A Rally Undaunted

US equities logged another weekly gain as an apathetic Friday session capped a five-day stretch dominated by upbeat data, including an extraordinary retail sales print.

The economic narrative is unambiguously bullish stateside. To the extent you think it’s a bad omen when everyone is whistling the same tune, you might be feeling a bit perturbed.

There was little evidence to suggest investors were put off by US officials’ decision to “pause” inoculations with J&J’s one-shot vaccine. Although the move isn’t expected to materially impact the potential for herd immunity achievement in the US from the supply side, it could affect the demand side, especially if more adverse events turn up. Many Americans were already reluctant to be vaccinated. The J&J situation doesn’t help when it comes to inspiring confidence among the skeptical.

The country’s caseload continued to move higher, even as vaccinations hit 200 million. Nearly 40% of Americans have received at least one dose. As Bloomberg noted, “it took the US 89 days to administer the first 100 million doses” and just 36 days to deliver the second 100 million. The seven-day average for new infections neared 70,000 late this week (figure below).

Note that the seven-day average is now higher in the US than it was during the summer wave last year. And that’s with 25% of the population fully vaccinated.

Stocks are unbothered by this. The rally was unimpeded.

Bank earnings were solid, to put it mildly. Concerns about loan growth weighed on sentiment though, and Archegos took a $911 million bite out of Morgan Stanley. One thing was clear: Wall Street’s traders and investment bankers performed.

You can never count on earnings beats to translate into immediate gains for bank shares. Goldman stood alone (figure below) after posting blockbuster results.

It was a bizarre week for bonds. Thursday’s eyebrow-raising duration rally left some folks scratching their heads. The assumption was that scorching US economic data provided the impetus for yields to keep rising (and for steepeners to keep working). Instead, 10-year yields ended the week around 1.57%, and that was after Friday’s modest cheapening.

“The rally seen throughout April – culminating most recently with 10-year yields’ attempt at 1.50% — suggests the data will continue to play second chair to the path out of the pandemic for a while longer,” BMO’s US rates team said. “The emphasis on the rare side effects from the viral vectors has pushed back global recovery expectations, although the impact on those in the US has been limited.”

“Treasurys staged an impressive rally despite above-consensus CPI and retail sales for March,” SocGen’s Adam Kurpiel and Subadra Rajappa wrote, in the bank’s weekly. “The story fits with the new fiscal year in Japan and related investor flows, with Japanese accounts selling foreign bonds in February and March and buying since the beginning of April,” they added, reiterating that “for Japanese investors, US Treasurys are now offering an attractive yield pick-up compared to European fixed income, on a FX-hedged basis.”

Bonds’ renewed buoyancy had implications for equities, especially from a style/thematic perspective. The Treasury rally has helped rescue secular growth and other longtime “slow-flation” winners from months of underperformance in the post-election, pro-cyclical macro regime.

“The impact of this MTD duration rally/bull-flattening on equities has been rather intense, because the rally in all things ‘bond proxy’ runs exactly contra to the prior YTD ‘reflation’ trend,” Nomura’s Charlie McElligott said Friday.

The US calendar is essentially empty next week, with the exception of housing data. That suggests earnings will be in the driver’s seat, assuming no family offices implode, no shooting wars commence and no virus mutation proves itself capable of truly imperiling the US recovery.

Note that we almost instinctually think in terms of developed markets + China, with some allowances for the importance of bellwethers like South Korea and Singapore. Outside of that, the harsh reality is that we (and by “we” I mean market participants) tend to give the cold shoulder to locales seen as “irrelevant” to the broader narrative.

That’s true even of major emerging markets like Brazil and India. Sure, we pay attention when the word “contagion” starts getting bandied about, but we don’t mean any virus. EM “contagion” only matters when an economic or financial event threatens to spill over into advanced economies. When it comes to biological contagion, it matters only until rich countries are vaccinated.

We should work to rid ourselves of that pernicious mindset. Humanity, like markets, is becoming more interdependent and interconnected every day. As we learned in 2020, when someone sneezes in Wuhan, the whole world can literally get the flu.