Defensives shine as volatility returns
- Global equities rose 0.8%, taking the YTD rally to +10% in a volatile week as crypto assets sold-off and the Fed talked ‘tapering’. Defensive assets, gold, real estate and healthcare equities led, whilst energy and industrials lagged as VIX volatility index was over 20.
- IPO boom continued, with Oatly and Squarespace last week. 20-yr high activity levels are stoking some indigestion, but balanced by share buybacks return, annualizing at US$600bn and the largest US buyer.
- Markets are well-supported, with growth offsetting likely lower valuations as inflation and bond yields rise. Reflation favors commodities, cyclical sectors and international markets vs technology and the US.
The Fed ‘tapering’ impact limited
- The Fed acknowledged the outlook for ‘tapering’, or reduction of US$120bn/month bond purchases, in its latest meeting minutes. We expect this by year end as a prelude to higher interest rates. Markets are pricing an 80% chance of higher rates next year.
- Equities have survived spiking US 10-yr yields YTD, UK and Canada tapering, and 2013 ‘taper tantrum’.
Building international momentum
- European equities are the best recent performers as vaccination rates accelerate and economies re-open. This has room-to-run with cheaper valuations, and more cyclical stock indices than the US, and with Friday’s PMI surprise highlighting growth rebound.
- Parts of emerging markets (EM) are also attractive, and can be owned directly, but also indirectly, with many global companies with greater liquidity, better governance, and often cheaper valuations. Spain’s ESP35 index is heavily LatAm focused, for example.
- US stocks with high overseas revenues saw near 2x the Q1 revenue growth of domestic-focused peers.
Crypto assets sharp sell-off
- Crypto assets saw a sharp sell-off blamed on new China restrictions, US regulation proposals, and leveraged positioning. Bitcoin (BTC) closed the week down 28%, and ethereum (ETH) down 41%.
- High volatility is not new to crypto and despite the sell-off it remains the best performing asset-class YTD, benefitting from a broadening investor base, use cases, and with higher institutional involvement.
Gold starting to shine again
- №1 commodity importer China stepped up effort to ‘talk down’ prices after their YTD surge. This causes volatility but longer impact limited by demand growth and little room to cut stockpiles or taxes, or boost FX.
- Gold saw new interest as a typically uncorrelated and inflation-defensive asset. Investment demand (-70% yoy in Q1) is seeing a comeback and jewelry demand (+50% in Q1) rebounding, but competition is also mounting, from bond yields and ‘digital gold’.
The week ahead: a quieter outlook
- Focus on Fed’ favored inflation metric (April PCE est. +0.7% mom) and accelerating European recovery. (German Ifo business sentiment index up to est. 98).
- Leading chipmaker Nvidia reports Q1 (EPSe +80% yoy) amidst surging demand and shortages (Wed).
- China YTD industrial profits (est. +137% yoy) as earnings forecasts ease as rebound softens (Thu).
- ‘Consensus by Coindesk’ crypto conference (Mon).
Written by a team of experienced financial analysts at eToro.
This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation. Past performance is not an indication of future results.