most benchmark indices to new highs, even as investors digest the volatile longer-term bond yields and factor in their discounts on future earnings. As a result, the Nasdaq Composite fluctuated due to speculation on the technology-oriented counters that comprise it. Within the S&P 500 the small real estate sector performed above average, while the health care and energy shares underperformed.

U.S. Economy

The fiscal stimulus package had been anticipated as the trigger for the continued economic recovery. Now that it has been passed there are varied speculations about the future implications it may have on the economy and financial markets. While the recovery has already taken off during the second semester of 2020, there are areas of the economy and the labor force that have lagged behind which the new stimulus may support. The state of the economy has been greatly helped by the preceding fiscal policy responses throughout the past year. Whilst in a typical recession, the plunge in employment would have been accompanied by a significant drop in aggregate income, the strategy of sending out stimulus checks directly to those whose livelihoods have been curtailed has sufficiently bridged the wage gap resulting from the shutdowns. Current personal income has surpassed pre-pandemic levels even before the most recent $1,400 checks have been sent out.

• The U.S. household net worth is presently at its record high level because in addition to personal income, home and asset values have arisen as well as stock prices being at their peak. With income levels receiving another boost from the new stimulus, consumer spending will find an additional impetus, as well as the U.S. GDP of which 70% is comprised by consumer spending. Economic growth may further ascend in the coming quarters, with GDP growth likely increasing to above-average levels in the current year.
• The ARP includes $400 billion in direct check payments to consumers amounting to $1,400, with distribution to commence over the weekend. This component alone amounts to 2% of the annual GDP, although it is expected to be spent over an extended period. The personal savings rate climbed from 13% to 20% during the last round of stimulus checks released in December, suggesting that people are depositing rather than spending their pandemic payments. This is not surprising, given the simultaneous lockdowns of retail businesses from which consumers would have purchased the goods and services they needed.
• While a strong recovery that may lead to a boom-type scenario may be seen for this year, it is pre-emptive to say that this trend will be sustained beyond 2021. There have been sectors of the economy that experienced accelerated growth during the pandemic, such as cloud computing, remote working, automation, and machine learning. It is premature to speculate, however, that this new trend may continue to push booming productivity enough to push the economy beyond the present year. The possible downside to the ARP remains in the form of the risk of an overheating economy, massive government debt, and the expectation that similar future downturns will prompt the same stimulus response from the Federal government.

Metals and Mining

Gold broke out from its week-long slump below the $1,700 level, beginning the week at $1,681 per ounce and rallying midweek to $1,739,10, 3.46% up for the week but still far below the $1,804 high it reached in later February. The metal corrected from its midweek rally to trade at $1,702.24 on Friday. The four weeks preceding saw a steady decline in the price of gold due to the strengthening bond yields simultaneous with the rising US dollar. The fundamentals for the metal remain sound, however, and a bull market is possible in its future.

Silver performed better than gold for the week, climbing 4.8% on Thursday from Monday’s prices, although it retraced slightly to trade at $25.58 per ounce on Friday. Platinum reversed two weeks of losses to peak at $1,218 per ounce and ended trading on Friday at $1,177. Palladium traded at $2,268 per ounce on Friday. Platinum is expected to outperform palladium and gold for the rest of the year due to positive fundamentals, although precious metals, on the whole, are expected to do benefit from quantitative easing and economic recovery.

The values of base metals are coming down from their strong performance at the beginning of the year. The recent pullbacks have been more consistent with a consolidation rather than a breakdown, however. Copper was priced at $9,062 per tonne on Friday, still below the eight-year high of $9,614.50 that it achieved in late February. Demand and economic growth may push the metal higher within the year. Nickel came down from its seven-year high of close to $20,000 per tonne in February to trade below $16,000 shortly thereafter on news that lower-grade nickel ore will be used to make battery-grade nickel sulfate. Nickel traded at $16,434 on Friday. Zinc made a modest gain rising from $2,742.50 per tonne on Monday to close at $2,784 for the week. Lead adjusted downward slightly, giving back $48.50 to close at $1,934.50 per tonne on Friday.

Energy and Oil

Tight supplies caused a drain in global inventories to push oil prices upward towards the week’s end. The success of vaccine deployment and the resumption of robust economic activity are bound to increase demand for oil in the coming weeks and months. OPEC had taken the contrarian view and downgraded its demand forecast, however, due to what it foresees as ongoing lockdown measures and other pandemic restrictions. Short-cycle shale drillers, on the other hand, are tempted by the increase in prices that they may be contemplating a ramp-up in production. Analysts point to the decision of OPEC+ to continue withholding production as a possible enticement to shale producers to take advantage of the tight supply and strengthening demand.

In further developments on the US side, the Biden administration’s Interior Department has approved 200 drilling permits in the last two weeks, mostly in Dakota and Wyoming. Although the government has temporarily suspended leases on federal lands, the recent approval of drilling permits appears to signal a rethinking of this position.  Analysts also note that over the next five years, fewer investments will be poured into the oil and gas companies as the largest institutional investors in the world appear to be scrutinizing more intensely the environmental credentials of the companies that compose their portfolios.

Natural Gas

At most locations during the report week (March 3 to March 10), natural gas spot prices declined as a result of warmer-than-normal climate throughout the lower 48 states. The Henry Hub spot prices slid to $2.60 per million British thermal units (MMBtu) from the previous week’s $2.84/ MMBtu. The price of the April 2021 contract at the New York Mercantile Exchange (NYMEX) fell to $2.692/MMBtu, a reduction of $0.12 from the previous $2.896/MMBtu. The price of the 12-month strip averaging April 2021 through March 2022 futures contracts fell to $2.890/MMBtu, a difference of $0.10/MMBtu.

World Markets

In Europe, share prices trended upward on the prospect that pandemic restrictions may soon be relaxed due to the ongoing vaccine distribution. Also, there is widespread expectation that supportive fiscal and monetary policies may be soon implemented to further spur the economy on the road to recovery. The stock market gains were somewhat muted by the apprehension that central banks may take measures to address the rising inflation rate. The pan-European STOXX Europe 600 Index gained 0.91%, in tandem with the major stock indexes. The UK’s FTSE 100 Index rose 2.27% for the week on the possibility of more fiscal stimulus in the annual budget and the expectation of an earlier-than-projected economic recovery. In response to long-term inflation expectations, core and peripheral eurozone bond yields increased. Yields were further boosted by uncertainty concerning possible European Central Bank action to address possible overheating.

Lockdown restrictions were extended by German Chancellor Angela Merkel and the regional chief ministers until March 28, dampening somewhat the expectation of a speedy recovery. Italy blocked 250,000 doses of the Oxford- AstraZeneca coronavirus vaccine that were scheduled to be transported to Australia, a decision condoned by Brussels. The shipment was supposed to have been the first intervention since the European Union (EU) introduced the rules governing vaccine shipment outside of the EU. It is also likely that France might block vaccine shipments abroad.

In Asia, Japan’s stock markets ended mixed for the trading week. The Nikkei 225 Stock Average ended 0.35% lower while the broader benchmark TOPIX Index closed higher by 1.70%. The yen lost ground against the dollar by JPY108 to USD. The 10-year Japanese bond ended the week at 0.09%, the lowest yield from the middle of February. The Japanese government continued to implement its state of emergency in Tokyo and three neighboring prefectures due to the persistent coronavirus spread. Volatility in China’s stock markets sent shares falling on concerns of contagion from rising US yields and inflation growth. The large-cap CSI 300 Index slid 1.4% whilst local currency A shares gave back 0.2%. Remarks from China’s banking and insurance regulators on the need to deleverage and avoid financial bubbles sent technology shares falling, including counters in the consumers, electric vehicles, property management, and financial sectors. The yield on China’s sovereign 10-year bond climbed 3.36% while the renminbi closed unchanged against the US dollar.     

The Week Ahead

In the coming week, among the reports expected to be released are the Fed Funds target rate, retail sales growth, and housing starts.

Key Topics to Watch

• Empire state index
• Retail sales
• Retail sales ex-autos
• Import price index
• Industrial production
• Capacity utilization
• National Association of Home Builders index
• Business inventories
• Building permits (SAAR)
• Housing starts (SAAR)
• Federal Reserve announcement
• Federal Reserve Chair Jerome Powell press conference
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Philadelphia Fed manufacturing survey
• Index of leading economic indicators

Markets Index Wrap Up

Stock Markets

Stocks pulled back as yields moved up, continuing the cycle of volatility of preceding weeks. During the week two emerging perceptions appear to prevail among investors. One is the view that high interest rates and high stock prices are simply incompatible and one must prevail. Second is the view that the decline in stocks has been significant enough to signal that the market is taking off in a new direction. Both views have merit but are somewhat overstated. Regarding the first perspective, although rates are higher, they are not high in retrospect. Ten-year rates have merely returned to their levels one year ago. The 20-year average of the ten-year interest rates is 3.1%, double the current 1.6%, thus the present level is nowhere near historical highs. The second view, that the market is entering a “sell-off” or “turmoil” as headlines predict, can hardly be substantiated given that the S&P 500 slid by only 3.4% from Monday’s closing high to Thursday’s closing low.

U.S. Economy

The recent market sentiment does appear to be changing from the sharp and steady climb it experienced over the past year. Concerns of rising interest rates and inflationary pressures have largely replaced talk of stimulus and reopening. That being said, it does not appear that the market has already peaked at the present. Broader economic measures, however, do not appear to support this position.

• The Fed is far from adopting a monetary policy that may lead to overtightening in the economy. The stimulus measures are still in effect and the policy rate has not yet undergone any upward adjustment. Any increase in inflation is taken as a sign of a recovering economy, particularly in light of the deep recession it has just been through. Eventually, rates will have to increase to more restrictive levels, but this may be years in the future. What is currently taking place is a recalibration process that has long influenced the interaction between the Fed and the stock market.
• The labor market is still on the road to recovery. The February employment report released last Friday shows that 379,000 jobs were added to the U.S. economy, more than double the gains in January, with the best payroll growth in the last four months. It is heartening to observe that of the new jobs added, 355,000 were in hospitality and leisure, indicating a comeback in this most depressed segment of the economy. It could only portend stronger performance particularly for small businesses and the services sector as vaccinations are deployed and restrictions are lifted.
• There is still significant upside in the labor market. Although 12.9 million jobs have been added since May, the employment level is still 9.5 million short of pre-pandemic employment figures. This points to further job recovery and more job creation, a leading driver in the economic recovery. It will further boost consumer confidence and aggregate income which, combined with the already increased level of personal savings, may just fuel average household spending and GDP growth for the year.

Metals and Mining

For the first time since June 2020, gold slid below $1,700 per ounce, continuing its decline after beginning the month at $1,735. Global gold ETFs fell 84.7 tonnes in February, historically the seventh-worst month for losses. Some upside is expected in the future, however, as the movement appears to form part of a correction that may soon see the bottom before recovering lost territory. As of Friday, gold was trading at $1,698.44. Silver also saw a pullback in the first week of March following a month of slow but steady gains. Part of the price drop was due to the metal’s correlation to gold, although it was buoyed by robust industrial demand and strong investor interest. The price held above $25 per ounce, trading at $25.02 on Friday.

Platinum peaked at a six-year high, breaking out at $1,212 per ounce at the start of the week’s trading, but subsequently dropping to $1,108 on Thursday. It recovered to trade at $1,113.30 on Friday. Palladium is the only precious metal to buck to trend downwards. It realized a modest 0.05% gain, rising from $2,261 to $2,274 per ounce over the week, and trading at $2.257 on Friday. It will continue to be sustained by demand in the automotive sector.

Base metals ended up mixed for the week. Copper continues to consolidate at the $8,700 range after hitting a 10-year high in February when it traded above $9,000 per tonne for the first time since 2011. Further demand may still boost the red metal as its antiviral properties are highlighted and supply remains tight. Nickel, on the other hand, plunged 13.4%. It faces a price recovery, however, as supply faces some constraints due to the suspension of operations in Guatemala’s Fenix nickel mine in light of environmental concerns. Nickel was trading at $16,144 per tonne on Friday. Prices for zinc and lead also saw a correction from their gains in February. Zinc closed the week at $2,734.50 per tonne, lead at $2,014 per tonne.

Energy and Oil

The price of oil continues on its steep uptrend as OPEC+ decided to suspend plans to ease production cuts for one more month. This caught the oil market off-guard as expectations for an easing in the oil supply situation were dashed. Even Saudi Arabia announced that it would continue to keep in place its 1 mb/d of voluntary oil cuts. The market reacted to the unexpected news with a sudden surge in prices.

As oil prices continue to rise and drillers are tempted to return from the sidelines, the shale business may likely return to aggressive production levels. As the markets get to the $70-$75 per barrel oil range, the prospects for strong growth are enhanced even with returns to investors becoming increasingly lucrative. This only entices shale producers to take advantage of the bullish market conditions. Further providing an incentive for the continued oil price increase is Biden’s moratorium on new drilling in federal lands. While this does not have an immediate impact, it is likely to curb production by anywhere between 230,000 to 490,000 bpd by the end of 2025.

Natural Gas

At most locations this week, natural gas prices remained relatively steady, rising only less than $0.10 per million British thermal units (MMBtu) at most hubs. The Henry Hub spot prices rose from $2.75/MMBtu on the Wednesday of the previous week to $2.85/MMBtu last Wednesday. The March 2021 contract expired last Wednesday at the New York Mercantile Exchange (NYMEX) at $2.854/MMBtu, while the April 2021 contract price increased by $0.02/MMBtu to $2.816/MMBtu. The price of the 12-month strip averaging April 2021 through March 2022 futures contracts rose to $2.988/MMBtu, up by $0.02/MMBtu.

World Markets

European shares rose on investor optimism that vaccine deployment will lead to an easing of restrictions to curb the coronavirus spread and that monetary and fiscal policies will be adopted to support the economy’s reopening efforts. The rise was tempered by sentiments that central banks will likely adopt measures to contain the possible increase in inflation rates. The pan-European STOXX Europe 600 Index climbed 0.91%, in tandem with major stock indexes. The UK’s FTSE 100 Index rose 2.27% this week, prompted by the release of finance minister Rishi Sunak’s annual budget calling for more fiscal stimulus. A further incentive was provided by projections from the Office for Budget Responsibility that the economy is likely to recover to pre-pandemic levels earlier than first projected.

In Germany, German Chancellor Angela Merkel extended lockdown restrictions until March 28, but at the same time eased containment measures in areas with reduced infection rates. Bookshops, some stores, garden centers, florists, museums, and art galleries were allowed to resume business. Italy blocked the shipment of 250,000 doses of the Oxford-Astra Zeneca coronavirus vaccine originally scheduled to be shipped to Australia. This is the first intervention of any country in the EU since rules were adopted regarding the shipment of vaccines outside the bloc. France may also block vaccine shipments outside the EU. The EU may likely impose export controls on vaccines until the end of June.

In Japan, the stock markets ended mixed for the week. The Nikkei 225 Stock Average declined 0.35% while the broader TOPIX Index rose 1.70%. The yen softened to close above JPY 108 against the U.S. dollar, and the yield of the 10-year Japanese government bond closed the week at 0.09%, its lowest level since the middle of February. Some positive news helped sustain the market as it was reported that the Japanese manufacturing sector expanded in February for the first time in nearly two years. However, the services sector saw a further slump in light of the continued coronavirus restrictions. In the meantime, Chinese shares fell in volatile trading as nervous sentiments concerning the U.S. rising yields and inflation expectations spilled over onto the country’s bourses. The large-cap CSI 300 Index slid 1.4% while local currency A shares declined 0.2%. Technology shares fell on the back of weakness in prominent companies in the consumer, electric vehicles, and property management sectors. The yield on China’s sovereign 10-year bond rose to end the week at 3.36%, while the renminbi remained unchanged against the U.S. dollar.

The Week Ahead

Important reports scheduled for release in the coming week include consumer sentiment, inflation data, and initial claims.

Key Topics to Watch

• Wholesale inventories
• NFIB small-business index
• Consumer price index
• Core CPI
• Federal budget
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Job openings
• Prudence price index final demand
• UMich consumer sentiment index (preliminary)

Markets Index Wrap Up

Stock Markets

In the past week, sector leadership shifted to economically sensitive sectors that have lagged due to the pandemic. The catalyst for this shift was the sharp rise in government bond yields that unsettled both equity and fixed-income markets. The acceleration in bond volatility brought it to its highest level since April 2020, affecting other asset classes. In equities, the Nasdaq pulled back 7% from its peak indicating enhanced pressure on technology shares. Growth investments charted their worst month over value investments since the beginning of the millennium. Long-term uncertainties account for the softness in high-growth technology stocks which derive much of their value further into the future. High interest rates have also begun to weigh on valuations.

Overall, last week’s pullback on domestic indexes was due to weakness in the tech sector, since the energy sector comprises 27% of the S&P 500. This does not indicate a long-term breakdown in the sector, because its dominant companies continue to report strong profitability and fast growth. The pressure on rising yields will eventually abate as the market eventually discounts the effect on asset valuation.

U.S. Economy

Projections for continued growth are firming up as the V-shaped recovery continues to hold and pent-up demand is released. The approval of the $1.9 trillion stimulus package is anticipated to coincide with the accelerated roll-out of Covid vaccines and the reopening of the economy, providing a strong boost to economic growth. As a result of these developments, 2021 GDP growth is estimated to exceed 5%, surging to its strongest level in the past 35 years and supporting a rise in interest rates. However, the economy is still recovering from a deep recession, therefore even if the economy returns to its 2019 peak level by the second half of this year, it is unlikely that it will exceed the trend set before the pandemic until sometime in 2022. For this reason, fears of an overheating economy that might reverse Fed policy are somewhat unfounded.

• Due to strong market gains in the past year, equity valuations have already discounted much of the anticipated positive news. The sudden uptick in government-bond yields edged out some of the excess returns in equities and deflated investor expectations of an enhanced risk premium. While the spread still favors equities, it is now at its lowest level in a decade.
• Valuations may likely start to normalize with continued corporate earnings recovery. With only 5% of the S&P listed companies still to report results for fourth-quarter earnings, those that have already reported have trended towards the upside and now show positive growth after year-on-year declines for three consecutive quarters. Estimates for the current year have been revised roughly 4% higher from beginning-of-year forecasts, and there appears to be further room for strong growth given the government’s aggressive spending policy.
• The income and spending report for January that was released last Friday indicate that personal income climbed 10% month-on-month, and despite the increase in consumer spending, personal savings rate also jumped to 20.5% from 13.4%. The increased savings may be regarded as pent-up consumer demand that could eventually drive growth and enhance corporate revenue, should consumer confidence catch up with personal income.

Metals and Mining

In the closing week of February, gold prices remain vulnerable to a strengthening economic outlook in response to the global vaccine distribution. Gold descended to its lowest level in six months, dropping 9.4% year-to-date and 12% since August of last year. Other precious metals saw a correction, contrary to the rising base metals prices. Worries over a possible increase in inflation due to the reopening economy would have triggered buying in gold, but contrary to expectations, Treasury bills appear to be the beneficiary of this recent trend. Gold and precious metals appear further headed for a slump if yields continue to rise. The World Gold Council (WGC) remains optimistic, however, that inflationary pressures may at some point drive prices higher consistent with historical correlations.

Gold was priced at $1,719.46 per ounce as of 11.26 a.m. Friday, while silver sold for $26.67 per ounce as of 11.50 a.m. Earlier in the week, silver appeared to test the $30 resistance level but lost 6.6% by mid-Friday. Eventually, buying interest in silver is expected to pull prices upward since a resurgence in industrial demand is forecasted in the near future. On the other hand, the price of platinum surged to a five-year high during the week although it corrected slightly by the week’s end. Prices dipped from $1,291 to $1,169 per ounce due to investors reconsidering further demand for the automotive metal. Palladium also reached a four-week high to $2,344 on Thursday. However, the metal dove to a two-month low of $2,186 per ounce during Friday’s open. By 11:59 a.m. Friday, platinum was selling at $1,172 while palladium was valued at $2,180 per ounce.

Base metals saw a surge with copper soaring to $9,614 per tonne, its highest level in a decade and 21% higher since the start of 2021. The rising copper price is driven by supply constraints and rising demand. The metal gave back some of its gains to trade at $9,201on Friday morning. Zinc recovered from its two-month low in early February to rise above $2,800 per tonne, Lead also climbed higher from $2,103 to $2,158.50 per tonne. The deep decline in output for both metals in 2020 may have been the catalyst for their recent price positivity. The world mine production of zinc declined by 5.9% year-on-year to 12.14 million tonnes, while global lead mine output fell by 5% to 4.48 million tonnes. Nickel also traded higher due to production shortfalls. On the last trading day, Zinc was priced at $2,894.50, lead at $2,158.50, and Nickel at $19.568 per tonne.  

Energy and Oil

The recent rise in oil prices took a respite as consolidation set in after rent traded only slightly higher than $67 on Thursday. Talk of the possibility that prices may reach $100 has been circulating among banks, although OPEC+ still has the option of raising production levels and potentially lower prices. Few analysts, though, will likely stake a bearish position. Since the onset of volatility in the Texas energy markets, the open interest on $100 strike December 2022 has surged higher. For traders, $100 oil is still a risky proposition, but interest has risen in the likelihood of triple-digit oil prices now than there had been in previous years.

OPEC+ is expected to consider a modest increase in oil production during next month’s meeting. The most likely estimate is an increase of 500,000 bpd starting April. Coinciding with that increase is the expiration of a voluntary 1 mb/d cut by Saudi Arabia. It is also expected that US shale production will no longer be a threat to OPEC and OPEC+.

Overseas, China’s prospective shale boom has failed to take off despite the country’s rich natural resources and best efforts. Recent analysis shows that the progress made by China so far in advancing its shale revolution is likely to be obsolete by 2025. The reasons cited were failure to attract more investors and the country’s complex geology. This year, China’s oil imports are expected to slow by the second quarter due to higher prices and refinery maintenance.

The cancellation of the Keystone XL Pipeline means that more oil will be moved by rail, further exacerbating Canada’s oil=by-rail shipments which have already tripled since July. Without Keystone XL, transport of oil by rail will rise throughout the 2020s for heavy Canadian crude to be transported to Gulf Coast refiners.  

Natural Gas

Natural gas spot prices dipped as temperature returned to normal or above normal across most of the lower 48 states. This brought most demand for heating and electricity down from record-setting levels. The Henry Hub spot price declined from $23.61 per million British thermal units (MMBtu) on February 17 to $2.75/MMBtu on February 24.

Regarding futures at the New York Mercantile Exchange (NYMEX), the March 2021 contract expired on February 24 at $2.854/MMBtu, down $0.37 for the week. The April 2021 contract price decreased by $0.24/MMBtu to $2.795/MMBtu. The price of the 12-month strip averaging April 2021 through March 2022 futures contracts dropped to $2.964/MMBtu, a decline of $0.18/MMBtu.

The production of natural gas fell by half in Texas during the freeze. Natural gas-supply shortages have been blamed in part by executives of energy corporations operating in Texas. In the long term, global LNG demand is expected to double by the year 2040. 75% of the forecasted growth in demand will likely be concentrated in Asia.

World Markets

The European bourses fell in sync with global markets, and volatility increased during the week on fears that rising inflation due to economic recovery may force Central Banks to preemptively adopt contractionary measures. The STOXX Europe 600 Index fell 2.38% for the week. The Major Continental stock indexes likewise slid. The UK’s FTSE 100 Index descended in response to a stronger British pound as the currency reached its highest level in nearly three years, peaking at $1.42 per pound before correcting. Investors were encouraged by the rapid rollout of COVID vaccines which raised hopes for a recovery. They also factored in a possible interest rate increase over the next two to three years. Peripheral eurozone government bond yields rose in step with U.S. Treasury yields. A plan for the gradual and irreversible lifting of lockdown restrictions was also announced by UK Prime Minister Boris Johnson, to take place within the period March 8 to June 21.

In Asian markets, Japan’s Nikkei 225 Stock Average slid by 3.5% or 1,052 points to close at 28,966.01. This benchmark remains 5.5% higher year-to-date. The broader equity indices similarly registered sharp losses, with the large-cap TOPIX Index and the TOPIX Small Index mirroring the Nikkei. Prices were generally down due to the shortened holiday trading week. The ye weakened against the dollar to close at JPY106. Chinese equities likewise lost ground, with the Shanghai Composite Index declining 5.1% while the large-cap CSI 300 Index losing 7.7%, the bourse’s worst weekly performance since October 12, 2018. Highflying counters in semiconductors, electric vehicles, and automaking succumbed to profit-taking; the same was seen for recent initial public offerings (IPOs). With the resurgence of travel and relaxation of quarantine restrictions, buying interest was focused on shares of Macau gaming companies and airline companies.

The Week Ahead

Among the important reports to be released next week are the PMI composite, jobs data, and consumer credit levels.

Key Topics to Watch

• Market manufacturing PMI (final)
• ISM manufacturing index
• Construction spending
• Motor vehicle sales (SAAR)
• ADP employment report
• Markit services PMI (final)
• ISM services index
• Initial jobless claims (regular state program)
• Productivity revision
• Unit labor costs revision
• Factory orders
• Nonfarm payrolls
• Unemployment rate
• Average hourly earnings
• Trade deficit
• Consumer credit

Markets Index Wrap Up

Stock Markets

Over the week, stocks set new highs on the back of the Congressional hearings looking into the GameStop trading spree and the better-than-foreseen economic data. Indices dipped slightly week-on-week, however, when optimism was tempered by concerns about the inflationary trend and rising bond yields. The ongoing negotiations of the details of the fiscal-aid package and growing anticipation of the accelerating vaccine roll-out continue to provide buying incentive for investors. The cyclical sectors outperformed the market, led by financials, industrials and energy and technology trailing behind. The benchmark 10-year Treasury yield advanced to 1.35%, its peak so far since November. The quick rise in yields may create some volatility in stocks, but in the longer term it might be a confirmation of the continued bull market rather than a threat.     

U.S. Economy

Retail sales jumped 5.3% over the past month with gains registering across all major retail sectors. The main reason for the surge appears to be the stimulus checks and the gradual loosening of restrictions in several states, thus boosting consumer spending. Overall, the fundamental outlook remains positive despite the rising interest rates which would normally dampen interest in stocks.

• Higher inflation expectations signal the likely rebound in economic activity. The present inflation growth takes into account the sudden drop in prices one year ago at the beginning of the pandemic when demand dropped due to the lockdown. The rising inflation can be viewed in light of the 5.8% spending increase in January detailed in the retail-sales report released last week. The trend will likely continue in February due release of pent-up demand and savings resulting in higher-than-average future GDP growth.
• Ten-year interest rates advanced almost 0.2% week-on-week, in effect doubling since September levels. Viewed in perspective, this brings the ten-year benchmark back to its level in February. Historically, the yield in 10-year Treasuries is still at its lowest level. For this reason, a pragmatic assessment indicates that interest rates are far from being at the point that would begin to stifle economic growth.
• While the longer-term rates have increased, the Federal policy rate remains unchanged, and neither is the Fed expected to raise short-term rates in the foreseeable future. This pattern is indicative of a yield-curve steepening that is typically associated with the early and middle stages of economic expansion. The impact of the vaccine-deployment and pent-up demand may result in the subsequent phase of labor-market improvement, further fueling the economic expansion. Occasional volatility may be expected as the market consolidates its gains before resuming its bullish trend.

Metals and Mining

Gold surged to a four-week high before giving way to pressure brought about by the rising currency. The late-week rebound by the dollar arrested the continued rise in precious metal prices. Gold opened at $1,829 and peaked at its five-day trading session at $1,851 before settling at $1,825.03 per ounce. Silver also tested its four-week high when trading reached $27.66 per ounce on Tuesday. It subsequently corrected but remain above the $27 support level for the rest of the week, ending at $27.31. Platinum registered a six-year high at $1,262 per ounce on Thursday, thus adding 18.9% to its value since January. Palladium also benefitted from some buying interest to tread near its four-week high. Bu the week’s end, platinum settled at $1,242 and palladium at $2,305 per ounce.

Base metals also performed strongly, bolstered primarily by nickel and copper which realized the most gains. Concerns surrounding the shortage of semiconductors prevailed in the market due to the impact of automotive manufacturers, slowing their production and possibly dragging back most of the supply chain. Copper began trading the week at $8,007 per tonne, and by Friday it had gained 3.5% to end the week at $8.292. Zinc rallied from its year-to-date low of $2,539 per tonne to be valued at $2,726 on Friday, representing a gain of 7.3%. Nickel added 2.9% to end Friday at $18,599 per tonne, on news that demand for the metal will rise in tandem with the electric vehicle sector. Lead made a modest gain, opening at $2,052 and ending the week at $2,082.50 per tonne.

Energy and Oil

The major story this week was the Texas electricity crisis. Approximately 45 gigawatts of electricity generation from renewables, coal and natural gas went offline on Tuesday, interrupting power to 4 million people. Much of the power was restored by Friday, and as repair works continued, attention was drawn to issues impacting the state’s grid policy. These include the lack of weatherization of Texas power generation assets, the isolation of the state grid from the rest of the country, and the lack of a capacity market. The power outages, wellhead freeze overs, and other equipment failures sidelined around 4 mb/d of U.S. oil production. The restoration process could take weeks as restarting frozen or shuttered wells may be necessarily straightforward.

The supply situation is expected to ease up in the coming weeks as Saudi Arabia is poised to reverse its 1-mb/d voluntary production cut. The returned barrels are expected to hit the market in April, a favorable development for the industry.  In the U.S., the shale industry could be in a better financial position with WTI surging to $60 per barrel. Drillers are likely to focus on cash generation rather than aggressively pursue spending plans. Concerning its neighbor to the north, Canadian shale gas drilling increased rapidly for the year consistent with the increase in the country’s gas exports to the U.S. As U.S. drillers cut back, Canadian drillers are looking forward to capturing a larger share of the U.S. market.

Natural Gas

Natural gas spot prices surged at most locations over the past week in response to the record-setting low temperature across the lower 48 states and losses in production as far south as the Gulf Coast. The Henry Hub spot price climbed to $23.61per million British thermal units (MMBtu) from $3.68/MMBtu. In nominal terms, this week’s close was the highest price since 1993; in real terms, it was the highest since February 2003. At the New York Mercantile Exchange (Nymex), the March 2021 contract rose by $0.31/MMBtu from $2.911/MMBtu to $3.219/MMBtu. The price of the 12-month strip averaging March 2021 through February 2022 futures contracts rose to $3.158/MMBtu, an increase of $0.12/MMBtu.

World Markets

Sideways consolidation saw European shares slightly increase on the back of companies’ quarterly earnings reports, coupled with concerns about the rising inflation and higher bond yields. The STOXX Europe 600 Index rose 0.21%, as France’s CAC 40 and UK’s FTSE 100 Indexes gaining ground. The German and Italian bourses sustained moderate losses as the core eurozone bond yields rose. In some welcome development, the UK and Switzerland are set to ease lockdowns. In England, PM Boris Johnson announced that the country would adopt “a cautious and prudent approach” by opening up in stages beginning with the commencement of face-to-face learning in early March. This is in response to the coronavirus levels in England, Wales and Northern Island falling to their lowest levels since early October. Switzerland also announced the gradual lifting of restrictions in March, starting with the reopening of shops and sports facilities, libraries, gardens and zoos. The EU signed a contract for another 200 million doses of coronavirus vaccine with Pfizer and BioNTech, bringing business expectations for the year ahead to the highest level since April 2018.

Japan’s indexes were mixed for the week, with the Nikkei 225 Stock Average closing at 30,017.92, the first time in three decades that it closed higher than the 30,000 resistance level. It nevertheless remains well below its all-time high of 38,597, established in 1989. The positive gains were due to encouraging economic reports regarding better-than-expected GDP figures, as well as an increase in the manufacturing Purchasing managers’ Index. Year-to-date, the Nikkei is up by 9.38%. The broader equity market benchmarks, the large-cap TOPIX Index and the TOPIX small index sustained modest losses for the week. The yen was slightly weaker, trading above JPY 105 against the dollar by week’s end. The yield of the 10-year government bond ended at 0.11% for the week, its highest level since November 2018. In China, shares also ended mixed in light of the holiday-shortened trading week. The large-cap CSI 300 Index dipped by 0.5% while the benchmark Shanghai Composite Index climbed by 1.1%. The yield on China’s 10-year government bond closed the week five basis points above the pre-holiday close, at 3.31%. Over the Lunar New Year, economic data reflected efforts to discourage travel due to the coronavirus infections that flared up in northern China.

The Week Ahead

The January leading indicator index, durable goods orders, and personal income and spending are among the economic data to be released in the coming week.

Key Topics to Watch

• Leading economic indicators
• S&P CoreLogic Case Shiller home price index (year-over-year)
• FHFA home price index (year-over-year)
• Consumer confidence index
• Fed Chair Jerome Powell testifies
• New home sales (SAAR)
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Gross domestic product revision (SAAR)
• Durable goods orders
• Core capital goods orders
• Pending home sales index
• Personal income
• Consumer spending
• Core inflation
• Trade in goods advance report
• Chicago PMI
• UMich consumer sentiment index (final)

Markets Index Wrap Up

Stock Markets

Amid strong earnings reports and the likelihood of additional fiscal stimulus, stock indices ended up slightly positive for the second week of February. Plans have been announced for the purchase of an additional 200 million vaccine doses as the rollout continues to accelerate. In pace with equities, bonds likewise edged further up but slowed tentatively midweek as fresh inflation data was weighed and discounted by investors. The 30-year Treasury bond yield rose to 2% for the first time in a year as expectations of an increasing inflation rate appeared to gain validation for the first time since 2014. Inflation and jobs data releases show a slowdown in recovery and the entertainment and restaurant industries remain lethargic, providing little incentive for stock indices to rise. Expectations about the improved vaccine distribution continue to provide hope for a further push in the job market and resumption of the bullish stock market trend.

U.S. Economy

Fears of rising inflation appear to gain ground in a high-liquidity, low-productivity scenario with lockdowns still in place and the stimulus package about to be released. The following suggest that inflation may indeed inch upward from the current low-inflation regime.

• Prices in April, May and June of 2020 dropped steeply at the height of the pandemic lockdown, setting the stage for annual inflation to jump for the same months this year on a year-on-year basis. The reduction in prices was partly impacted by gasoline prices falling 34% and airfare by 28% during the second quarter of the past year. These depressed the consumer price index (CPI) for the same months in 2020, causing the base for computation of this year’s inflation to drop and this year’s rates to seemingly spike. The markets are not likely to react adversely since Fed officials are aware of the likelihood of this mathematical aberration. Since Fed Chair Powell announced that U.S. employment is significantly behind where it needs to be, it is unlikely that the Fed will start to lift its accommodating monetary policy anytime soon.
• Demand patterns have shifted due to the pandemic, redirecting consumption spending towards goods rather than services. This tendency has created bottlenecks and disrupted global supply chains. An example is the recent drop in automotive production that was caused by a shortage in semiconductor chips has caused car manufacturers significant revenue losses. Simultaneously, rising shipping and raw-materials costs are pushing commodity prices to their highest levels than they have been for more than a year. A survey of purchasing managers in the manufacturing industry confirms increasing production costs that will likely translate to higher-end prices for the consumers.

Notwithstanding the inflationary pressures, a persistent rise in prices is not expected due to structural forces that work to hold inflation down. Prices have remained lower and more stable since the mid-nineties; furthermore, the link between stimulus, labor-market conditions, and inflation appear to have been realigned since after the 2008 global financial crisis. Over the last ten years, the inflation rate has averaged a consistent 1.7% and moved slightly upward to 2.3%in 2019 as unemployment fell to 3.5%, the lowest it has been for half a century. Another contributor to deflationary forces is the “Amazon” effect, wherein disruptive technologies and a fully transparent market work to keep prices at their lowest levels. Gains in productivity in the post-pandemic period and the increased adoption of technology are likely to exert downward pressures on prices that will continue to keep inflation in check.

Metals and Mining

Gold prices rallied to a four-week high during trading in the past week before downward pressure exerted by the rising US dollar. An increase in the dollar’s valuation arrested the spike in the precious metals sector which saw breakthrough prices in most counters. Gold continued to test the $2,000 per ounce resistance level, opening the session at $1,829 and hitting its five-day peak at $1,851 before holding at $1,825.03 on Friday afternoon. The inverse correlation between gold and the dollar appears to prevail and will persist in the near future. Silver also tested its ceiling, trading at a four-week high of $27.66 per ounce on Tuesday and trading Friday afternoon at $27.31. Silver is expected to remain strong throughout the year, according to forecasts by the Silver Institute. Platinum traded as high as $1,262 for the week and slid to $ 1,242 per ounce on Friday. Palladium also rallied to settle at $2,305 per ounce on Friday.

Base metals also traded higher for the week with copper starting at $8,007 per tonne and closing Friday at $8,292. Zinc likewise rallied 7.3 percent from its year-to-date low of $2,539 per tonne to close $2,726 by week’s end. Nickel prices increased by 2.9 percent to trade at $18,599 per tonne by Friday. Lead likewise realized slight gains for the week, beginning trading at $2,052 and increasing to $2,082.50 per tonne where it held until the end of trading.

Energy and Oil

In Friday’s early trading, Brent held at $61 per barrel despite a slightly stronger dollar. Analysts are divided concerning prospects for the rally’s continuation or a possible slowdown in upward price momentum. The OPEC cartel announced on Thursday that they expected oil demand to increase by 5.8 million barrels per day (bpd) which is a 100,000 bpd downward adjustment from projects made last month. The adjustment is attributed to the continuing lockdowns in the major developed economies.

In the meantime, U.S. shale is expected to grow later this year with WTI over $50, according to the EIA. Supply forecasts for 2022 by the agency were increased to 11.53 mb/d, an increase from last month’s 11.49 mb/d. With regards to oil, a broad commodity supercycle is taking place that could create an upside risk to $65, as per Goldman Sachs. A macro-repricing is foreseen by analysts which will likely lead to repricing for everything. Libya’s oil port has reopened after a month-long strike during which time output was reduced by more than half from 320,000 to 120,000 bpd. Finally, some good news as the Advanced Research Projects Agency-Energy (ARPA-E) of the U.S. Department of Energy announced the availability of $100 million in funding for high-risk high-reward early-stage low-carbon technologies.

Natural Gas

Responding to an extended cold-weather trend that continues to sweep most of the lower 48 states, natural gas spot prices increased for most of the week from February 3 to 10, and below-freezing temperatures being forecasted until the Gulf coast. The Henry Hub spot prices rose to $3.68 per million British thermal units (MMBtu) by week’s end after beginning the week at $2.91 per MMBtu. Price likewise increased at the Chicago Citygate by $1.14 from $2.85 per MMBtu to hit a weekly high of $3.99 per MMBtu on Wednesday as temperatures in the city dropped more than 18˚F lower than normal since Friday. Throughout the West, natural gas prices also reached new daily highs. The PG&E Citygate price at Northern California reached $4.11 per MMBtu on Wednesday from $3.55 the week prior, and at the SoCal Citygate in Southern California, it increased from $3.18 per MMBtu to $4.97.

The average total supply of natural gas, as per data from HIS Markit, dropped by 0.6% week-on-week. During the same period, dry natural gas production fell by 0.2 percent, while average net imports from Canada likewise decreased by 4.8 percent. Flows on the pipe were reduced due to an outage on Compressor Station 2 of the Enbridge West Coast Transmission in British Columbia, thus affecting the supply of natural gas into Washington State. The total U.S. consumption of natural gas increased by 3.6 percent from the previous week, although natural gas consumed for power generation fell by 2.5 percent. Consumption in the residential and commercial sectors increased by 7.9 percent, and in the industrial sector consumption increased by 3.5 percent. Exports of natural gas to Mexico increased by 3.5 percent.

World Markets

Volatility continued to dominate in the European markets although prices ended higher overall. The equity markets were generally propped up by improved vaccination rollouts, improving coronavirus infection rates, and optimism of a forthcoming U.S. stimulus package, although worries about extended valuations resulted in some profit taking by skittish investors. The pan-European STOXX Europe 600 Index rose 1.09 percent as major indexes were mixed. Italy’s FTSE MIB climbed 1.42 percent while France’s CAC 40 gained 0.78 percent and Germany’s Xetra DAX Index moved sideways. Showing the largest gains was the UK’s FTSE 100 Index which increased a modest 1.55 percent. Yields generally came under downward pressure on a lower-than-expected U.S. inflation report and a gloomy European Commission (EC) economic outlook. The EC forecasted a 3.8 percent growth in the eurozone economy for 2021-22. The projection is lower for 2021 than previously expected, although slightly more optimistic for 2022.

The Japanese bourses showed a continuation of the robust gains it exhibited the week before, with the Nikkei 225 Stock Average rising 2.6 percent to close at 29.520.07, ahead by 7.56 percent year-to-date. Weekly gains were also recorded by the broader equity market benchmarks, the large-cap TOPIX Index and the TOPIX Small Index. The yen closed stronger against the dollar to close Friday at JPY 105 per USD. Despite the strong showing, sentiment remained week due to concerns about the continued effects of coronavirus on the economy. The latest data showed a decrease in household spending, and much of Japan remained under a state of emergency due to the pandemic. In China, stocks rallied in advance of the Lunar New Year holiday. In the shortened trading week that ended Wednesday, the Shanghai Composite Index gained 4.5 percent while the large-cap CSI 300 Index shot up by 5.9 percent. Holidays throughout Asia are expected to last the week beginning February 12, prompting Hong Kong’s stock index to increase by 18% to date in 2021 as a result of record inflows from mainland investors. Stock, bond, and currency markets across China will resume trading on February 18.

The Week Ahead

Reports detailing important data expected in the coming week include the February preliminary Markit Purchasing Managers’ Index, producer inflation, and retail sales growth

Key Topics to Watch

• Empire State manufacturing index
• Retail sales
• Retail sales ex-autos
• Producer price index final demand
• Industrial production
• Capacity utilization
• Business inventories
• National Association of Home Builders index
• FOMC minutes
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Housing starts (SAAR)
• Building permits (SAAR)
• Import price index
• Philadelphia Fed manufacturing index
• Market manufacturing PMI (flash)
• Markit services PMI (flash)
• Existing home sales (SAAR)

Markets Index Wrap Up

Stock Markets

Major indexes closed at new record highs as U.S. stocks registered their best weekly gain since November. Optimistic outlook for a fiscal stimulus bill and the progress in vaccine distribution continue to provide impetus for the bourse. Crude oil traded at 10% gains for the week, its highest level in more than a year. The week’s activity was dominated by the GameStop play which initially sparked a pullback, and thereafter a strong rally to breakout levels. Speculative volatility, as observed last week, does not show signs of a broader market bubble. The underlying fundamental strength of the economy remains intact as evident in the economic and earnings growth reports. Investors are urged to avoid the risk of being enticed to bet on the fast-moving counters with little fundamentals at the risk of being caught holding the bag in a whipsaw. Instead, they should balance out their portfolio to reduce the distorted view of risk in a fast-moving market. Choose stock for value and not for play.

U.S. Economy

The January jobs report fell below expectations, registering only 49,000 new jobs out of an anticipated 100,000. The outlook for the rest of the year might be brighter, however, with the prospects of an opening economy as a result of the wider vaccine distribution. Also, the initial jobless claims, which is viewed as a more reliable labor market trend metric, fell for the third straight week.

• Additional fiscal stimulus from Washington and monetary stimulus from the Feds, supportive central bank policies, and the vaccine roll-out may further increase economic spending and, therefore, economic recovery. Over time, it is fundamentals that set the trend and pace, and it appears that momentum may build towards the year’s end. The housing market and manufacturing are particularly strong,
• The release of the January employment report showed that the economy gained 49,000 new jobs and unemployment dropped from 6.7% to 6.3%. The improved employment situation is expected to impact household spending that comprises 70% of U.S. GDP. Further improvement in the labor market was partly stalled by renewed lockdowns as monthly job gains averaged only 29,000 for the last three months.  This pales in comparison to the average monthly gains from July through October which registered 1.18 million. The second half of the year may see an escalation in jobs growth due to the vaccine rollout and a more open economy.
• Expectations of a 20% hike in corporate profits for 2021 are foreseen to contribute to the positive fundamentals outlook. Earnings rose by 15% or more in only 12 years since 1980, averaging a return of 12%.

Metals and Mining

Gold and silver ended the week at a loss; silver dropped 13.9% from its high of $30.03 on February 1. Silver’s rise was attributed to the WallStreetBets play, with retail investor sentiment dampening after the opening bell. The following day saw silver back to the previous $26 range. Gold felt the downward pressure exerted by a stronger US dollar and rising Treasury yields. The yellow metal traded below the $1,800 per ounce support level set in late November. The first week of February proved to be volatile for gold, dipping as low as $1,784 as safe-haven demand slackened. Despite the possibility of a correction from oversold levels, gold will continue to remain bearish due to the improving currency situation. Gold was priced at $1,808.73 at 11:25 a.m. EST, while silver was trading at $26.42 an ounce.

Platinum rose to $1,125 per ounce, a four-year high, days after the Anglo-American Platinum (Amplats) announced a fourth-quarter production decrease of 49%. The dip in production was caused by the closure of AMPLATS’ convertor plant coupled with COVID-19 fears. The announcement likewise benefitted palladium which remained on an uptrend during the five-day trading week, chalking a 3.7% increase from its Monday open at $2.189 per ounce. Palladium was valued at $2,264,50 per ounce at 11.27 a.m. Friday, while platinum was $1.118.  

Base metal prices remained soft for most of the week, moving sideways-to-lower in a consolidation. The absence of a downward momentum suggests that the market merely lacks buying incentive as investors seek to avoid increased exposure. Copper commenced the week’s trading at $7,827 a tonne, and slid lower to $7,800 by Tuesday. It recovered to trade at $7,864 by Friday. Increased demand from China as economies recover post-COVID vaccine deployment is seen to keep copper demand up. Other metals continued to move sideways, with Zinc priced at $2,600, nickel at $17,915, and lead at $2,010 per tonne in Friday’s trading.

Energy and Oil

For the first time in 2021, Brent is closing in on $60 per barrel as crude inventories in both the U.S. and China fell for the week, signaling tightening market supply. Oil price is seen to continue its surge on the back of unchanged OPEC+ shipments in the face of narrowing world supply. As prices continue to rise, however, division may increase between OPEC+ members. In the meantime, legal challenges by the PennEast Pipeline Col. LLC will be taken up by the Supreme Court to condemn private land through eminent domain, to build a project that could carry shale gas to east coast refineries. The result of the case could have broad repercussions for energy companies’ use of eminent domain.

The Biden administration announced that it would restart the issuance of permits for the first major U.S. offshore wind farm, a project mothballed in the preceding administration. Jennifer Granholm, the nominee to lead the Department of Energy, has cleared the committee vote and heads towards confirmation. She expressed support for U.S. liquid national gas exports coupled with efforts to combat climate change. Meanwhile, the Global Energy Monitor issued a new report that approximately 212,000 kilometers of pipeline, roughly equivalent to the entire length of the U.S. highway system, is under construction or at the drawing board stage. As the country’s energy transition picks up momentum, this could result in $1 trillion worth of pipeline projects getting shelved.

Natural Gas

At most locations, natural gas spot prices increased for the week ending February 3. The Henry Hub spot price rose from $2,71 per million British thermal units (MMBtu) at the start of the week to $2.91 by week’s end. The February 2021 contract at the New York Mercantile Exchange (Nymex) expired on February 3 at $2.760/MMBtu, while the March 2021 contract price rose by $0.09 to $2.789/MMBtu. For the week ending January 29, the net withdrawal from working gas totaled 192 billion cubic feet (Bcf). This is higher than the year-ago level by 2% and higher by 8% than the five-year average for the week.

For the week ending February 3, the natural gas plant liquids composite price at Mont Belvieu, Texas increased by $0.38/MMBtu. The price averaged $7.51/MMBtu over the week, with prices rising by 3% for natural gasoline and propane, 5% for butane, 8% for isobutane, and 11% for ethane. Baker Hughes reported that the natural gas rig count remained flat at 88 for the week ending January 26. The number of oil-directed rigs increased by 6 to 295, bringing the total rig count to 384, an increase of 6.

World Markets

Hopes of a U.S. fiscal stimulus and accelerated economic recovery due to improved coronavirus vaccination distribution spurred European bourses upward. The pan-European STOXX Europe 600 Index closed the week 3.46% higher. Italy’s FTSE MIB Index rallied 7% in response to the fresh mandate given to Mario Draghi, former European Central Bank president, to form a new government. Germany’s Xetra DAX Index and France’s CAC 40 also posted solid gains but not as high as Italy’s. UK’s FTSE 100 Index likewise rose by 1.28% despite disappointing earnings reports and a strengthening currency. The UK pound surged after traders abandoned hope for a possible interest rate cut, and data underscored the rapid rollout of the country’s coronavirus vaccination program.

Demand for core bonds slackened due to expectations of improved economic growth, driving yields higher. The release of better-than-expected eurozone GDP data pushed expectations of a long-term inflation increase, further adding to the increase in yields. Peripheral bond yields fell across the markets, however. Gilt yields kept pace with core markets as the Bank of England kept monetary policy steady and announced that at least six weeks are needed for lenders to prepare for negative interest rates, stifling investors’ bets for an interest rate cut for the rest of the year.

In Asia, Japan’s stock markets rose for the week, with the Nikkei 225 Stock Average advancing by 1,116 points (4%) to close the week at 28,779.19. This brings the bourse to 4.9% ahead of its year-to-date figure. The strong weekly gains covered the broader equity market benchmarks, the large-cap TOPIX Index and the TOPIX Small Index. The yen closed slightly down at a shade above JPY 105 against the U.S. dollar. China’s stocks also rose over the week, with the large-cap CSI 300 Index advancing 2.5% to outperform the Shanghai Composite Index. Behind the improved sentiment is the agreement reached by Alibaba Group with regulators over the restructuring of Ant Group, its fintech affiliate. An impending IPO offering of Ant Group, amounting to $34.44 billion, was canceled in November.

The Week Ahead

Economic data expected to be published this week include the small-business optimism report on Tuesday, the inflation report on Wednesday, and the consumer confidence report on Friday.

Key Topics to Watch

• NFIB small-business index
• Job openings
• Consumer price index
• Core CPI
• Wholesale inventories
• Federal budget
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Consumer sentiment index (preliminary)

Markets Index Wrap Up

Stock Markets

Volatile trading in several sectors of the market triggered the largest weekly loss in the stock market. Fears of speculative excesses were coupled with reduced optimism that fourth-quarter GDP growth would slow down after a spectacular third-quarter growth figure. The heightened political and economic uncertainties ahead under an untested Biden administration have prompted increased caution in consumer spending. Some sectors of the economy fared well, such as housing and business investment. Growth may slow down for the first quarter although activity and employment may be expected to make a comeback, in light of the $900 billion fiscal stimulus package that passed in December. Even considering the negative equity-market returns for January and the extreme volatility in some of the heavily shorted stocks the basic outlook for the stock market remains steady. Prospects for economic momentum remain unchanged with continued support expected from the central bank and government stimulus later in the year.  

U.S. Economy

This week saw a slew of unusual market behaviors, most remarkable of which is the GameStop speculative play fueled by small day traders squeezing out the short position from large hedge funds. Despite the narrative surrounding the small video-game retailer and the attention-grabbing headlines suggesting a David-versus-Goliath face-off, the unusual market gains realized are not indicative of a sustained breakout in any particular sector. The event does, however, suggest that market conditions might be vulnerable to further speculative excursions capable of yielding short bursts of abnormal returns. While it is unlikely that the recent activity suggests that a stock-market bubble exists or that a new and persistent trend is developing in equities trading, it does however underscore a greater risk-taking spirit, causing ripples in the smooth market advance of the previous years. Notwithstanding recent events, the future outlook remains stable.

• A large amount of liquidity has been introduced into the markets and the economy in general as a result of the recent federal stimulus. The stimulus package is a significant driver in lowering the costs of borrowing to consumers and businesses alike, thus maintaining the stability of the credit system and the overall economic recovery. The extra liquidity is also fueling investment in riskier assets as investors shy away from low-risk, low return interest-bearing instruments to seek greener pastures.
• Vaccine distribution continues to fuel optimism despite timeline issues, and it is widely expected to gain momentum later in the year. The pandemic’s impact on recent corporate earnings have currently evaluated market valuations; by year’s end, a more fully-opened economy is expected to enhance earnings and bring valuations to normal levels. Moving forward, the Fed has committed to maintaining interest rates at current levels and monetary stimulus consistent at levels favorable to enhanced market performance.

The recent market volatility does not have any long-term implications on the economy. Bouts of speculation keep the market players interested, while investors continue to search for value plays and encouraging corporate earnings reports. The underlying fundamentals of business activity remain sound and safe for long-term investing.

Metals and Mining

The recent volatility in the stock market has pushed gold prices up as flight to safety continued. Gold recovered some of its mid-month attrition and ending at 4.4% off its year-to-date high. It opened Monday and traded at $1.864 per ounce before correcting to $1,836 on Wednesday in light of the growing strength of the US dollar. On Thursday the metal began covering from its descent, remaining below its resistance level at $1,860 as initial optimism about hope for an economic stimulus appears to be discounted. Silver traded at $28 an ounce, attracting the interest of retail investors who targeted GameStop over the week. The market volatility weighed as well on the metals sector, causing it to give back earlier gains by midweek.  By 9:42 am on Friday, silver was trading at $27.17 per ounce.

During the closing week of January, platinum showed volatility and broke down to $1,043 per ounce, levels which it had not seen since early in the month. The metal recovered somewhat later in Friday trading, buoyed by the recovery in gold and silver. It rebounded from an intraday high of $1,100 to settle at $1,082 at 9:48 a.m. Palladium, on the other hand, continued on its downward trend since early in January after its year-to-date peak of $2,364 per ounce. It has since then dropped by 5.7% off its high, trading at $2.221 at 9:51 am Friday. The rest of the base metals appear to continue on their downtrend as they are weighed down by the improving dollar, except for tin which continues to remain strong. Copper fell from $7.984.50 per tonne earlier in the week to $7,778.50, improving slightly to $7,814 by Friday. Nickel closed the week at $17,580, zinc at $2,546, and lead at $2,009.50 per tonne.

Energy and Oil

Oil prices traded flat for most of the week, although it ended Friday slightly up from one day earlier, on positive news of more vaccine supply with the possible release of Johnson & Johnson and Novavax into the market. Oil companies are expected to post earnings results; Chevron was the first to announce its earnings loss during the past week, although other companies may be more optimistic in light of help provided by the OPEC and Big Pharma. There was some initial reaction concerning Biden’s order that the U.S. government switch over its 645,000-vehicle fleet to electric (EVs) made with union labor and at least 50% of their parts made in America. This was found to be non-executable in the near future, however, as no such EV currently exists. EVs are built with a high percentage of imported components, and Tesla, the most successful EV manufacturer, is not unionized. GM announced that by 2035 it aims to produce zero-emission cars and trucks, and be fully carbon-neutral by 2040, although critics feel that these goals are largely aspirational and unrealistic.

In the meantime, oil lobbyists are attempting to build an alliance with ethanol producers to mount a front against the new administration’s push towards EVs; so far, the effort has not been successful. At the same time, Standard and Poor’s (S&P) Global Ratings announced that it may cut the credit ratings of several oil majors based on climate and “energy transition” risk. The credit-rating agency believed that the transition to other forms of energy, price volatility, and weaker profitability increase the risk for oil and gas companies. In another order, Biden ended the financing of fossil fuel projects abroad. In the past five years, the U.S. has invested billions of dollars in oil and gas projects, such as LNG in Mozambique, the Vaca Muerta shale in Argentina, and financial support for Pernex, all of which are to be terminated.

Natural Gas

Spot prices for natural gas increased in the past week at most locations. The Henry Hub spot price ascended to $2.71 from $2.42 per million British thermal units (MMBtu) during the period January 20 to 27. At the New York Mercantile Exchange (Nymex), the February 2021 contract price expired on Wednesday at $2.702/MMBtu, higher by $0.16/MMBtu. The March 2021 contract price went up to $2.720, an increase of $0.19/MMBtu. The 12-month strip average from March 2021 through February 2022 futures contract price increased by $0.14/MMBtu to $2.915/MMBtu. Working natural gas stocks totaled 2,881billion cubic feet (Bcf) for the same week, amounting to 3% above last year’s corresponding level and 9% more than the preceding five-year average for the same week. Net withdrawals from working glass for the week totaled 128 Bcf.

At Mont Belvieu, Texas, the natural gas plant liquids composite price dropped by $25/MMBtu to average $7.10/MMBtu for the week. Propane, butane, and isobutane prices slid by 6%, 5%, and 4% respectively. The natural gasoline price rose by 1%, while the ethane price remained unchanged over the week. For the week ending January 19, the number of oil-directed rigs rose from 287 to 289 and the natural gas rig count increased from 85 to 88. This brings the total rig count to 378.

World Markets

European shares continue to descend due to continued pandemic concerns and fear in the delay of coronavirus vaccine distribution. The pan-European STOXX Europe 600 Index closed the week 3.11% down, while Germany’s Xetra DAX Index, France’s CAD 40, and Italy’s FTSE MIB slumped 3.18%, 2.88%, and 2.34% respectively. The UK’s FTSE 100 Index also declined by 4.30%. The European Commission committed to allowing European Union (EU) members to block the exports of vaccine doses if their purchase orders had not yet been completed. Production shortfalls in Pfizer and Astra Zeneca prompted a scale-back in inoculation programs in Spain, Germany, and France, a situation that may prevail until the second quarter when vaccine availability is expected to improve.

Fourth-quarter GDP reports in the European economies showed overall resilience, creating optimism that the region may avoid a deeper recession. Germany’s GDP expanded by 0.1% resulting from strong exports and construction activity. Spain’s economy expanded unexpectedly by 0.4% partly due to increased household consumption. France’s GDP by 1.3% in the fourth-quarter, which was still better than the expected 4.1% fourth-quarter contraction. Improvements were attributed to robust fourth quarter exports, strong investment in business, and rising consumer spending. Germany, on the other hand, downgraded its 2021 GDP growth forecast to 3% from a previously estimated 4.4% in light of continuing lockdowns. In Italy, political uncertainties prevail as Prime Minister Giuseppe Conte steps down after losing a parliamentary.

Japan’s stock market fell during the week. The Nikkei 225 Stock Average dropped 3.4% to close the week at 27, 663.39, although the blue-chip index remained over its year-to-date level by 0.8%. The Japanese government approved a third supplementary budget amounting to JPY 19 trillion (equivalent to US$ 185 billion) to strengthen measures to head off the third coronavirus wave.  Chinese stocks fell for the week due to monetary concerns. The country’s central bank drained US$12.1 billion in liquidity from the financial system to stem a possible financial asset bubble. The Shanghai Composite Index dropped by 3.4% and the large-cap CSI 300 fell 3.9%. Economic news was more optimistic with industrial profits rising 20% in December from its corresponding level last year, increasing 4% for the year after a decline in 2019. The country celebrates its Lunar New Year next month, with tighter restrictions on traveling and social gatherings due to Covid.  

 The Week Ahead

About 22% of the S&P 500 companies are scheduled to release their earnings reports in the coming week, bringing the earnings season to full swing. Important economic data is also scheduled to be released, including the ISM Purchasing Managers Index and the January jobs report.

Key Topics to Watch

• Markit manufacturing PMI (Final)
• ISM manufacturing index
• Motor vehicle sales (SAAR)
• Housing vacancies
• ADP employment report
• Markit services PMI (final)
• ISM services index
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Productivity
• Unit labor costs
• Factory orders
• Nonfarm payrolls
• Unemployment rate
• Average hourly earnings
• Trade deficit
• Consumer credit

Markets Index Wrap Up

Stock Markets

The week ended with equities slightly short of their record highs as investors continue to weigh the prospects posed by recent developments. Investor ambiguity was driven by the anticipated $1.9 trillion fiscal-stimulus bill and its possible impact on the long-term sustainability of the government’s deficit spending. Worsening news on the coronavirus situation also caused some concerns, tempering the early optimistic surge on the vaccine rollout. Nevertheless, week-on-week the stock market sustained solid nine-month gains, capping off the strongest surge from post-election to inauguration day since 1932.  The coming week will provide further direction with 23% of the S&P 500 releasing reports on company earnings and fundamentals.

U.S. Economy

The housing sector continues to demonstrate strength as starts and permits continue their ascent and demand remains robust due to persistently low rates despite short-term pullback in mortgage and refinancing. Overall, hopes for a full economic recovery and the expectations of a return to normalcy are buoyed by announcements of more, and more effective, vaccines coming to market. There remain looming concerns of a possible increase in tax rate under the Biden administration, although the general sentiment is that these will be postponed until later in the year after recovery has stabilized.

• Much of the expected recovery and continued economic growth hinges on the successful vaccine roll-out, therefore any news that may detract from the vaccine program may cause volatility in the markets. Effective vaccine distribution is crucial to a return to normal consumer spending and demand-led resurgence of service industries, including hospitality and leisure. Opening up of these industries will further alleviate the labor situation caused by the pandemic lockdowns.
• Corporate earnings are poised to grow as a result of the upturn in the business cycle. The GDP is expected to grow 4% to 5% in 2021, while the softening of the U.S. dollar by 7% against foreign currencies may enhance trade competitiveness, enhance revenue growth and enable an increase in profit margins. A growth rate of 20% in 2021 appears feasible for corporate earnings.
• Due to the strong gains already made, a period of consolidation is possible and even expected as the markets price in the improvement in corporate fundamentals. Near-term investor optimism may be moderated somewhat by news of more infectious COVID-19 mutations that are prolonging European shutdowns, and the degree to which legislative processes deliver on the promises of the new administration.

The market’s bullish run is still expected to continue in the long term although occasional volatilities may occur in response to possible policy changes and uncertainty about how they may impact future economic developments.

Metals and Mining

Gold trended upward to reach a two-week high, buoyed by a flight to safe assets as the Biden stimulus was speculated to create inflationary pressures that would pull the greenback further downward. After Biden’s inauguration on the 20^th of January, gold rose to $1,874 per ounce before correcting to $1,850 two days later. It does not seem likely that gold will soon test its early-year high of $1,950, as delays in vaccine shipments and the emergence of a faster-spreading coronavirus strain dampened investor hopes of a faster recovery. Silver also chalked up a slight gain for the week to trade at $25.91 per ounce by mid-Thursday. Year-over-year, silver gained considerably, trading at $24 to $25.50, at about 2013 prices. Gold was priced at $1,853.11 while silver traded at $25.39 at about 10:52 am Friday. Platinum and palladium ended the week higher largely due to fears of an interruption in production. Platinum was trading at $1,098 and $2,248 an ounce at 11:10 a.m. on Friday.

Among the base metals, the price of copper rose to $8,000 per tonne which is still below its year-to-date high of $8,146. There continues to be an upside to the metal, though, as worldwide demand for copper will likely be pushed by a recovering global economy in a post-pandemic scenario, sustained industrial growth, and strong demand from China. Zinc rebounded during the week from a two-month low on Tuesday to reach $2,707 on Friday, although future prospects for this metal remains cautious due to continued lockdowns and logistical disruptions. Nickel tested its 18-month high on Thursday at $18,370 per tonne. Lead ended the week at $2,040 from its Monday trading price of $1,974 per tonne.

Energy and Oil

Oil closed down for the week as Brent slid to below $55 per barrel and WTI to $52. Negative news came in the form of increased travel restrictions in Shanghai, Hong Kong and the UK, as well as a temporary rise in the US greenback. Contributing to the pessimism is the first-day executive order by President Biden canceling permits for the Keystone LC pipeline and rejoining the Paris Climate Accord. In light of the policy changes, the Chamber of Commerce and the American Petroleum Institute (API) signaled openness to reimplement methane regulations on oil and gas operations, which were previously held to be applied on a voluntary basis. Biden has also placed a 60-day moratorium on new drill leases on federal lands, a move seen to have little impact on current supplies in the industry as it has stockpiled leases enough to last for years. The new administration is expected to implement policies away from oil and gas and more towards renewables.

Due to the drop in crude oil prices, energy shares likewise fell sharply on Thursday. Oil prices are expected to find support in the anticipated stimulus package in the United States, coupled with the expected inability of Iranian oil to reenter the global market. Suriname is drawing international attention as possibly the next big oil boom with its low-cost exploration and production well into the current year. China’s electricity consumption with rose suddenly within a short period due to the cold spell drove spot gas prices higher in the regional market. Concerning renewables, China increased its wind capacity last year by 72 GW which is more than double over its earlier record. It also added 48 GW of new solar energy capacity. The combination tops 84 GW, the country’s previous record for all renewable energy installations in just one year.

Natural Gas

The U.S. Energy Information Administration (EIA) forecasted an increase of 98-cent per million British thermal units (Btu) in the annual natural gas spot price, to average $3.01 per MMBtu in 2021. The higher natural gas prices are expected to result in increased production of dry natural gas through the second half of 2021, from a monthly low of 87.3 cubic feet per day (Bcf/d) in March 2020. According to EIA expectations, dry natural gas production will descend to an average of 88.2 Bcr/d in 2021 from an average 90.8 Bcf/d in 2020, due to a reduction in natural gas consumption in the electric power sector. Reduced demand for natural gas was driven by the higher prices of natural gas coupled with increased capacity in renewables generation. Natural gas consumption will increase moderately resulting from economic growth in the residential, commercial and industrial sectors. Natural gas imports will exceed exports over the next two years, with natural gas pipeline exports increasing by 0.6 Bcf/d to 8.6 Bcf/d, and liquefied natural gas (LNG) exports increasing by 2.0 Bcf/d to 8.5 Bcf/d in 2021.  

World Markets

The STOXX Europe 500 Index moved sideways for the week on the back of continued concerns about coronavirus and doubts about the US economic stimulus. Germany’s Xetra DAX Index increased by 0.63% while Italy’s FTSE MIB declined 1.31% and France’s CAC 40 slid 0.93%. The UK’s FTSE 100 Index dropped 0.60%, constrained by fears of stricter coronavirus lockdown measures and the relative strength of the British pound against the US dollar. The European Central Bank (ECB) signaled that the entire amount available in the pandemic emergency bond-purchasing program may not entirely be used, causing core eurozone government bond yields to rise. Peripheral eurozone bond yields also trended up in tandem with core markets, although the trend eased at the news that Italian Prime Minister Giuseppe Conte won a confidence vote in Parliament. Gilt yields rose due to good news released by the Bank of England (BOE) about the UK’s economic recovery and the UK’s vaccine rollout.

In Japan, the stock market also remained relatively unchanged for the week, as the Nikkei 225 Stock Average inched upward 112 points (0.4%) to close at 28,631.45, a new weekly closing high, up 4.3% year-to-date. The yen ended almost unchanged at JPY 104 against the US dollar. Japan’s central bank announced that it intended to continue its current quantitative and qualitative monetary easing policy in keeping with its price stability target of 2% core inflation. The growth domestic product (GDP) growth forecast was further adjusted by the monetary policy committee to -5.5% from -5.4%, while its growth target for fiscal year 2021 was increased from 3,6% to 3.9%. Finally, the customs data indicated that for the first time in two years, Japan’s exports increased due to a growth in plastics, nonferrous metals, and semiconductor production equipment, offsetting a decrease in auto-related production equipment.

Chinese stocks surged on strong economic data and the prospects of improved US-China economic relations under the new administration. The Shanghai Composite Index increased by 1.1% to 3,606.8 while the CSI 300 large-cap index advanced 2% to 5,569.8. The three Chinese companies ordered delisted from the New York Stock Exchange (NYSE) have appealed the decision and expect a response in the next 25 days. The yield on the country’s sovereign 10-year bond remained flat despite strong December economic data. In currencies, the renminbi-to-dollar exchange rate remained stable.

The Week Ahead

Expected during the coming week are important economic data that includes personal income, consumption growth, and inflation breakdowns.

 Key Topics to Watch

• FHFA house price index (year-over-year change)
• S&P Case-Shiller home price index (year-over-year change)
• Consumer confidence index
• Durable goods orders
• Core capital goods orders
• FOMC meeting announcement
• Jerome Powell press conference
• Initial jobless claims (regular state program, SA)
• Continuing jobless claims (regular state program, SA)
• Gross domestic product
• Advance report on trade in goods
• New home sales
• Leading economic indicators.
• Personal income
• Consumer spending
• Core inflation
• Employment cost index
• Chicago PMI
• Consumer sentiment index (final)

Markets Index Wrap Up

Stock Markets

After hitting record highs in the first trading month of the year, stocks corrected by more than one percent at the close. Earnings reports were released by JP Morgan and Wells Fargo at the start of what analysts anticipate will be a robust earnings season. The much-awaited fiscal-stimulus package was indeed announced by President-elect Joe Biden to the tune of $1.9 trillion, intended to mitigate the COVID-19 impact. Fears of an extended economic lockdown spread among the investing community as the new highly-contagious coronavirus strain appeared over several states and the vaccine roll-out failing to meet expectations. Further need for economic stimulus is signaled by a slowing job market as initial claims spiked during the two weeks ending January 9. The current short-term outlook looks volatile, however, the classic response of the stock market to the coming fiscal and monetary stimulus is expected to be optimistic and would only be further bolstered by resolution of the current delays in vaccine distribution. 

U.S. Economy

As the stock market appeared to lose its steam after testing historic highs, fixed income and Treasury yields drew the attention of investors during the first two trading weeks of 2021. Although the benchmark 10-year Treasury yields started the new year at what turned out to be the lowest level to start a new year in history, it has steadily climbed to test the highest level it has been since March before ending Friday on a slight correction. Future potential higher yields for investors poses some interesting prospects:

• Inflation for December increased only slightly, registering a comparatively modest price index gain of 1.6% compared to 2.2% the year before, with the exclusion of energy and food. Expectations for future inflation, though, appears to be trending up for the first time in years, as indicated by the 10-year breakeven rate reaching levels unseen since 2018.
• The announced fiscal stimulus plan amounting to $1.9 trillion represents approximately 9% of GDP. The economic plan covers added relief checks to households, increased unemployment benefits, an expansion of minimum wages, funding for the COVID-19 vaccine, and expanded aid to states and local governments. The increased spending is expected to strengthen recovery efforts while adding to the already growing bond supply and moving yields higher.
• Under a scenario marked by a possible sudden increase in long-term yields, growing inflation, and a resulting tightening of monetary policy by the Fed, valuations may come under pressure resulting in greater market volatility.

In a strong interest rate regime, it is appropriate for investors to allocate a major proportion of their portfolio to bonds and other fixed-income investments. Certain sectors in the equities market will continue to remain viable and attractive such as the technology sector which generally outperforms the market due to strong earnings. Investments that are economically sensitive and that have recently lagged, such as small-cap stocks, can also provide buying incentives.

Metals and Mining

After dropping from a year-to-year high during the week, gold prices recovered to show modest gains on January 15^th. It was priced at a 60-day high of $1,942 per ounce on January 4^th but gave up its gains on January 11^th when it slid 5% to $1,834.70. Nevertheless, analysts expect a further move upward due to the anticipated $1.9 billion stimulus package. Gold is also expected to gain from a possible stock market pullback and inflationary pressures as a result of investors’ flight to safety. By 10:02 am EST on Friday, gold was trading at $1,840.10 per ounce.

Silver continued on a slow uptrend during its second straight week in an attempt to test its five-month-high of $30 per ounce set in early January. Continued volatility has kept the metal below the $26 level for the week, trading at $25.01 at 10:10 a.m. on January 15^th. In the meantime, platinum moved closer to its three-year peak of $1,114 per ounce on Thursday, while palladium ticked up slightly. Supply challenges out of South Africa during the year are bound to benefit the prices of both metals, according to analysts. Palladium traded at $2,284 while platinum was priced at $1,075 as of 10:45 p.m. on Friday.

Base metals are mixed for the week, responding to both corrective pressure and buying interest due to concerns that coronavirus lockdowns may disrupt supply chains and cause shortages. Copper prices traded at $7,951 per tonne which represents a 2.3% slide from its January value of $8,146, an eight-year high. It recovered slightly on Friday morning to trade at $8,002The week’s trades saw zinc at $2.716 and lead at $2,040, while nickel rose 4.5% due to supply disruptions from the Philippines, the world’s second-largest nickel exporter. 

Energy and Oil

Market sentiments weighed heavily on oil prices as China reported its highest COVID-19 case count in months. OPEC upgraded its forecast for U.S. oil production to increase by 370,000 bpd from a previous expected 71,000 bpd. Total decides to withdraw from the American Petroleum Institute, the most powerful lobby in the industry due to API’s opposition to methane regulations, EV subsidies, and carbon pricing. Total likewise took issue with API’s political contributions to U.S, politicians who oppose the Paris Climate Agreement. In related developments, Saudi Arabia has announced a reduction in its sales of oil to 11 or more Asian refineries, in compliance with its commitment to reduce oil production by 1 mb/d.

Regarding renewables, companies in the solar and wind power industries rose in value, prompting the likelihood of a growing bubble in clean tech stocks. Major investments in clean energy are also foreseen in a possible sequel package to Biden’s stimulus plan, which ay likely to take place in the spring. It bears watching whether the rally in clean energy will remain sustainable in the long term.

Natural Gas

Skyrocketing LNG prices due to seasonally cold weather have expanded beyond Asia to other regions of the world. Consumers are being forced to cut back  Global markets are experiencing consumer cutbacks due to supply shortages, further undermining the spot market and possibly driving players to seek greater stability through oil-linked contracts. In Mozambique, a chronic insurgency poses risks to Total’s $23 billion gas production and LNG export project, which halted work due to nearby attacks. The same situation poses risks to ExxonMobil’s planned $33 billion facility. Finally, the Port of Cork in Ireland allowed its agreement with NextDecade Corporation for an LNG import terminal to expire due to concerns surrounding methane emissions. While NextDecade has been experiencing setbacks for similar projects in Europe it still is currently in plans for an LNG export terminal in Texas.

World Markets

A resurgence in coronavirus outbreaks in Europe tempered optimism in a prospective Biden stimulus package. The pan-European STOXX Europe 600 Index slid 0.81% lower; the German Xetra DAX Index declined by 1.86%, Italy’s FTSE MIB by 1.81%, and the French CAC 40 by 1.67%. The UK’s FTSE 100 Index lost 2.00% in response to economic data indicating that its economy contracted in November as a result of a more stringent coronavirus lockdown.  Political uncertainty in Italy prompted cored eurozone government bond yields to fall and peripheral eurozone bond yields to climb. UK gilt yields rose for the first half of the week but gave back their gains in the second half to end down overall due to coronavirus concerns, mirroring trading patterns in core markets.

Shifting focus to the Asian markets, Japan’s Nikkei 225 Stock Average surged 380 points (1.4%) to end at 28,519.18, a new decades-long record weekly closing high, The large-cap TOPIX Index moved sideways while the TOPIX Small Index descended. The resiliency of Japan’s markets can be attributed to loosened government lending policies and financial support during the pandemic. Chinese stocks gave up their gains as nine other Chinese companies were added to the U.S. investment blacklist on Thursday, bringing the total of blacklisted companies to 44. These companies were cited for their ties to the Chinese military. The large-cap CSI 300 Index slid by 1.4% while the Shanghai Stock Exchange Composite Index fell by 0.6%, on jitters that Alibaba and Tencent might likewise be blacklisted. Further disappointing news surrounded Sinovac’s coronavirus vaccine CoronaVac, which was found by Brazilian scientists to barely exceed 50% efficacy, far below initially reported levels.

Brazil’s Bovespa Index descended 3.7% on news that the country’s 2020 inflation was 4.5%, a four-year high, with core inflation likely to extend to 5% by midyear due to price shocks in the food and electricity sectors. Turkey’s BIST-100 Index also declined, by about 1% due to a reported current account deficit of $35 billion from January to November 2020.   

The Week Ahead

Monday is Martin Luther King Day in recognition of which markets will remain closed. For the rest of the week, economic data to be released will include building permits, housing starts, existing home sales, and PMI breakdowns.

Key Topics to Watch

• National Association of Home Builders
• Inauguration of Joe Biden as president
• Initial jobless claims (state program, SA)
• Continuing jobless claims (state program, SA)
• Housing starts
• Building permits
• Philadelphia Fed Index
• Markit manufacturing PMI
• Markit services PMI
• Existing home sales

Markets Index Wrap Up