21.05.2021 - Global equities were little changed on the week after experiencing a sharp selloff at midweek followed by a late-week recovery. The nominal yield on the US 10-year Treasury note was steady at around 1.63%, but the real yield rose nearly 10 basis points to -0.83% as inflation breakevens eased. The price of a barrel of West Texas Intermediate crude oil fell $2.25 to $62.80 from last Friday while volatility, as measured by the Cboe Volatility Index (VIX), rose to 20.6 from 19.5.
MACRO NEWS
Fed thinking about thinking about tapering
The minutes of the April meeting of the Federal Open Market Committee showed that a number of members of the US Federal Reserve Board wanted to discuss curtailing bond buying at future meetings. In recent months, Chair Jerome Powell has said that the Fed isn't even thinking about thinking about" tapering quantitative easing, so April's discussion was a notable shift. Fed officials have said that they will communicate any change in the pace of asset purchases well in advance, and markets that [process will be spelled out this summer. However, the FOMC agreed that the economy was still far short of its longer-run goals.
Strains between US and EU ease
The United States and the European Union declared a trade truce of sorts this week, beginning talks aimed at avoiding a scheduled 1 June escalation in tariff rates linked to the 2018 imposition of levies on steel and aluminum. Separately, the administration of US President Joe Biden announced that while it remains opposed to the Nord Stream 2 natural gas pipeline between Russia and Germany, if has waived sanctions against the company leading the project and on its chief executive. German officials welcomed the move, calling it a constructive step. European officials also welcomed a move by the Biden administration to lower to 15% from 21% its proposed minimum global corporate tax.
European firms join buyback trend
European companies have traditionally favored dividends over buybacks, but after preemptively issuing close to $1 trillion in corporate debt in the early days of the pandemic, many firms are now redeploying that cash by buying back shares. French bank Société Générale estimates that European buybacks will rise 25% above their five-year average this year to around €150 billion. Firms are reluctant to issue dividends that may later have to be cut as the medium-term outlook remains uncertain despite the receding pandemic.
UK economy bouncing back
Retail sales in the United Kingdom rebounded strongly in April as the easing of coronavirus restrictions gathered pace. Sales jumped 9.2% as nonessential shops reopened, doubling the pace expected by economists. As well, the composite purchasing managers' index surged to 62 in May, its highest level since at least 1998. Additionally, factory orders expanded at a record pace in May, the Confederation of British Industry reported, while business confidence reached an all-time high.
Wild week for crypto
Fears that inflation could spur tighter monetary policy coupled with increased regulatory scrutiny helped set cryptocurrencies on a wild ride this week. At one point, more than $1 trillion in market capitalization was wiped out as prices for a variety of tokens plunged. Bitcoin, the largest coin by market cap, slipped below as $35,000 before steadying around $40,000. Bitcoin traded close to $65,000 just over a month ago.
QUICK HITS
A rapidly reopening US economy has given the services sector a strong boost, preliminary purchasing managers' data showed on Friday. The Flash Markit services PMI reading for May jumped to 70.1 from 64.7 in April.
Bank of America estimates that central banks have purchased $1 billion in assets every hour since February 2020.
Retail sales in China rose 17.7% from a year ago in April but fell short of forecasts for a 24.9% advance. Sales rose 34.2% in March. The People's Bank of China said that the foundation of the economy is not yet solid and that the economy is operating below prepandemic levels.
Goldman Sachs estimates there have been $504 billion in announced US stock buybacks this year, a record pace.
Bank of America's May Global Fund Manager Survey called investor sentiment unambiguously bullish, with a record 69% expecting above-trend growth and inflation. Inflation is now viewed as the biggest tail risk to the markets, overtaking taper-tantrum fears.
US housing starts fell 9.5% in April as surging materials costs caused some builders to postpone new projects. The National Association of Homebuilders reported this week that building materials prices are up 12% over the past year.
The European Union announced that it will open its borders to vaccinated tourists this summer.
The European Central Bank's financial stability report warned this week that if more upward US inflation surprises cause markets to price in an earlier Fed tightening, the spillovers from a US equity market repricing could be substantial. The ECB also cautioned that a US correction could tighten Euro-area financial conditions.
The Conference Board's Q2 CEO Confidence Survey surged to a record 82. The figure stood at 34 a year ago during the pandemic's initial phase. Strong CEO confidence suggests strong hiring and capital expenditures lay ahead.
Consumer prices in the eurozone rose 1.6% year over year in April, up from 1.3% in March. In the UK, prices rose 1.5% in April, a jump from the 0.7% March rate.
As more US states cut back enhanced unemployment benefits, jobless claims fell to a pandemic low of 444,000 this week.
The Fed said this week that it will publish a paper on the potential for a US digital currency this summer. Chair Jerome Powell said the paper will be the beginning of a thoughtful and deliberative process and that a Fed-issued digital currency would ideally serve as a complement to, rather than a replacement for, cash and bank deposits.
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