3 Minute Market Update 24th January 2021
Markets up as tech stages a comeback
Banks beat bullish expectations but fall nonetheless
Soft commodities and the reflation trade pause for breath
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The Week That Was
On the surface (at a country level) markets were fairly calm last week and markets were up by 1-2% around the world as Biden’s inauguration passed peacefully and his stimulus plans started take shape. Below the surface (looking at underlying sectors) things were much more interesting and as we have come to expect recently the real story was about value vs growth and sentiment. World growth indices were up 4% while value stocks were flat. Tech was the epicentre of the positive sentiment with Apple and Microsoft surging 9% and 6% respectively for reasons that are quite difficult to discern (they have provided no guidance and the market had appeared to have already priced in a fairly lofty earnings expectations for next week's results (as revenue is expected to hit a record $100bn for the last quarter). Other so-called FAANG stocks like Netflix, Google and Facebook were also up strongly ahead their results announcements next week. Even more fascinating was the intersection of this sentiment with known fundamentals. For instance, at the other end of the spectrum banks, including JP Morgan, Citigroup Bank of America and Morgan Stanley, all released results that were well ahead of similarly optimistic expectations in the past week. They have all fallen by 5-10% since they announced their results, admittedly having had a great run over the last three months. Talk about ‘buy the rumour, sell the fact’. At the end of the day this was more about sentiment and a pause in the ‘Reflation’ trade which has been so dominant recently and predictably energy stocks were also down.
With the local earnings season not starting in earnest until mid-February it was quieter in Australia, at least amongst the largest stocks as the miners and banks were essentially flat and range bound. Overall though the rest of the market had a good week with healthcare (mainly CSL) bouncing while local tech stocks like Afterpay and Wisetech enjoyed the bullish mood surrounding tech stocks globally. However, the biggest contributors overall were locally focused consumer discretionary stocks such as Wesfarmers, Aristocrat Leisure, Dominos and Tabcorp which may owe something to the lack of locally transmitted COVID cases across the country last week.
Bond markets were also reasonably calm with local government bond yields here and in the US oscillating in a 0.06% range and remaining just above 1% (through even that tiny variance has become somewhat significant in the pressure cooker low-rate environment that we now find ourselves in). That left government bond prices down slightly while corporate credit made modest gains.
Amongst commodity markets the only significant move was downwards for most soft commodities with wheat, corn and soy beans down 5%, 6% and 9% respectively, having risen 15%, 30% and 40% over the last year. With most of the rise having occurred since September, this perhaps underscores the point that in the last week we have seen at least a pause in the ‘reflation trade’. Well, that may explain the cyclical and industrial side of things but for growth stocks it is anyone's guess.