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Global Markets Weekly Update: December 17, 2021
U.S.
Tightening and omicron fears spark volatility
Stocks ended lower for the week, as the prospect of central bank tightening and fears over the impact of the omicron variant of the coronavirus sparked considerable volatility. As longer-term interest rate expectations increased, growth stocks and the technology-heavy Nasdaq Composite Index fared the worst. The latter touched an intraday low on Friday roughly 7% below its recent peak—still above the 10% threshold for a correction. Technology and consumer discretionary shares performed worst within the S&P 500 Index, while the typically defensive utilities, health care, and consumer staples sectors managed gains. Volatility to end the week was partly due to “triple witching,” or the expiration of three types of options and futures contracts on Friday. The Cboe Volatility Index (VIX) rose for the week but remained well below its levels early in the month.
The Federal Reserve’s monetary policy meeting on Tuesday and Wednesday appeared to dominate sentiment for much of the week. The major indexes dropped sharply on Tuesday morning after a report that producer prices jumped 9.6% in November from a year earlier, the biggest increase since data were first collected in 2010. The data heightened speculation that Fed officials would signal more rate hikes in 2022. Indeed, the Fed’s quarterly survey of individual policymakers’ views, released Wednesday, showed that a majority of officials now expect three quarter-point hikes in 2022 instead of two. The Fed also announced a faster tapering of its monthly asset purchases, which are now expected to stop by the end of March.
Fed Chair Jerome Powell optimistic about growth ahead
Stocks rose after the Fed’s announcement, however, which T. Rowe Price traders attributed to relief that the Fed did not act more aggressively. Investors may have also been reassured by Fed Chair Jerome Powell’s press conference, in which he expressed confidence in the state of the economy. Retail sales data released earlier Wednesday showed that consumers reduced spending on an inflation-adjusted basis in November, but Powell stated that “consumer demand is very strong” and suggested that the pullback might have been due to an extended holiday shopping season. Gauges of current economic activity released on Thursday came in modestly below expectations but still indicated robust expansion, while housing market indicators surprised to the upside.
Powell also stated that the omicron variant, although a risk to the Fed’s outlook, did not justify a change in the Fed’s tapering program. Omicron fears appeared to grow later in the week, however, especially as some Wall Street firms put new office restrictions in place in response to a surge in cases. Stocks sold off on Friday morning, but the declines may have been cushioned by growing evidence that omicron, while much more contagious, causes less severe symptoms than prior variants.
Omicron pushes yields lower
Treasury yields also decreased Friday morning as headlines surrounding omicron caused risk sentiment to weaken, pushing the 10-year Treasury note yield below 1.40% for the first time in nearly two weeks. Price action in the broad tax-exempt municipal bond market was relatively subdued this week despite volatility in U.S. Treasuries. T. Rowe Price municipal traders noted that new issuance volume waned as the week progressed—preserving a positive technical environment for the market—and is expected to remain muted through the end of the year.
Investment-grade corporate bond credit spreads—the additional yield offered over Treasuries and an inverse measure of the sector’s relative appeal—started the week wider alongside concerns regarding a less accommodative Fed and surging coronavirus cases. After the Fed’s policy meeting, credit spreads tightened and trading volumes rebounded as risk markets seemed to welcome the central bank’s decision to accelerate asset purchase tapering. There was no primary issuance this week, and forward supply expectations are muted through year-end.
High yield bonds experienced some weakness ahead of the Fed meeting, but the few deals launched in the high yield market during the early part of the week were met with strong demand, according to our traders. The primary market is expected to be quiet for the rest of the year. Our traders noted that risk markets traded higher following the Federal Open Market Committee decision, and investors appeared to take the hawkish tapering and rate hike guidance in stride.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
35,365.44 |
-605.55 |
15.55% |
S&P 500 |
4,620.64 |
-91.38 |
23.02% |
Nasdaq Composite |
15,169.68 |
-460.92 |
17.70% |
S&P MidCap 400 |
2,728.09 |
-51.76 |
18.27% |
Russell 2000 |
2,173.93 |
-37.88 |
10.08% |
This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.
Source of data: Reuters, obtained through Yahoo! Finance and Bloomberg. Closing data as of 4 p.m. ET. The Dow Jones Industrial Average, the Standard & Poor’s 500 Stock Index of blue chip stocks, the Standard & Poor’s MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments of the U.S. equity markets by market capitalization. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock exchange and the National Market System. Frank Russell Company (Russell) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.
Europe
Shares in Europe fell as governments tightened restrictions to curb the spread of the coronavirus and central banks became more hawkish. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.35% lower. The main indexes also declined, with Germany’s Xetra DAX Index losing 0.59%, Italy’s FTSE MIB Index giving up 0.41%, and France’s CAC 40 Index dropping 0.93%. The UK’s FTSE 100 Index pulled back 0.30%.
Core eurozone bond yields whipsawed this week, ending lower. They initially declined sharply, as the spread of omicron sparked fears about the economic recovery. Yields then rebounded on hawkish moves by major central banks and the European Central Bank’s (ECB) decision to scale back its emergency bond-buying program. Bond yields then came under pressure after ECB President Christine Lagarde indicated that an interest rate increase was “very unlikely” next year and on coronavirus concerns. Peripheral eurozone bond yields rose overall. UK gilt yields advanced after the Bank of England (BoE) surprised the market with a short-term interest rate increase.
Denmark, Norway curb social activity
The Danish and Norwegian governments tightened restrictions on social activity and recommended working from home to contain the coronavirus. The German and UK parliaments voted in favor of mandatory vaccines for health workers. The UK also approved stricter measures—including passes showing proof of vaccination to enter entertainment venues—despite strong opposition within the ruling Conservative party. France severely limited travel to and from the UK. Meanwhile, the European Center for Disease Prevention and Control suggested that vaccination alone will not work to stem the omicron variant and urged more controls.
ECB leaves policy unchanged but signals end of emergency program
The ECB kept its main policy rates at existing levels. It also said it would end its emergency asset purchase program in March but temporarily increase its Asset Purchase Program to smooth the transition. The ECB signaled that any exit from ultra-easy monetary policy would be slow, as the pandemic was again depressing business and consumer sentiment and threatening economic growth.
BoE, Norges Bank raise rates
The BoE unexpectedly raised its bank rate 15 basis points to 0.25% as a first step to control inflation. Data released before the meeting indicated that 12-month consumer price inflation hit 5.1% in November—the highest level in a decade. The labor market also continued to tighten after the government ended its job support plan. Earlier, the International Monetary Fund suggested in its UK country review that policymakers should avoid “inaction bias” and raise interest rates to prevent inflation from becoming entrenched.
The Norwegian central bank lifted its main interest rate by another 25 basis points to 0.5% and indicated that more rate increases could follow while acknowledging the potential for delays if the pandemic slows economic growth. The Swiss central bank kept an ultra-loose monetary policy in place and its key rate at -0.75%, saying inflation was lower in the country than elsewhere in Europe.
Japan
Japanese equities rose over the week, with the Nikkei 225 Index gaining 0.38% and the broader TOPIX Index advancing 0.46%. Investor sentiment was lifted by the U.S. Federal Reserve’s tapering decision, as many feel that the move signals confidence in the post-pandemic economy, and Japan’s open market is highly leveraged to the global economic recovery. Against this backdrop, the yield on the 10-year Japanese government bond (JGB) fell slightly, to 0.04% from 0.05% at the end of the previous week, while the yen weakened modestly, to JPY 113.56 against the U.S. dollar from the prior week’s JPY 113.39.
Bank of Japan remains among the world’s most dovish central banks
Following its December monetary policy meeting, the Bank of Japan (BoJ) maintained short-term interest rates at -0.1% and the target for 10-year JGBs at around 0%, as widely expected. The central bank extended its special program (launched in response to the coronavirus) to support financing, mainly of small and medium-sized firms, by six months until the end of September 2022. It will reduce some of its crisis-era monetary support by completing its additional purchases of commercial paper and corporate bonds by the end of March 2022, as scheduled.
In its monetary policy statement, the BoJ said that although Japan’s economy has improved, it remains in a severe situation due to the impact of the coronavirus at home and abroad. While exports and industrial production have continued to increase, they remain weak due to the effects of supply-side constraints. Downward pressure on services consumption is waning somewhat, while inflation expectations have picked up.
The BoJ remains among the world’s most dovish central banks. Governor Haruhiko Kuroda commented that its policy stance is contingent on Japan’s economic situation and independent of the decisions of other central banks, many of which across the developed world are beginning to reduce policy accommodation.
Exports strengthen on recovery in auto shipments; sustained recovery in private sector
Japan’s exports rose 20.5% in November from last year’s level, driven by a recovery in auto shipments that suggested supply chain bottlenecks may be easing. Exports to China, the U.S., and the European Union all increased strongly. Imports, meanwhile, surged 43.8%, with a weaker yen making oil imports even more expensive. Separate data showed that the recovery in Japan’s private sector was sustained in December, although it suggested that momentum was slowing. The au Jibun Bank Flash Japan Composite Purchasing Managers’ Index fell to 51.8 in December from the previous month’s 53.3. Both manufacturers and services companies signaled softer rates of output and new order growth, as cost pressures continued to build.
In other developments, an admission by Prime Minister Fumio Kishida that the government had overstated construction order data from builders for years raised some concerns about the reliability of the country’s economic data. The government is undertaking an investigation to determine whether any data may need to be revised. The builders involved were mostly smaller firms, so the impact on gross domestic figures could be minimal.
China
Chinese markets fell for the week amid the resurgence in global COVID-19 cases and U.S.-China tensions after Washington placed investment and export restrictions on dozens of Chinese companies for their role in allegedly repressing China’s Muslim minorities and in supporting Beijing’s military. The CSI 300 index retreated 1.9%, and the Shanghai Composite Index eased 0.9%. Yields on China’s 10-year government bonds rose to 2.873% from the previous week’s 2.861%. The yuan to weakened to CNY 6.3714 per U.S. dollar from last week’s CNY 6.3672.
On December 9, the People’s Bank of China (PBOC) said it would raise the foreign exchange reserve requirement ratio, an action that took effect last week. The reserve ratio hike was viewed as Beijing’s attempt to rein in the yuan, which reached its highest level versus the dollar since mid-2018 earlier in December. Following the PBOC’s move, regulators granted fresh quotas worth USD 3.5 billion under the Qualified Domestic Institutional Investor scheme, a key outbound investment program.
More signs of currency intervention appeared in data showing that the central bank recorded in November its biggest net purchase of foreign exchange in more than six years. China’s foreign exchange regulator is also reportedly involved in efforts to cap the yuan’s rise by speeding up the approval process for companies to convert yuan into dollars and remit the funds to pay offshore dollar debt. However, T. Rowe Price analysts believe that the change will not likely have much impact on the yuan’s direction versus the dollar.
Early in the week, Beijing pledged economic stability in 2022 at the government’s annual Central Economic Work Conference. T. Rowe Price analysts viewed China’s policy statements as dovish overall despite a number of hawkish statements. For now, China’s economic policy appears to be similar to its 2019 stimulus plan that aimed to stabilize activity as opposed to the massive stimulus package it deployed in 2016 to turn around the economy.
In economic readings, data showed that China’s factory output grew faster than expected in November, but new pandemic curbs hit retail sales and fixed asset investment growth lagged forecasts. November data also revealed that new home prices suffered their biggest month-on-month decline in six years, with the country’s lower-tier cities and developers bearing the brunt of the downturn. Government revenue from land sales fell for the fifth straight month in November, another sign of stress for the beleaguered property sector.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned about 2.4%.
Late the previous week, S&P Global Ratings lowered its credit outlook for Turkey from “stable” to “negative”—a warning to investors that it could downgrade the sovereign rating at some point. S&P noted that its weaker outlook reflects the risks to Turkey stemming from currency weakness and inflation. Bonds and the lira fell sharply as investors reacted to S&P’s action, though equities rose for much of the week (before slumping on Friday) in anticipation of more central bank interest rate cuts that would continue to stoke economic growth. The lira was pressured further when the central bank, as expected, reduced its one-week repo auction rate by 100 basis points, from 15.0% to 14.0%, on Thursday. The one-week repo auction rate was as high as 19.0% in September.
According to the central bank’s post-meeting statement, this week’s rate cut decision reflects policymakers’ intention to “complete the use of the limited room” for rate cuts stemming from transitory factors. The statement also notes that central bank officials will be monitoring the “cumulative impact of the recent policy decisions” in the first quarter of 2022—which suggests that the central bank will keep rates on hold during that time.
T. Rowe Price sovereign analyst Peter Botoucharov believes that the Turkish lira could continue to struggle, particularly in view of the potential for a large fiscal push by the government, as suggested by a 50% increase in Turkey’s minimum wage in 2022. Signs that President Recep Tayyip Erdogan’s regime is committed to the “new economic model,” which relies on deeply negative real interest rates, are also likely to contribute to a weaker currency and higher inflation. Headline inflation was recently measured at a year-over-year rate of 21.3%.
Mexico
Mexican stocks, as measured by the IPC Index, returned about 2.1%. On Thursday, Mexico’s central bank decided to raise its key interest rate by 50 basis points, from 5.00% to 5.50%. The decision was not unanimous: Four Governing Board members voted for the increase, but one policymaker preferred a smaller, 25-basis-point increase. While a rate hike was widely expected, some were surprised by the size of the rate increase.
According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the post-meeting statement from policymakers was once again hawkish, with the Governing Board removing language related to inflation being “transitory”—consistent with U.S. Federal Reserve Chair Jerome Powell’s recent “retirement” of the word—while reiterating upside risks for inflation despite downside risks for growth. Central bank officials also referenced the Fed’s faster reduction of monthly asset purchases, as well as several emerging markets accelerating their monetary tightening efforts. Gifford notes that the statement made no mention of the new governor, Victoria Rodriguez Ceja, taking over in January or next year’s 22% minimum wage increase, but he believes that those were likely factored into the rate increase decision.
Chile
Chilean stocks, as measured by the S&P IPSA Index, returned -1.2%. On Tuesday, the Chilean central bank held its regularly scheduled monetary policy meeting and raised its key interest rate from 2.75% to 4.00%. The decision was unanimous among policymakers and in line with market expectations.
According to Gifford, the post-meeting statement accompanying the decision was hawkish, but a bit less so than the previous one. Central bank officials highlighted strong economic growth during the quarter—mostly due to robust private consumption on the back of high household liquidity—even though sequential prints have softened and there’s still a way to go for labor markets to normalize.
The statement also mentioned household and business sentiment declining recently, likely a reflection of political uncertainty and inflation concerns. Inflation has continued to increase, though policymakers acknowledged that core inflation has been mostly in line with their projections in the September quarterly monetary policy report. Given strong growth and high inflation, central bank officials expect the policy rate to continue increasing in the near term.
On Wednesday, the central bank published its latest quarterly monetary policy report, which revealed that it expects a stronger economy and higher inflation for longer, albeit with a meaningful pullback further out. The central bank now sees the economy expanding 11.5% to 12.0% in 2021, before decelerating to 1.5% to 2.5% growth in 2022. Policymakers seem to be expecting near-recessionary conditions (0.0% to 1.0% growth) in 2023.
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