Market Update: June 14, 2021

Photo by Christian Thöni on Unsplash

Economic data for the week included stronger consumer inflation results, as well as higher job openings, and continued decline in the number of weekly jobless claims.

U.S. and European equity markets saw further gains, with accommodative policy and tempered longer-term inflation expectations swaying sentiment. Bonds earned positive returns as well, along with falling long-term interest rates. Commodities ticked higher, largely due to crude oil and natural gas prices.

The strong CPI report on Thursday was a non-event for markets, perhaps due to the moderation in pace compared to the very strong April numbers. ‘Some’ inflation now appears baked into market expectations, with the status quo assumption of ‘transitory’ higher prices being accepted for the time being.

Sector results were largely led by the growth group, with healthcare, technology, and consumer discretionary all up over a percent—these were aided by lower interest rates that tend to aid ‘longer duration’ equities (those with higher expected long-term growth and lower dividend payouts). Specifically, healthcare was boosted by Biogen’s newly FDA-approved Alzheimer’s therapy (despite questions over the efficacy results, and an expected retail price of $56,000/year). On the other hand, more cyclical financials, industrials, and materials each lost upwards of -2% as the ‘value’ trade lagged. Real estate assets gained several percent as continued improvement in fundamentals and lower financing rates helped sentiment.

The U.S. Senate passed the United States Innovation and Competition Act of 2021, with support from both parties, in a long-awaited effort to provide research funding to technological and scientific endeavors. This is intended to help combat the growing strength of China in these areas, by limiting their ability to work with American research partners, as well as provide a more immediate shot in the arm to the supply-constrained semiconductor industry. Despite not being widely advertised, the U.S. government has historically played an important sponsorship role in science/technology over the decades, so this is really a revamp after a bit of a lapse in their involvement.

Interestingly, the prior weekend, the group of G7 nations reached an agreement on a global minimum tax of 15%. This concept has been years in the making, and is intended to prevent multinational companies from moving profits from one subsidiary to another on their balance sheet in order to take advantage of lower-tax jurisdictions (like Ireland, for example). This could get a bit complicated, and gets to the question of whether profits should be taxed on domicile of headquarters or where revenue is actually earned, but does at least prevent the revenue-negative proposition for countries losing firms to the lowest tax rate bidder. There could be pushback on this from the corporate side, as well as governments not wanting to cede tax rate control to a ‘global’ rulemaking body.

Foreign stocks in developed markets performed largely in line with domestic equities, driven by Covid reopening expectations and fiscal/monetary stimulus. The ECB meeting last week ended in promises of continued strong bond purchases for the coming quarter. While this was taken positively by markets, the pandemic situation in the U.K. remained dicey, with broader reopenings delayed due to the spread of a Covid variant. The smaller emerging equity market in Peru was especially hard-hit early in the week, down -10% overall following the close election results featuring the strong showing of a leftist/populist candidate for president. On the other hand, a Mexican election was expected to keep current moderate policies largely in place.

U.S. bonds experienced one of their strongest weeks in the last few months, as interest rates continued to moderate on the longer end of the treasury yield curve. Tighter credit spreads also held investment-grade corporate bonds fare best on the week, although all bond groups ended positively. Foreign bonds were flattish in developed markets, but USD-denominated emerging market debt gained nearly a percent last week in keeping with strength in risk assets broadly.

Commodities on average rose slightly last week, despite a stronger dollar, as gains in energy and industrial metals offset declines in agriculture. The price of crude oil gained another 2% to just under $71/barrel, while natural gas prices rose over 6% due to hotter weather across the central U.S. (One of the primary natural gas price drivers is cold and hot weather extremes.) In petroleum-related news, the proposed Keystone XL pipeline project was officially terminated under environmental and Presidential pressure. While this was seen as an environmental victory, it could eventually exacerbate the supply deficit that could reduce U.S. energy independence, and increase reliance on OPEC and other producing nations.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.