Despite an eventful week with a large segment of global trade stalled by a massive cargo ship stuck in the Suez Canal and the unwinding of an overleveraged hedge fund, equity markets broadly were undeterred with the S&P 500 and Dow Jones pushing to new all-time highs last week. Positive investor sentiment was aided by encouraging news on the vaccine rollout and the Federal Reserve’s decision to end restrictions on dividends and buybacks for U.S. banks. For the week, the S&P 500 and Dow Jones gained 1.6% and 1.4%, respectively, while the Nasdaq Composite slid -0.6% as investors continued to favor stocks leveraged to the economic recovery over high growth technology stocks with high valuations that notched strong outperformance during the disruption from the pandemic. Bond yields took a breather from their recent surge last week but have continued to climb higher in this week’s early trading with the 10-year Treasury pushing past 1.73% driven by the expected upcoming stimulus announcement from President Biden.
Although equity markets broadly gained ground last week, several individual U.S. media stocks, including ViacomCBS (VIAC) and Discovery (DISCA), as well as a handful of Chinese internet stocks faced significant price drops from forced liquidations of concentrated and highly-leveraged positions at investment firm Archegos Capital Management. A series of margin calls requiring the fund to post more collateral triggered a wave of large block sales of the firm’s positions, which ended up totaling almost $30 billion in value. The wave of selling dealt large losses, reportedly totaling up to $6 billion, to some of the large prime brokers that had lent to Archegos, though they are expected to have sufficient capital to absorb the losses. While the broader market impact from the unwinding of the fund is expected to be limited, the episode has raised some concerns about the ability to take such concentrated and leveraged bets and the potential for systemic risks.
On the pandemic front, the U.S. vaccine rollout continues to gain steam as President Biden doubled the vaccine rollout target for his first 100 days in office from 100 million doses administered to 200 million doses. As of Saturday, 140 million doses have been administered in the U.S. with over 28% of the population having received at least one dose to date. The encouraging vaccine picture has driven increasing demand for consumer services. However, the trends in new Covid-19 cases last week also rebounded higher, with the seven-day average rising to over 61k per day, a 12% increase compared to the week prior, according to Johns Hopkins University.
While consumer demand is heating up, global supply chains faced another setback this past week as the Suez Canal, one of the most highly trafficked maritime trade routes in the world, was blocked off by a container ship that had gotten lodged sideways in the canal. It took six days to finally dislodge the vessel that caused a back-up of over 450 ships in the passage that serves as a conduit for 12% of total global maritime trade. Although the bottleneck has been removed, it adds to a series of acute disruptions that may lend pressure to a near-term increase in prices as demand ramps.
In the week ahead, much of the focus will turn to the next stimulus push with President Biden expected to unveil a proposal for a two pronged spending package totaling between $3 and $4 trillion, which would likely be funded through an accompanying tax increase of over $3 trillion. The first part of the package, anticipated to be announced on Wednesday, would focus on infrastructure stimulus, while the second part of the proposal would be announced in April with a focus on expanding child care and the Affordable Care Act, among other items. The proposal would then head to Congress for debate and negotiation. The biggest uncertainty right now seems to be whether there is sufficient support among Democrats to use reconciliation again. We will keep you apprised of policy developments and the implications for clients and financial markets in the weeks ahead.
