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Global Markets Weekly Update: February 25, 2022
U.S.
Volatility reaches two-year highs following Ukraine invasion
The major indexes closed mostly higher after a holiday-shortened week of historic volatility sparked by Russia’s invasion of Ukraine. (Markets were closed Monday in observation of Presidents Day.) On Thursday, the Nasdaq Composite Index swung by 6.8%, the largest intraday range since the World Health Organization declared the start of the coronavirus pandemic in March 2020, according to T. Rowe Price traders. As one example of the volatility, Tesla added USD 100 billion to its market capitalization over the course of the day on Thursday but declined roughly 5.5% over the week as a whole.
The consumer discretionary sector generally underperformed within the S&P 500 Index as the turmoil in Europe weighed on travel-related shares. Conversely, resilience in Internet giants Alphabet (the parent company of Google) and Meta Platforms (the parent company of Facebook) supported communication services stocks. Health care shares were also strong.
Although a Russian incursion into Ukraine had been widely anticipated, investors appeared surprised by Russian President Vladimir Putin’s decision to launch a broad-scale invasion beyond the breakaway Donbass region. Over the previous weekend, Putin recognized the independence of the so-called Luhansk and Donetsk People’s Republics in eastern Ukraine and announced their occupation by Russian “peacekeeping” troops. (See the Other key markets section below.)
Investors seek safe havens
News of attacks on the capital, Kyiv, and other major cities on Wednesday evening and Thursday morning sent stocks sharply lower—at its low at the start of trading Thursday, the S&P 500 Index hit 4,115, nearly 15% below its peak at the start of the year, putting it firmly in correction territory. The conflict also sent shock waves through fixed income markets. For much of the week, investors rushed into perceived safe havens, driving longer-term U.S. Treasury yields lower and the U.S. dollar higher, particularly against the Russian ruble and other emerging markets currencies.
Bond yields then increased and stocks rallied sharply at the end of the week after Russian government spokespersons stated that Russia was ready for negotiations with Ukraine and that it was prepared to send a delegation to Minsk—the capital of Belarus—for talks. Investors may have also been reassured that Western sanctions against Russia were not as severe as some feared, particularly regarding its energy sector. Several favorable corporate earnings reports and upside surprises in data related to January durable goods orders and personal spending may have also fostered the rebound.
Growth picking up after omicron lull
The week’s earnings reports and economic data generally seemed to take a back seat to the geopolitical tensions, however. The Federal Reserve’s preferred inflation gauge, the core personal consumption expenditures price index, rose 5.2% over the year ended in January, up from the prior month’s pace and in line with estimates. Pending home sales tumbled to a nine-month low in January amid historically low inventory and eroding affordability in the housing market as mortgage rates rise. IHS Markit’s flash purchasing managers’ indices (PMIs) for February revealed that the U.S. manufacturing and service sectors were growing at a faster pace following an omicron-related lull in January.
Friday’s rally pushed the yield on the benchmark 10-year U.S. Treasury note slightly higher for the week. (Bond prices and yields move in opposite directions.) Our traders noted that investment-grade corporate bonds traded lower for much of the week alongside headlines regarding the Russia-Ukraine conflict. Relatively light overnight activity from Asia, coupled with active primary issuance in the face of the weakened macroeconomic tone, contributed to the weakness. Despite elevated new issue premiums being offered by the issuers, demand for the new deals was relatively subdued.
The high yield bond market also struggled under the risk-off sentiment, but our traders noted that buyers looking to source high-quality BB-rated paper sought to take advantage of the weakness. Elevated cash balances due to the recent modest new issuance also contributed to the strong demand for higher-quality bonds. Similarly, the bank loan market traded lower amid the uncertainty surrounding the Russia-Ukraine conflict, but some opportunistic buyers stepped in at lower levels. Primary market activity continued to be light with only a few new deals announced.
Muaddi: Fed likely to remain on course
T. Rowe Price emerging markets debt Portfolio Manager Samy Muaddi observes that war is always inflationary, but that Fed policymakers will have to weigh the trade-off between financial conditions and higher commodity prices—both Ukraine and Russia are leading grain exporters, and Russia is a major supplier of aluminum, titanium, nickel, and especially palladium. Germany’s suspension of the construction of the Nord Stream 2 pipeline supplying natural gas from Russia to Western Europe, along with sanctions on Russian oil exports, is likely to result in a classic supply-side energy shock to inflation, in his view.
At the same time, he observes that higher premiums on risk assets, the stronger U.S. dollar, and falling equity valuations as a result of the crisis are already helping achieve the Fed’s goal in raising interest rates—tightening financial conditions to lower inflation. As a result, the Fed may not have to raise rates as much as recently expected. On balance, though, Muaddi believes that the Fed will not be deterred from starting its rate hiking program in March in order to fulfill its mandate to keep inflation low and steady.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
34,058.75 |
-20.43 |
-6.27% |
S&P 500 |
4,384.65 |
35.78 |
-8.00% |
Nasdaq Composite |
13,694.62 |
146.55 |
-12.47% |
S&P MidCap 400 |
2,661.59 |
29.09 |
-6.35% |
Russell 2000 |
2,040.93 |
31.60 |
-9.10% |
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 Russia’s invasion of Ukraine fueled fears of higher inflation and an economic slowdown. In local currency terms, the pan-European STOXX Europe 600 Index ended 1.58% lower. Germany’s DAX Index, one of the most exposed to Russia, declined 3.16%. France’s CAC 40 Index gave up 2.56%, while Italy’s FTSE MIB Index lost 2.77%. The UK’s FTSE 100 Index slipped 0.32%.
Core eurozone bond yields fell after Russia’s invasion of Ukraine drove a flight to safety. UK gilt and peripheral eurozone bond yields also declined.
EU, UK begin imposing sanctions on Russia
The European Union (EU) and the UK began imposing sanctions on Russia as part of a coordinated Western response to the invasion of Ukraine. These measures included export controls on certain technologies and financial penalties on parliamentarians, the defense minister, wealthy individuals, and banks. The UK also said it would stop Russian companies from raising capital in Britain and banned Russian airline Aeroflot. Germany halted approval of Gazprom’s Nord Stream 2 pipeline, which would transport natural gas from Russia.
Wieladek: Natural gas prices key impact on eurozone economy
Tomasz Wieladek, international economist at T. Rowe Price, is closely watching the natural gas market to judge the impact of the Russia-Ukraine war on the eurozone economy. Wieladek believes that, in the worst-case scenario, high gas prices stemming in part from a prolonged supply shortage could tip the economy back into recession.
Eurozone business activity strengthens, UK PMI surges
Eurozone business activity accelerated in February as easing coronavirus restrictions boosted the services sector, an IHS Markit survey showed. A first estimate showed the composite PMI rose to a five-month high of 55.8, an improvement from the 53.3 reading registered in January. (PMI readings greater than 50 indicate an expansion in activity.) Rising demand and fewer supply bottlenecks lifted manufacturing activity as well. Average prices charged climbed at a record rate due to an uptick in wages and energy costs.
UK business activity rebounded in February after disruptions caused by the omicron variant of the coronavirus at the turn of the year, according to initial PMI data. The UK Composite Output Index surged to an eight-month high of 60.2, up from 54.2 in January. Both services and manufacturing activity accelerated sharply.
EU to ask governments to withdraw fiscal support
EU Executive Vice President Valdis Dombrovskis said the European Commission will soon ask governments to start withdrawing pandemic-related fiscal stimulus in 2023 because the economy has recovered and is growing strongly, Reuters reported. "Of course, we need to remain agile, and, if there are new shocks and new problems, we need to be able to react and adjust our policy response accordingly," he said.
Japan
Amid ongoing caution about the conflict between Russia and Ukraine, Japan’s stock market returns were negative for the week, with the Nikkei 225 Index down 2.38% and the broader TOPIX Index 2.50% lower. The yield on the 10-year Japanese government bond fell to 0.20% from 0.22% at the end of the previous week. Bank of Japan Governor Haruhiko Kuroda said that the central bank has no immediate plans to scale back its monetary stimulus, and, if necessary, it would purchase unlimited quantities of bonds to keep yields within its target range. The yen weakened to around JPY 115.32 against the U.S. dollar, from JPY 115.00 the prior week.
Japan announces two sets of sanctions targeting Russia
In response to Russia’s initial infringement of Ukraine’s sovereignty and territorial integrity—whereby it recognized as independent the breakaway regions of Donetsk and Luhansk and authorized the sending in of troops—Japan adopted a first set of sanctions on Wednesday, addressing the issue in cooperation with the international community. This comprised visa suspensions and asset freezes for individuals connected to Donetsk and Luhansk, a ban on imports and exports from these regions, and the prohibition of the offering and issuance of new sovereign bonds by the government of Russia in Japan. A second set of sanctions, more stringent and closely coordinated with the U.S. and Europe, was announced on Friday, following Russia’s invasion of Ukraine. This included export controls on semiconductors and other high-tech products, a freeze on some Russian banks’ assets, and a suspension of visa issuance for certain Russian individuals and entities.
Prime Minister Fumio Kishida said that Japan had enough oil and gas reserves to cushion any short-term blow to energy supplies and that the government would implement measures to limit the economic impact of further oil price increases. The country will work in cooperation with international partners to stabilize the crude oil market, and Kishida believes that the current situation will not immediately pose a major obstacle to the stable supply of energy.
Business activity in the private sector contracted sharply
On the economic data front, flash PMIs showed that business activity in Japan’s private sector contracted sharply in February, driven by a steep downturn among service providers, while manufacturers signaled a moderate improvement in operating conditions. This was against the backdrop of record coronavirus cases amid the spread of the omicron variant and the reintroduction of restrictions. Rising average cost burdens also continued to dampen private sector firms’ activity.
China
Markets in China recorded a weekly loss as the Ukraine conflict depressed risk sentiment. The Shanghai Composite Index dropped 1.1%, and the large-cap CSI 300 Index shed 1.6%. The yield on the 10-year Chinese government bond fell to 2.806% from the prior week’s 2.814%. The yuan rose slightly against the U.S. dollar to end the week at around 6.3135 per dollar from 6.33 a week ago, boosted by foreign inflows into Chinese assets.
The People’s Bank of China’s (PBOC) decision to keep interest rates steady also dampened buying sentiment. The central bank left the one-year and five-year loan prime rates unchanged, surprising some experts who had forecast a reduction in the benchmark lending rate. However, T. Rowe Price credit analysts believe that the Chinese government’s earlier easing efforts to support the economy are slowly gaining traction.
In China’s debt-laden property sector, home prices rose 2.3% in January from a year earlier, the slowest year-over-year growth pace since December 2015, though a slight improvement from December marked the first monthly increase in home prices since September. China appears to be moving toward incremental easing on the housing side, with some cities reportedly reducing down payments for first-time buyers and state banks cutting mortgage rates in a major province, according to T. Rowe Price analysts.
Nevertheless, the country’s property sector remains in dire straits. All of China’s largest listed developers that disclose monthly sales data reported double-digit sales drops in January, according to Nikkei Asia, underscoring the challenges facing the sector. Chinese property developers need to repay almost USD 100 billion of debt this year, Bloomberg reported.
In corporate news, Moody’s Investors Service cut its rating for Shimao Group deeper into junk territory after a trustee said a note guaranteed by the developer may not be redeemed in March. The downgrade reflects Shimao’s “heightened liquidity risks over the next six to 12 months given the company's slower-than-expected fundraising progress to address its large upcoming debt maturities,” the agency said. Shimao, once regarded as one of China’s more financially healthy developers, defaulted on a trust loan in January. Meanwhile, developer Zhenro Properties asked its creditors for more time to pay back about USD 1 billion in debts due to mature this year, citing liquidity pressure. The company also said it was exploring the possibility of asset sales to improve its liquidity.
Other Key Markets
Russia
Stocks in Russia, as measured by the Russian Trading System (RTS) Index, returned about -32.7%.
Russian assets declined during the week after the government formally recognized the self-proclaimed “Donetsk and Luhansk People’s Republics” in eastern Ukraine as independent states. Russian President Vladimir Putin also ordered the military to send “peacekeeping” troops into those breakaway regions. The sell-off intensified on Thursday after Russia launched what Putin called a “special military operation” to “demilitarize” Ukraine. Russian forces, striking from Russia, Belarus, Crimea, and the Black Sea, attacked military targets in a number of Ukrainian cities.
Various nations around the world condemned Russia’s actions, and the U.S., the UK, and other European powers made good on their promise to implement new sanctions in response. While each country’s sanctions vary, and while full details are not yet available, the sanctions issued thus far generally target a number of key Russian individuals and financial institutions. They seem to include measures such as freezing assets and prohibiting transactions with certain Russian businesses, and now around 80% of the Russian banking system—including the second-largest bank VTB—is under sanctions with sharply reduced or no ability to settle international transactions. Also, in the U.S., there is a ban on American firms and individuals trading and investing in the secondary market of new Russian government debt. However, Russia, so far, has not been cut off from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), an international banking and messaging network.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about -0.1%.
During the week, the government reported that its mid-month inflation reading was higher than expected. T. Rowe Price sovereign analyst Richard Hall notes that about one-third of the headline figure was from the 5.6% seasonal adjustment in education tuition. While a fairly high adjustment, it was lower than headline inflation of 10% and did not include any makeup for limited adjustments in 2020 or 2021. However, Hall also observes that there was another upside surprise in the cost of industrial goods, plus a surprisingly high food inflation print. In addition, he sees evidence of broadening pressure in services, which is understandable given the 10% minimum wage increase in January.
Hall believes that Brazil’s inflation is plateauing at an elevated level and that signs of disinflation are not likely to become apparent until sometime in the second or third quarter of this year. A large electricity price cut coming in April and recent currency appreciation should also help reduce inflation pressures. However, the benefits from the latter have been offset by higher oil prices so far.
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