1. Central banks remain dovish despite inflationary signs
2. President Biden pitches $4 trillion in economic spending
3. Equities continue rise amidst low-rate environment
4. US economic growth surges
5. Strong earnings across the board
6. Sentiment continues to improve
7. Vaccination progress continues, but India struggles
Policy & Geopolitics
Central banks keep policy frameworks unchanged
On April 28, Federal Reserve (the “Fed”) Chairman Jerome Powell announced the continuation of near-zero interest rates and monthly Treasury bond and mortgage-backed security purchases of $120 billion or more until the U.S. economy shows substantial recovery from the COVID-19 pandemic.
Chairman Powell added that he sees bubbles in certain asset prices following the accelerating vaccine rollout and the reopening of the economy. Powell reiterated that the expansive monetary policy will be maintained until inflation exceeds 2% moderately “for some time” and that persistent rising inflation is unlikely until the labor market recovers significantly, which would “take some time.” Inflationary indicators are likely to be transient given the supply chain constraints caused by the pandemic.
The Fed shed light on the pick-up in economic recovery as vaccination progress, fiscal policy, and President Biden’s $1.9 trillion stimulus plan strengthened economic indicators and employment. The hardest hit industries “remain weak but have shown improvement” since March. Economic recovery still depends heavily on the pandemic and risks to recovery still abound.
On April 22, the European Central Bank (the “ECB”) kept its policy unchanged, maintaining interest rates at -0.5% and buying up to €1.85 trillion of eurozone bonds through March 2022. ECB President, Christine Lagarde, stated that maintaining favorable conditions during the pandemic is essential for economic recovery. Last month, when government bond yields were rising in the euro area in tandem with U.S. yields, the ECB said that it expects to increase its bond purchases. Data from Deutsche Bank shows that the ECB purchased €74 billion in bonds in March, up from €53 billion and €60 billion in February and January, respectively. On April 26, the ECB announced that it purchased net assets of about €32 billion in the week ending April 23 compared to €17 billion the week before. Lagarde said that economic data and indicators suggest that “economic activity may have contracted again in Q1 but point to a resumption of growth in Q2.”
President Joe Biden's first 100 days
President Joe Biden’s administration tackled key policy issues during his first 100 days in office, ending on April 30. In December, President Biden set a goal of 100 million COVID-19 shots, which was achieved on the 59th day of his administration. By April 27, 230 million vaccination shots were administered. The U.S. has vaccinated around 96 million people fully, more than any other country, after having the highest COVID-19 death toll. The next challenge is tackling vaccine hesitancy among Americans.
Another relief bill passed on March 10 included direct payments of $1,400, an extension of weekly unemployment payments of $300, and almost $20 billion for vaccine development and distribution. The relief bill and efficient vaccine rollout are expected to lead to economic growth of 7% this year.
A day before the 100-day milestone, President Biden made his first address to a joint session in Congress in which he announced new proposals, including a $2 trillion American Jobs Plan (primarily infrastructure) and a new $1 trillion American Families Plan that includes free community college, family care, and paid family and medical leaves.
Labor market shows recovery
The US labor market recovery accelerated in April 2021. Unemployment fell slightly to 6.0% in March from 6.2% in February. Non-farm payrolls rose by 917,000 in March. Weekly initial unemployment benefit claims fell by 39,000 in the week ending April 17 from the previous week to 547,000, the lowest level since March 2020 when it was 256,000. Applications for unemployment benefits reached a new pandemic low this month. Eurostat reported stable February 2021 unemployment in the euro area at the January level of 8.3%, but above the 7.3% in February 2020. Strict measures following the resurgence of COVID-19, the rapid spread of variants, and a slower-than-expected vaccine rollout have kept the euro area economic recovery behind the US and China.
Vaccine and stimulus boost growth forecasts
The US economic recovery is accelerating after a slowdown from Q4 2020 through January 2021. The growth outlook continues to improve as the vaccination campaign, the $1.9 trillion relief package, and business re-openings increase consumer spending and reduce layoffs. While annualized US GDP growth of 6.4% in Q1 2021 was slightly below estimates of 6.5%, it signals economic recovery and robust expansion. Consumer spending increased 10.7% in Q1 2021 compared to 2.3% in Q4 2020. Paradoxically, the savings rate also jumped to 21% from 13%, indicating that consumer spending will continue to grow. Nonetheless, the Fed estimates that about 8.4 million more people are unemployed than before the pandemic.
US retail sales jumped 9.8% in March across most categories as consumers received government stimulus checks, the largest monthly gain since the first wave of cases and lockdowns in May 2020. The bar and restaurant industry saw a 13.4% jump following the easing of restrictions.
The European Commission forecast 3.8% growth in the euro area economy in 2021 and 2022 after newfound optimism at the spring meeting of the International Monetary Fund (IMF), and hinted that the forecast for 2021 may increase further in the May projections. While the overall outlook for Europe remains gloomy, the IMF forecast 4.4% growth in 2021 with accelerating vaccine rollout and economic recovery in the second half of 2021.
Existing U.S. home sales fell 3.7% in March for the second consecutive month to a seasonally adjusted annual rate of 6.01 million, the lowest rate since August 2020. Record-low supply amid strong demand for housing continues to push prices to near record highs.
The Consumer Price Index (CPI) increased 2.6% year on year (YoY) in March and a seasonally adjusted 0.6% month on month. The YoY increase was the highest since August 2018. The largest contributor to the monthly rise was the 9.1% increase in gasoline prices in March. Core CPI, which excludes food and energy, climbed 1.6% YoY and 0.3% from February. Prices are expected to continue rising following muted inflation for almost a year. The Fed expects the rise in prices to be temporary. CPI in the euro area increased 1.3% YoY in March, the highest since January 2020, while core inflation fell to 0.9% from 1.1% in February.
The IHS Markit US Manufacturing Purchasing Managers’ Index (“PMI”) rose to 60.6 in April from 59.1 in March. The IHS Markit Euro Area Manufacturing PMI rose for a 10th consecutive month to a record 63.3 in April from 62.5 in March, exceeding forecasts of 62.0 to the highest rate in over two decades.
Sovereign bonds yields anticipate inflation
Global government bond yields were on the rise after the 10-year US Treasury yield jumped due to rising inflation expectations and an anticipation of expansionary policies. On April 29, 10-year US Treasury yields peaked at 1.68%, the highest level in more than two weeks, before ending the month at 1.63%. The climb followed the release of Q1 US economic growth data and reached its two-week peak after President Biden announced a new $1.8 trillion proposal. 10-year inflation expectations, measured by Treasury Inflation Protected Securities, reached a peak of 2.41% in April, the highest level since April 2013. However, bond market pricing expect the surge to be temporary given that the five-year rate is above the 30-year rate. Germany’s 10-year bund yields closed at -0.20%, its least negative yield since June 2020.
Equity markets shake off fears of rising rates
US equity markets rose in April after reports of strong corporate earnings, a record 21% surge in household income in March and an improved economic outlook. The S&P 500 rose 5.2% in April, its biggest monthly gain since November 2020. The Nasdaq and the Dow also rose 5.4% and 2.7%, respectively. However, US stocks fell at month end as the surge in COVID-19 cases in India and Brazil threatened the overall global recovery.
European equity markets also rose in April with the STOXX Europe 600 and the UK FTSE100 rising 1.8% and 3.8%, respectively, amid an improving economic outlook with rising vaccine distribution and positive earnings reports. In Asia, the Hong Kong Hang Seng index rose 2.0%, the Chinese SSE Composite Index rose 0.1%, and the Japanese Nikkei 225 Index fell -1.2%. New economic data showed that China’s economic recovery may be slowing with official indicators of manufacturing and service activity falling below expectations in April.
Credit spreads continue tightening
Investment grade spreads tightened to 0.94% while high-yield spreads tightened to 3.24% from 3.36%, continuing the trend since peaking at 11.13% over a year ago. First-lien and second-lien spreads to maturity contracted to LIBOR + 3.84% from LIBOR + 3.86% and LIBOR + 7.11% from LIBOR + 7.26%, respectively. The yield-to-maturity of first and second-lien debt remains below year-end 2019 levels due to near-zero interest rates and unprecedented Fed support for the fixed income market.
Oil rallies to pre-pandemic levels
Spot WTI and Brent crude oil prices posted strong gains this month but finished lower amid concerns over the global economic recovery and a worsening COVID-19 situation in India. However, the overall rally reflects rising energy demand, promising economic data, strong earnings, and higher economic forecasts. Spot WTI and Brent prices settled at $63.58 and $66.7 per barrel at month end, respectively from $59.16 and $62.74 in March.
Further oil demand recovery depends on how the pandemic situation evolves. The worsening COVID-19 crisis in India led to a drop in oil sales in the world’s third largest importer in April, halting the rise in oil prices temporarily. A further drop in fuel demand is expected in May as the second wave of COVID-19 peaks in India. However, the vaccine rollouts, the eventual lifting of lockdowns in Europe, and the reopening of economies globally are expected to boost oil demand. OPEC Plus agreed to increase production by more than 2 million barrels a day in a meeting on April 1. On April 27, OPEC Plus decided to raise oil production gradually by 350,000 barrels in May and June and 441,000 in July. Goldman Sachs predicts Brent to rise to $75 in Q2 2021 and $80 by Q3.
US dollar declines, gold rises, and Bitcoin surges
After a strong start to 2021, the US dollar began to decline in April after the Fed kept interest rates near zero, with the ICE US Dollar Index reaching a nine-week low of 90.4 against a basket of currencies on April 29, before edging higher after the latest US GDP report exceeded expectations and US Treasury yields increased. The ICE US Dollar Index ended the month down 2.1% from the previous month to 91.3. The overall decline in Government bond yields and the US dollar boosted demand for gold, but gold prices fell at month end to $1,767 per ounce due to rising US Treasury yields, inflation, and US GDP. Gold prices were still up 3% for the month and should stabilize as the climbs in bond yields and inflation are expected to be temporary. Meanwhile, on April 13, the price of Bitcoin reached a record $63,729, more than doubling since the start of the year, as investors awaited the IPO of cryptocurrency exchange Coinbase, valued at above $100 billion. Bitcoin later dropped to a low of $47,468 on April 23 before ending the month at $53,098. On April 14, the market cap of Coinbase exceeded $100 billion after its debut, before dropping to $85.8 billion when shares closed at $328.28.
Technology delivers strong earnings
Apple reported a 54% increase in companywide sales YoY. Fiscal year Q2 2021 (calendar year Q1 2021) revenues increased 53.7% YoY to $89.58 billion, 16% above estimates, while earnings per share (EPS) of $1.40 were 41% above estimates. Apple reported a second consecutive quarter of double-digit growth in every product category, with iPhone, Mac and iPad sales up 65.5%, 70.1% and 79%, respectively, YoY.
Amazon reported a 44% rise in Q1 2021 revenues to $108.52 billion YoY, exceeding estimates by 4%, while its EPS of $15.79 beat estimates by 66%. Amazon Web Services reported a 32% increase in net sales to $13.5 billion. Prime Day, which takes place in June, is likely to boost Q2 revenue.
Facebook beat estimates but warned that the changes in privacy settings in iOS 14 (asking users to opt in rather than opt out of data collection, which hinders ad targeting) and a worsening pandemic situation could impact its business in Q2. Q1 2021 sales grew 48% YoY to $26.17 billion, beating estimates of $23.67 billion, while EPS of $3.30 was above the consensus estimates of $2.37. Revenue growth is attributed to a 30% YoY increase in the average price per ad and a 12% increase in the number of ads shown.
Alphabet reported a 34% YoY rise in Q1 2021 revenues to $55.31 billion, 7% above the consensus estimates. EPS of $26.29 exceeded estimates of $15.82. The growth was driven by the 32% YoY rise in revenues from the advertising segments (Search and YouTube) to $44.6 billion, the fastest annualized growth in at least four years. Revenues from YouTube ads increased 49% YoY to $6.01 billion.
Microsoft revenues of $41.71 billion and EPS of $1.95 topped expectations by 2% and 10%, respectively. Revenue grew 19% YoY, the biggest quarterly increase since 2018. Cloud business revenue, including Azure and GitHub, grew 23% YoY. Productivity and Business Processes, which includes Office products and LinkedIn, grew 15%. Revenues of the personal computing unit, which includes Windows, gaming, devices, and search, increased almost 19% YoY to $13.04 billion.
Tesla reported Q1 EPS of $0.93, exceeding estimates by 18%, while revenue increased 74% YoY to $10.39 billion, exceeding estimates by barely 1%. GAAP quarterly net income reached a record $438 million driven by the growth in bitcoin and regulatory credit revenue. CEO Elon Musk said the new Model S sedans will begin delivery in May 2021. CEO Musk and CFO Zachary Kirkhorn expect supply chain issues to remain a challenge in 2021.
Financials mixed but less cautious
The earnings of JP Morgan and Citi beat consensus estimates by 45% and 39%, respectively, as they continued to release loan loss reserves of $5.2 billion and $3.9 billion, respectively, amid an improved economic outlook. Their revenues of $33.1 billion and $19.3 billion, respectively, beat the expected forecast of $30.5 billion and $19.3 billion.
The EPS of Morgan Stanley and Goldman Sachs exceeded estimates by 31% and 82%, respectively, as a boom in special purpose acquisition company (SPAC) issuance in Q1 led to record investment banking and equity underwriting revenues. Goldman revenues increased 498% YoY to a record $17.7 billion, beating the expected $12.6 billion, while Morgan Stanley revenues increased 61% YoY to $15.7 billion, beating estimates of $14.1 billion.
Shopify and Qualcomm among biggest COVID-19 winners
Shopify was among the biggest winners of the pandemic as business restrictions accelerated the global shift to e-commerce. Shopify revenue increased 101% YoY to $988.6 million, beating estimates of $862.7 million. Q1 2021 EPS of $2.01 were more than triple the estimates of $0.75. Shopify shares surged 11.4% on April 28, but executives cautioned that growth may slow this year as the reopening of the economy continues.
Q1 earnings of Qualcomm, another pandemic winner, increased an annualized 51% to $7.93 billion, beating estimates of $7.62 billion, driven by demand for 5G phones. EPS of $1.90 beat expectations by 14%. Qualcomm President Cristiano Amon said that the company is utilizing its scale and global supply chain to weather the global chip shortage which should ease by year end.
Energy and Industrials earnings show signs of recovery
Large energy companies, like Exxon and Chevron, returned to profitability in Q1 after four consecutive quarters of losses following the recovery in oil demand and aggressive cost-cutting measures since last year. Both companies maintained their dividend payouts, while Chevron announced a 4% increase in dividends. The two oil giants held preliminary discussions for a potential merger over the past 12 months.
The revenues of Caterpillar, often considered a barometer for economic cycles, increased 12% YoY to $11.9 billion, exceeding estimates by 8%, driven by higher demand and an increase in dealer inventories that boosted sales volumes. The EPS of $2.87 beat the average estimates of $1.93
Consumer sentiment rises, market fear subdued
The Consumer Sentiment Index of the University of Michigan rose to 86.5 in April from 84.9 in March, the highest reading since March 2020, largely due to improving economic conditions and an optimistic outlook. Consumers are also more optimistic about the improving labor market and the recent round of stimulus checks.
Following months of elevation, the VIX dropped to 16.25 on April 16, the lowest level since February 2020, amid additional fiscal aid and accelerating vaccine rollout.
The month-end Fear and Greed Index (which uses seven factors including market momentum, safe-haven demand, and junk bond demand) showed “greed” at 56. Junk bond demand and stock prices show extreme greed as investors pursue higher risk strategies and more stocks reach 52-week highs than lows.
As of April 29, 2021, global confirmed cases of COVID-19 were 149,216,984, with 3,144,028 deaths and 968,452,196 administered vaccine doses. Since the rollout of COVID-19 vaccines in late 2020, the number of daily new cases dropped significantly in January and February 2021, especially in countries with effective vaccine campaigns. COVID-19 recovery remains uneven and slower than anticipated. Vaccine distribution to a significant portion of the population remains a challenge for most countries. Only seven countries have administered at least one dose of a vaccine to more than 20% of the population. The US is still the worst-affected country in terms of overall case numbers, followed by India and Brazil.
The Center for Disease Control and Prevention reported 2.7 million average daily vaccinations in the U.S. during the last week of April following a record 3.4 million doses on April 13. The slowdown may be due to the pause on distributions of the Johnson & Johnson vaccine on April 13 following reports of blood clots. By April 29, more than 40% of Americans had received at least one vaccine dose and almost 30% of the population was vaccinated fully. Johns Hopkins University reported a seven-day average of daily new cases of 52,500, and a decline of at least 5% in the number of daily cases in 34 states over the last week of April.
Many countries across Europe started the year with lockdowns and curfews to fight accelerating COVID-19 infections. Over a year after the first COVID-19 cases were reported, 5.5% of the European population have contracted COVID-19 while 7% are fully vaccinated. The U.K. is gradually lifting its lockdown as almost 34 million people have received the first dose of a vaccine and over 13 million are fully vaccinated. On April 29, Hans Kluge, the Europe regional director of the World Health Organization, reported the first significant drop in new COVID-19 cases in the region in two months, but cautioned that infection rates remain high in many areas.
India has been the second worst-affected country in terms of overall cases after the US. Recently, the number of cases and deaths in India started rising to record levels every day. Hospitals and crematoriums are at full capacity with a shortage of oxygen beds and drugs. India reported more than 5.8 million cases in April and record daily deaths of more than 200,000 on April 28. The US announced it would supply India the raw materials needed to produce the AstraZeneca vaccine. The European Union and the UK announced that they will supply oxygen, drugs, ventilators, and medical aid. Saudi Arabia, Pakistan, the United Arab Emirates, Canada, China, and other countries also offered aid.
The Month Ahead
1.Global vaccine rollout
2.Fiscal stimulus in the US and Europe
3.Central bank reactions to rising yields
4.India’s COVID-19 crisis
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