Global Markets Weekly Update: December 30, 2022
U.S.
Stocks close out down year on down note in thin trading
The major indexes ended mostly lower in a second week of light holiday trading, although the S&P 500 Index remained above its intraday low recorded the week before. Consumer staples and materials shares fell the most, while consumer discretionary shares were resilient, thanks in part to strength in Target and several other retailers. A highly publicized wave of flight cancellations pushed shares of Southwest Airlines sharply lower when trading opened Tuesday, but the airline recaptured some ground as the week progressed. Bond trading closed early on Friday, and both equity and bond markets were scheduled to be closed on Monday in observance of the New Year’s Day holiday.
T. Rowe Price traders noted that there were few data reports or other macroeconomic catalysts to drive sentiment during the week, leaving investors to keep a close eye on the global impact of China’s relaxation of COVID containment rules (see below). Wednesday brought additional news of the blow to the housing sector from the Federal Reserve’s rate hikes, with pending home sales in November falling to the second-lowest level in two decades. October home prices, as measured by the Case-Schiller Index, fell somewhat less than expected, however (0.8% versus roughly 1.2%).
Positive signals on supply chains and manufacturing prices
The Richmond Fed’s index of manufacturing activity in the Mid-Atlantic region brought some good news, recording its first positive reading in eight months. While wages continued to increase in December at a solid pace, supply chains also eased, helping to send prices paid and received lower and leaving inflation expectations for the coming year “much lower than current price trends.” Weekly jobless claims rose from 215,000 to 225,000, but in line with expectations and still below their mid-November peak of 241,000.
Longer-term yields touch highest level since mid-November
The yield on the benchmark 10-year Treasury note rose over the week, touching its highest intraday level since November 14 on Friday morning. (Bond prices and yields move in opposite directions.) Our traders noted that the positive economic surprises appeared to be one factor pushing Treasury yields higher, although the prospect of faster economic growth in China also played a role. The broad tax-exempt bond market logged negative returns through most of the week, as municipal bonds continued to see outflows, likely reflecting year-end tax-loss harvesting by investors.
High yield market volumes were noticeably below average during the short trading week. Our traders observed that the news about China loosening COVID restrictions provided a boost to commodity and energy names, although trading was still limited. No new deals were announced as the primary calendar was already finished for the year. Leveraged loan market participation was also minimal, with just a slight pickup on Wednesday before liquidity dried up. Our traders noted that investors trying to get small agendas done before year-end drove the week’s modest trading activity.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,147.25 |
-56.68 |
-8.78% |
S&P 500 |
3,839.50 |
-5.32 |
-19.44% |
Nasdaq Composite |
10,466.48 |
-31.38 |
-33.10% |
S&P MidCap 400 |
2,430.37 |
-4.78 |
-14.48% |
Russell 2000 |
1,761.25 |
0.32 |
-21.56% |
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’s presentation thereof.
Europe
European shares pulled back during a week of thin trading. In local currency terms, the pan-European STOXX Europe 600 Index slipped 0.60% over the trailing five trading days ended December 30. Germany’s DAX Index was down modestly. Meanwhile, France’s CAC 40 Index gave up 0.48%, and Italy’s FTSE MIB Index dropped 0.71%. The UK’s FTSE 100 Index slipped 0.28%.
ECB policymakers press for more rate hikes
Dutch central bank Governor Klaas Knot, one of the more hawkish members of the European Central Bank’s (ECB) Governing Council, said in an interview with the Financial Times newspaper that the ECB would achieve “quite a decent pace of tightening” through half-percentage-point increases in the deposit rate—now at 2%—at its next five policy meetings. Knot also opined that any recession would be “short and shallow” and suggested that recent economic data in some eurozone countries, such as Germany, showed that “the worst…may already be behind us.”
In an interview with the Frankfurter Allgemeine Zeitung, Executive Board member Isabel Schnabel asserted that the ECB would continue to do whatever is necessary to bring inflation back to the 2% target. “The terminal rate, which is the peak rate expected during the interest rate cycle, has risen above 3%. Whether we will still need to go higher than that will depend on the future inflation outlook,” she said.
Spain unveils third financial aid package
The Spanish government announced a third financial aid package worth EUR 10 billion, among other measures, to help households with higher living costs. The total amount of aid provided by the government this year now stands at EUR 45 billion.
UK house prices decline for fourth month; more UK workers unveil strike plans
UK house prices contracted for a fourth consecutive month in December as higher mortgage rates continued to depress the market, according to a survey by Nationwide, a mortgage provider. The cost of a house fell 0.1% month over month. On a year-over-year basis, house price growth slowed to 2.8% from 4.4% in November.
The list of UK workers mainly in the public sector striking or planning to undertake other actions in a bid for better pay and working conditions increased, raising concerns that the Bank of England may hike interest rates over a longer period to prevent inflation from becoming entrenched. The list includes nurses, ambulance drivers, some doctors and teachers, rail and postal workers, airport baggage handlers, border security agents, highway workers, civil servants, bus drivers, firefighters, charity workers, and meteorologists.
Japan
Japanese equities began the final week of 2022 positively, recording early gains amid thin holiday trade. Having fallen to three-month lows on Thursday, the Nikkei 225 clawed back some lost ground on Friday, but ended down 0.54% for the week and down 9.37% for the year, it first annual loss in four years. In the currency market, the yen rebounded late in the week after the Bank of Japan announced a raft of unscheduled bond purchases.
Signs that U.S. inflation may be receding provided encouragement during the week, as did comments from Bank of Japan Governor Haruhiko Kuroda, who reiterated that the central bank does not intend to alter its long-standing stance of easy monetary policy. China’s announcement that it would drop quarantine requirements for international arrivals from January 8—seen as an important first step toward reopening its borders—also boosted sentiment.
However, the upbeat mood soon waned as ongoing concerns about the health of the global economy, the possibility of recession in the U.S., and reports of rapidly spreading coronavirus infections in China all weighed on sentiment. Several countries, including Japan, immediately imposed new restrictions mandating COVID tests for passengers arriving from China.
Investors were also disappointed by data released midweek showing that Japanese industrial output fell 0.1% in November—the third straight monthly decline—suggesting that the economy remains fragile.
China
Chinese stocks rose as Beijing continued to ease coronavirus pandemic restrictions despite a surge in cases. The Shanghai Composite Index gained 1.42% and the blue chip CSI 300 added 1.13%, reversing several weeks of losses. In Hong Kong, the benchmark Hang Seng Index increased 1.61%, according to Reuters.
Chinese officials scrap quarantine measures despite rising cases
The National Health Commission (NHC), China’s health regulator, downgraded the management of the coronavirus from the highest to second-highest level starting January 8, 2023. While China will continue to focus on vaccinating the elderly, availability of medical supply, and tiered medical treatment, it will lift almost all standard restrictions, according to a statement by the NHC in state-run media. The change in approach requires inbound travelers to provide a negative COVID-19 test result 48 hours before departure, while outbound travel will resume in “an orderly manner.” The NHC also said it would stop publishing daily coronavirus statistics.
Many countries have tightened entry requirements for travelers from China ahead of January’s reopening. The U.S., Japan, Taiwan, India, Malaysia, and Italy introduced COVID-19 testing on arrivals from China due to concerns about the severity of the virus and lack of transparency from the Chinese government regarding the spread.
Economic activity show signs of rebound
Economic activity picked up in several cities in China where coronavirus cases have shown signs of peaking. The number of passengers using subways in Beijing, Chongqing, Chengdu, and Wuhan rose by 40% to 100% as residents start to return to normal activities. Reports also showed an increase in traffic congestion, movie sales, and air travel in some areas.
In other news, China's Ministry of Finance (MOF) announced it will boost fiscal expenditures next year to support economic growth. Government investment will play a bigger role in leading private investment, boosting consumption, and stabilizing international trade and foreign investment. The MOF's statement aligns with guidance of targeted monetary policy and strengthened fiscal policy from the government’s Central Economic Work Conference earlier in December, when officials said that reviving domestic demand was their top priority in 2023.
Other Key Markets
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about 2.0% as President-elect Luiz Inacio Lula da Silva announced the remainder of his cabinet members ahead of this weekend's inauguration. Environmentalist Marina Silva is set to return as environment minister, the same post she held for most of President Lula's previous presidency. Market-friendly Senator Simone Tebet was announced as planning and budget minister. Several members of Lula's announced cabinet were from more moderate parties, a welcomed result following the recent passage of the spending cap waiver.
Peru
Peruvian markets were volatile as political turmoil continued following former President Pedro Castillo's impeachment and arrest. The appeals chamber of Peru's Supreme Court upheld the decision to hold Castillo in pretrial detention. Weeks of protests following Castillo's removal from office caused damage and blocked major roadways, leading to economic slowdowns. New Finance Minister Alex Contreras announced a significant plan to revive the economy, targeting regions most affected by roadblocks. Contreras stated that Peru would maintain its growth estimate for 2023 with the recovery plan.
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