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Global Markets Weekly Update: July 2, 2021
U.S.
Better-than-expected economic data help lift stocks to new highs
The S&P 500 Index and Nasdaq Composite Index moved to new highs and closed out a fifth consecutive quarterly advance. Large-cap growth stocks led the gains, with the Russell 1000 Growth Index stretching its weekly winning streak to eight. Technology and health care stocks led the gains within the S&P 500, and consumer discretionary stocks were also strong, boosted by a solid rise in Nike shares. Small- and mid-caps underperformed after strong gains the previous week. T. Rowe Price traders noted that quarter-end rebalancing caused some increase in volumes, but they remained relatively muted. U.S. markets were set to be closed on Monday, July 4 in observance of the Independence Day holiday.
Generally favorable economic data seemed to support sentiment. The Conference Board’s index of consumer confidence beat expectations and reached a 16-month high. The spirits of homeowners—if not buyers—may have been lifted by gains in housing prices, which also surprised on the upside. The strong labor market was another factor in making Americans feel more optimistic about their economic prospects. On Friday, the Labor Department reported that employers had added 850,000 nonfarm jobs in June, well above consensus estimates of around 700,000 and the most since last August. Weekly jobless claims also fell more than expected, to a pandemic-era low of 364,000.
The Institute for Supply Management’s (ISM’s) gauge of factory activity fell a bit more than expected but still indicated healthy expansion. ISM researchers cited labor and material shortages as preventing even faster growth. Pending home sales data may have been the biggest surprise of the week, jumping 8% in May in contrast to consensus expectations for a slight decrease.
Health officials stress effectiveness of vaccines against delta variant
T. Rowe Price traders noted that worries over the spread of the “delta” variant of the coronavirus seemed to rein in investor enthusiasm somewhat. The U.S. saw an increase in cases concentrated in states with lower vaccination rates, and some new restrictions were put in place in Israel and elsewhere (see below). U.S. health officials stressed that current vaccines were effective against the variant, however. Johnson & Johnson shares rose Friday morning after the company reported that its vaccine provoked a durable immune response and experienced only a small drop in efficacy against the delta variant, and a lesser one than against the earlier “beta” variant.
U.S. Treasury yields decreased through most of the week, particularly for the longest maturities. T. Rowe Price traders cited investors’ month-end rebalancing needs and the Fed’s buying of longer-dated Treasuries among the factors behind the lower yields.
The broad municipal bond market posted gains through most of the week, with our traders noting a pickup in demand on Wednesday, in particular. New issuance and secondary market trading were muted heading into the holiday weekend, but buying activity was supported by inflows from reinvestments of July 1 coupon payments. Moody’s Investors Service upgraded its rating on Illinois general obligation and sales tax-backed bonds to Baa2 from Baa3, citing “material improvement in the state’s finances.” However, the ratings agency cautioned that the state still carries substantial long-term pension liabilities that are structurally underfunded.
Subdued issuance supports investment-grade corporate bond market
According to our traders, investment-grade corporate bond spreads—the extra yield offered over Treasuries, and an inverse measure of the sector’s relative appeal—moved tighter on Monday despite a mixed session in equities and a move lower in rates. Subdued new issuance and expectations of forward supply, coupled with strong month-end buying activity and overnight demand from Asia, contributed to a supportive technical backdrop. In the latter half of the week, spread movements were limited as secondary flows and overnight activity were relatively light in the leadup to the holiday weekend.
Our traders reported that high yield market sentiment was generally positive as broader risk markets continued to weigh the impact of COVID variants, the status of fiscal policy negotiations, and inflation expectations. Month- and quarter-end trades drove most of the market’s activity before the arrival of the jobs report on Friday. Our traders noted that no new deals were launched in the latter half of the week as the primary calendar shut down ahead of the holiday weekend.
U.S. Stocks1
Index |
Friday's Close |
Week’s Change |
% Change YTD |
DJIA |
34,786.35 |
352.51 |
13.66% |
S&P 500 |
4,352.34 |
71.64 |
15.87% |
Nasdaq Composite |
14,639.33 |
278.94 |
13.59% |
S&P MidCap 400 |
2,709.56 |
-16.92 |
17.47% |
Russell 2000 |
2,305.76 |
-28.64 |
16.76% |
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 were down slightly on worries that inflationary pressures might bring forward interest rate increases. Another headwind was the spread of a highly infectious variant of the novel coronavirus, which clouded the outlook for an economic recovery. In local currency terms, the pan-European STOXX Europe 600 Index slipped 0.18%. Major indexes were mixed. Germany’s Xetra DAX Index rose 0.27%, while France’s CAC 40 Index fell 1.06% and Italy’s FTSE MIB Index declined 0.89%. The UK’s FTSE 100 Index gave up 0.18% of its value.
Core eurozone government bond yields fell, reflecting growing fears about the spread of the delta variant of the coronavirus in Europe. Comments from European Central Bank (ECB) President Christine Lagarde highlighting the risk of virus variants and their potential effects on the eurozone economic recovery also weighed on yields. Peripheral bond yields broadly tracked core markets. UK gilt yields likewise fell in tandem with core markets. Bank of England Governor Andrew Bailey reiterated the view that the uptick in UK inflation would prove transitory appeared to contribute to the decline in gilt yields.
Coronavirus cases rise again, EU starts COVID-19 travel certificates
The number of new cases of COVID-19, the disease caused by the coronavirus, rose for the first time in 10 weeks in Europe, according to Dr. Hans Kluge, the World Health Organization’s regional director for Europe. Portugal reimposed a nighttime curfew in 45 municipalities, including Lisbon, to contain the spread of the delta variant. The rise in infections came even as Europe had vaccinated 60% of its adult population with at least one dose in June and was on track to reach 70% in July, data from the European Centre for Disease Prevention and Control showed.
The EU Digital COVID Certificate became available on July 1 and as of that date had been adopted by 16 states. The EU also recommended that member states reopen travel to vaccinated U.S. citizens and urged the U.S. to ease a ban on European travelers.
Eurozone inflation dips, jobless rate falls, manufacturing booms
The eurozone’s index of consumer prices fell to 1.9% in June from 2.0% in May, according to a first estimate from Eurostat. Inflation has ticked up for six consecutive months and is near the ECB’s target of “below but close to 2.0%.” The euro area jobless rate fell to a seasonally adjusted 7.9% in May from 8.1% in April but was up from 7.5% in May 2020. IHS Markit’s eurozone purchasing managers’ index (PMI) came in at 63.4 in June—above the flash estimate and its highest reading on record—suggesting that the expansion in the manufacturing sector was even stronger than initially estimated. (PMI readings greater than 50 indicate an expansion in activity levels.)
Japan
Japan’s stock market returns were negative for the week, as concerns about rebounding coronavirus infection rates eroded optimism about progress in the country’s vaccination drive. The Nikkei 225 Index fell 0.97% while the broader TOPIX Index finished 0.32% lower. The yen weakened to its lowest level since February 2020, closing the week at JPY 111.43 against the U.S. dollar. The yield on the Japanese 10-year government bond declined to 0.046%.
Authorities to decide on possible extension of coronavirus restrictions
With coronavirus restrictions in Tokyo due to expire on July 11—ahead of the start of the Olympics on July 23—authorities are set to decide on a possible extension of the “quasi” state of emergency currently in place. Coronavirus cases in the capital have rebounded notably in the 10 days since it exited a state of emergency and moved to less severe restrictions. Keeping these restrictions in place for longer could affect the number of spectators allowed into Olympic venues: A quasi-emergency caps spectators at 5,000. Spectators from overseas have already been banned.
Prime Minister Yoshihide Suga said during the week that the games could be held without spectators depending on the coronavirus situation and that authorities would act with the safety and security of the Japanese people as their top priority.
BoJ’s Tankan survey indicates broader economic recovery
The Bank of Japan’s (BoJ’s) closely watched Tankan survey signaled that the domestic economic recovery was broadening, with sentiment improving in both the manufacturing and services sectors. The headline index for sentiment among large manufacturers rose to 14 in June from 5 in March, the highest level since 2018. Manufacturers’ business confidence has been supported by solid global demand. The auto sector remains a weak spot, however, due to shortages of semiconductor chips. The mood in the nonmanufacturing sector also improved, with the index rising to 1 from the previous survey’s -1. Industries such as hotels and restaurants showed signs of improvement, as consumers have adapted to coronavirus conditions.
Industrial production contracts, unemployment rises to highest since December 2020
Other economic data were more negative. Industrial production contracted by more than expected, falling 5.9% month on month in May amid expectations of a 2.1% decline. The contraction was due primarily to carmakers and other manufacturers cutting back on production due to the global semiconductor chip shortage. Meanwhile, Japan’s unemployment rate rose to 3.0% in May, the highest level since December 2020. This compares with 2.8% in the prior month. Most sectors saw lower employment, including manufacturers, logistics, and finance.
China
Chinese stocks fell for the week. Both the Shanghai Composite Index and large-cap CSI 300 Index posted a weekly loss after each index recorded its biggest one-day percentage drop since early March on Friday, Reuters reported. Reports of profit-taking by domestic investment funds and open market operations undertaken by China’s central bank to drain funds from the financial system may have contributed to the declines, according to T. Rowe Price traders.
Investors had expected ample liquidity ahead of China’s celebration Thursday of the ruling Communist Party’s 100th anniversary, especially after a cash injection the previous week. The seven-day interbank rate rose to a level about 30 basis points above the official target, but analysts said the rise more likely reflected market pressures at quarter-end and did not necessarily signal tighter policy. In its latest policy meeting, the People’s Bank of China said that it would “keep the macro leverage ratio basically stable," suggesting that the central bank would not tighten policy in the near term.
Bond yields were unchanged for the week, with the yield on the 10-year sovereign bond ending at 3.10%. In currency trading, the renminbi shed 0.4% against the U.S. dollar to RMB 6.479 per dollar.
In economic news, June’s official manufacturing PMI met expectations. However, the nonmanufacturing PMI came in weaker than expected, which may have been due to a resurgence of COVID-19 infections in the southern province of Guangdong. The private Caixin manufacturing PMI also edged lower, in line with the official reading. Overall, the June PMI readings remained in expansionary territory, suggesting that China's post-pandemic recovery continues at a healthy pace.
Industrial profits growth also remained strong, according to the official monthly survey of profits at larger industrial enterprises. Filtering out pandemic base effects, industrial profits’ two-year average growth slowed slightly from 22.6% in April to 20.2% in May, leading some analysts to believe that industrial profits growth may have peaked this cycle. Sales revenues from January to May surged 9.9% on the same two-year average basis.
On the property front, secondhand home prices in Shenzhen—one of China's hottest property markets—declined in May, the first monthly retreat since July 2019, while transaction volumes in the city have fallen every month since February, according to local reports. The decline in transactions suggests that the government’s efforts to cool the property market nationwide and to curb speculation in Shenzhen may finally be working.
Other Key Markets
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about 0.2%. Equities were fairly flat as the second quarter came to an end and as investors were cautious due to emerging corruption allegations regarding the government’s purchases of coronavirus vaccines.
Elevated inflation remains a chief concern for investors in Brazil, and while the central bank has begun raising interest rates in response, T. Rowe Price sovereign analyst Richard Hall expects additional near-term inflation pressures stemming from rising electricity costs. During the week, the country’s electricity regulator announced a 50% increase in a tariff surcharge starting in July. According to Hall, this increase will be reflected in the government’s mid-July inflation report. More significantly, the regulator announced a new public consultation about additional surcharge increases, which could come as early as August.
Chile
Chilean stocks, as measured by the S&P IPSA Index, returned about -0.9%. The financial markets were closed on Monday for a holiday.
While the equity market was little changed for the week, the peso strengthened against the U.S. dollar following news that the ministry of finance would step up its sales of dollar-denominated assets from Chile’s sovereign wealth fund to help finance the USD 10.8 billion fiscal package announced at the end of May to aid the economic recovery. The package, which the legislature approved in June, includes support for households, such as a universal emergency basic income for most citizens; smaller businesses, such as greater tax benefits; and the health system’s broad coronavirus vaccination efforts.
In June, the government was originally selling up to USD 200 million in assets per day but increased this daily maximum to USD 300 million after the fiscal package became law. This week, the finance ministry indicated that the daily sales limit would be increased to USD 500 million starting on June 30 and continuing for all of July. The government’s planned monthly sales total for July will be USD 4.7 billion.
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