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Market Watch Weekly | 12 February 2021| Equity Market Perfection

Aarinder Lidder - Feb 12, 2021

Welcome to our weekly newsletter, where I will be discussing what's been going on in investment markets and what to look out for in the days and weeks ahead. The title of this newsletter eludes to perfection and that's because we saw something interesting in equity markets in the US last week. We saw a perfect week on S&P 500. In which I mean every day of the week we saw the S&P 500 close at a new 52 week high.

It’s an unusual event and obviously it's something that's quite bullish and positive and you will be perhaps not surprised therefore to hear that the S&P 500 was hitting new all-time highs, as was the Dow Jones as well as the NASDAQ.  Equity markets in the US have been in a very risk on mode, we had a pull back at the end of January but we've rebounded strongly and that's been reflected around the rest of the world to a certain extent, but perhaps not so much in Europe.

The main driver behind that optimism has obviously been the hope of more fiscal and monetary stimulus around the world, particularly in the US. That's been a positive driver for equity market as well we've had earnings season that's been ongoing. The earnings reports have been greeted with optimism from investors. They have been better than expected so that has been another driver of course in the background.

 We've got the coronavirus and there are of course problems with the roll out of the vaccine, particularly in Europe. Despite that, there is still this bias towards the upside. Markets are very bullish, in fact, equity markets at the moment across the globe are in a very positive upward trend. It almost feels like nothing can happen to stop this momentum. US markets such as the S&P 500, Dow Jones and NASDAQ, across the board, they've got amongst the lowest levels of shorting the market that we've seen in 17 years.

The positive all-time highs that we're seeing in equity markets in the US, were seeing similar feats elsewhere. The Japanese indexes are at their highest point since 1991. This is obviously 30 years, so we’re seeing this upward momentum pushing higher across the globe.  If you look at the emerging market indices they have been pushing higher because we've seen a bit more weakness in the dollar, so the message for investors has been risk is being rewarded - this means holding equities.

Now if you go across to the bond space it is a different story. They are at levels that we haven't seen since before the vaccine. When the vaccine was first announced, we saw yields spike, but we've even surpassed the levels that we saw when the first hope and optimism surrounding the vaccine occurred. Don't forget when there is optimism about the economic recovery, that tends to be bad for bonds which therefore you see their yield rise.

It's been a pretty poor time to hold bonds, in fact, bonds have not been doing so well because of the risk on nature of markets now. The US 10-year US Treasury got up to about 1.2%, hitting levels we've not seen since the pandemic started over a year ago. We are seeing yields pick up and rally, and that’s negative for any bond holdings that you may have.

It's also interesting to see what's going on in the commodity space, particularly with gold. Gold has had a bit of a rough time. It fell back towards the $1800 level, then broke below that towards the $1750 level. That's going to be a key level for gold. If gold doesn't hold above this level of $1750 then we could see the gold price fluctuate. If it can recapture its 50-day moving average around $1850 and push higher, then we could see the price of gold recover. Gold has underperformed the rebound; we have seen in the last couple of days that it has been because we've seen the dollar start to weaken again. We saw it strengthen too, a bit, but it's starting to weaken which is also driving up the emerging market indices.

We're seeing what we saw at the beginning of January. We are seeing it start to repeat at the beginning of February. It’s a very risk on environment and interestingly these days it seems that people can't talk about gold without talking about Bitcoin. Bitcoin has rallied to new all-time highs. It does feel like we're talking about new all-time highs and a lot of risk assets at the moment. That was partly because Tesla announced they'd bought about $1.5 billion worth of Bitcoin. This therefore pushed the enthusiasm and the price of Bitcoin even higher.

 If you want a snapshot of where the market is right now, I often talk about the fear index; the VIX. That is obviously a measure of expected volatility on the S&P 500. About a week or so ago, towards the end of January, it spiked above 31 which is a sign that fear was starting to drive the market. In four days, last week, we saw the VIX plummet and it's now down to around 21. In fact, the four day fall in the VIX meant that fear was receding. This was one of the biggest falls we've ever seen on record, so you can see at the moment that markets are very much on risk on mode. Investors are piling into equities and it's driving your portfolios even higher at the expense of bonds, which is typical when you see that dynamic between equities and bonds. While we talk about a perfect week, it starts to ask the question, are markets priced to perfection now? Is all the good news already being priced in markets or is this the start of another leg higher in another bull market?  There's a lot to keep an eye on in the coming days and weeks ahead, particularly with gold and the equity indices.

Have a great family day weekend and join us next week for our next newsletter.


Kamal and Indy Lidder