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Global Markets Weekly Update: June 18, 2021
U.S.
Hawkish Fed drags cyclical stocks lower
Stocks declined as a surprisingly hawkish outcome from the Federal Reserve’s June 15–16 policy meeting and late-week comments from a Fed official about potentially earlier-than-expected rate hikes dragged the Dow Jones Industrial Average lower. The Dow includes many cyclical companies—those most reliant on economic growth. On the other hand, the tech-heavy Nasdaq Composite index posted a much more modest loss. The broad market S&P 500 Index declined.
Large-cap equities held up better than small-caps. Growth stocks easily outperformed value as investors sold companies in the energy and financials sectors amid fears that the Fed will remove its accommodative policies and raise rates sooner than markets had anticipated.
Policymakers talk about talking about tapering
The early part of the week was relatively quiet on subdued trading volumes as investors looked forward to the end of the Fed policy meeting on Wednesday. The Fed’s post-meeting statement and Chair Jerome Powell’s press conference were widely viewed as surprisingly hawkish. Policymakers acknowledged that progress on vaccinations has allowed the economic recovery from the pandemic to gain strength, and Powell acknowledged that Fed officials have begun to discuss slowing the central bank’s bond purchases, the first step toward eventually raising interest rates. Powell said that observers could characterize the meeting as “talking about talking about tapering.”
Fed officials project faster tightening pace
The Summary of Economic Projections released after the meeting showed that policymakers now expect two rate hikes by the end of 2023, indicating a faster pace of tightening than in earlier projections. Powell reiterated that high inflation is likely to be transitory but stressed uncertainty about the inflation outlook. Some market participants may be concerned that the Fed could be undermining its credibility in pursuing its new framework of letting inflation run above 2% to achieve full employment without preemptively raising rates. Stocks declined modestly for the day on Wednesday.
On Friday, stocks took another leg lower after St. Louis Fed President James Bullard said that he expects the Fed’s first rate hike in late 2022, before the early 2023 beginning of the tightening cycle that market participants expected. Friday’s decline affected cyclical stocks the most, and the Cboe Volatility Index (VIX) hit its highest level since late May.
Volatile Treasury market
U.S. Treasuries were volatile following the Fed policy meeting. The 10-year U.S. Treasury yield increased sharply after the Fed meeting on Wednesday before falling on Thursday and Friday. (Bond prices and yields move in opposite directions.) Short- and intermediate-term Treasury yields experienced more sustained increases. The difference in yield on five- and 30-year Treasuries reached a lower level than where it started 2021, a trend that could weigh on financial stocks because banks tend to profit from larger spreads between short- and long-term rates.
According to T. Rowe Price traders, the investment-grade corporate bond market featured a relatively high level of new issuance before the Fed policy meeting. The primary and secondary markets were less active following the Fed meeting. Our high yield corporate traders noted that market participants had a generally muted reaction to the news from the Fed despite the pullback in equities.
Index |
Friday's Close |
Week’s Change |
% Change YTD |
DJIA |
33,290.08 |
-1189.52 |
8.77% |
S&P 500 |
4,166.45 |
-80.99 |
10.93% |
Nasdaq Composite |
14,030.38 |
-39.04 |
8.86% |
S&P MidCap 400 |
2,611.92 |
140.25 |
13.24% |
Russell 2000 |
2,237.73 |
-98.08 |
13.31% |
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 after the U.S. Federal Reserve indicated that it would increase rates earlier than previously expected. In local currency terms, the pan-European STOXX Europe 600 Index slid 1.19%. Germany’s Xetra DAX Index fell 1.56%, Italy’s FTSE MIB Index declined 1.94%, and France’s CAC 40 Index eased 0.48%. The UK’s FTSE 100 Index slipped 1.63%.
Core eurozone government bond yields rose with U.S. Treasury yields after the Fed signaled plans to begin raising interest rates in 2023. However, dovish comments from the European Central Bank (ECB) helped to moderate this move. Peripheral government bond yields broadly tracked core markets. However, Greek five-year government bond yields turned negative for the first time, reflecting the ECB’s plan to continue its monthly bond-buying program. UK gilt yields ended higher overall on increased expectations that the Bank of England (BoE) would tighten policy after inflation exceeded the bank’s target and on the Fed’s more hawkish stance.
England delays reopening; France ends curfew
UK Prime Minister Boris Johnson delayed a full reopening of society in England, which had been slated for June 21, for another month and said the vaccination campaign would be accelerated. The number of infections caused by the so-called Delta variant of the novel coronavirus has surged in the UK. France ended the nighttime curfew that was in place since October and began phasing out mask requirements in most public places, as did Denmark, amid signs that infection rates were falling. Germany said it was planning to do so as well.
UK inflation surges; payrolls rise
UK inflation jumped again in May, accelerating to 2.1%, on higher prices for clothing, fuels, and meals in restaurants and bars. The increase was above economists’ forecasts and the BoE’s target. Governor Andrew Bailey said last month that he would not hesitate to tighten monetary policy if the inflation rate consistently exceeded the BoE’s target. UK payrolls rose for a sixth consecutive month, driven by hiring in the hospitality industry, while the unemployment rate averaged 4.7% in the three months ended April 30.
Spain, Portugal recovery plans approved
The European Commission signed off on the first two national recovery plans—those of Spain and Portugal—supported by the EUR 800 billion Next Generation EU fund. Italy’s plan is next in line, with approval expected in coming days.
Industrial production in the eurozone was stronger than expected in April, rising 0.8% sequentially and 39.3% year over year, as the output of consumer goods more than doubled.
Japan
Japan’s stock markets generated mixed returns for the week, with the Nikkei 225 Index rising 0.05% and the broader TOPIX Index down 0.38%. The yield on the Japanese 10-year government bond rose to 0.06%, while the yen weakened to JPY 110.23 against the U.S. dollar.
Government eases some coronavirus restrictions
The government announced an easing in some coronavirus restrictions, a little more than a month ahead of the start of the Olympics: The state of emergency in nine prefectures is to be lifted, although seven areas, including Tokyo and Osaka, will remain under a quasi-emergency state. The move comes as infections are declining nationwide and the rollout of vaccinations is accelerating. Concerns about a resurgence in cases remain, however, particularly given the spread of highly contagious coronavirus variants.
Bank of Japan announces new lending measure to aid climate change efforts
The Bank of Japan (BoJ) left key policy rate targets and guidance unchanged at its June monetary policy meeting, as widely expected. It extended the duration of the special coronavirus financing support program by six months to the end of March 2022, giving Japan’s vaccination drive more time to work. In a surprise move, the BoJ also announced a measure to support climate change mitigation: A new initiative will provide funds for bank lending to climate-friendly businesses. The climate change facility will start operating within the year, and the central bank will provide details at next month’s meeting.
PM survives no-confidence vote
Opposition parties submitted a vote of no confidence against Prime Minister Yoshihide Suga as his handling of the coronavirus pandemic and decision to push ahead with the Olympics have come under scrutiny. The motion came after the ruling coalition rejected the opposition parties’ request for the current parliamentary session to be extended to allow more time to debate the highly pressing issues facing the country. In the event, the lower house of parliament voted down the motion; had the vote passed, Suga would have had 10 days to dissolve the lower house or have the entire cabinet step down.
Suga is, however, believed to be planning to dissolve the lower house for a general election after the Olympic and Paralympic Games finish in early September, with the aim of securing reelection as leader of the ruling Liberal Democratic Party (LDP) to stay in power. The government is said to be considering a new economic stimulus package before the expected snap election, which, together with an accelerating vaccine rollout, could boost support for the LDP.
Exports rise at fastest pace since 1980
Japan’s exports rose 49.6% year on year in May, the highest growth since 1980. The jump in exports largely reflected a rebound in shipments from last year’s plunge in the wake of the pandemic shock. The highest export growth was to the U.S., driven by cars and auto parts, while exports to China were also strong, led by chip production equipment and hybrid cars.
China
Chinese stocks recorded their third weekly loss. The large-cap CSI 300 Index fell 2.3% and the Shanghai Composite Index shed 1.8%. Domestic brokerage CITIC Securities reported tighter A-share liquidity in June as northbound Stock Connect inflows dried up, while domestic mutual funds experienced greater redemption pressures. New energy vehicle (NEV) stocks rallied on Friday after an official at the 2021 China Association of Automobile Manufacturers projected that the NEV share of new vehicles would increase from 20% to 30% within five to eight years. Industry data showed a NEV penetration rate of 12.0%, a historic high, while domestic NEV sales in May jumped 8.3% from April and more than doubled from a year ago.
The yield on China’s 10-year government bond rose five basis points to 3.20%. Huarong Asset Management, whose financial woes have raised questions about Beijing’s willingness to backstop state-owned companies, was back in the news as the company reportedly plans to sell off several non-core assets, according to financial news outlet Caixin. The asset sale should allow Huarong to refocus on its business of managing nonperforming assets.
In currency trading, the renminbi (RMB) weakened slightly against the U.S. dollar to end at 6.44 per dollar. China’s trade-weighted currency basket, the CFETS index, hovered close to its 2018 high of 98 and is up 3.0% this year, compared with the RMB’s 1.6% gain against the dollar. Unlike other Asian countries, most of the shift toward monetary policy normalization has already occurred in China, which some analysts believe could help support the Chinese currency ahead of U.S. policy tightening expected to occur later this year.
Chinese consumer spending was cautious during the Dragon Boat Festival holiday from June 12–14, based on high frequency data. Tourist numbers declined slightly from 2019 levels, but total spending fell 25%, a similar shortfall with the May Day holiday. Weak box office revenue at China’s cinemas also offered evidence of a sluggish recovery in consumer services.
Weaker-than-expected May economic data from the National Bureau of Statistics led some China economists to conclude that the country’s growth momentum has peaked. Retail sales grew a below-forecast 4.5% based on a two-year average annual growth rate, barely above April’s pace and roughly half of its pre-pandemic rate. Analysts believe that some of the weakness was due to a recent COVID-19 flareup in the southern coastal province of Guangdong, which accounts for one-tenth of China’s sales. On a positive note, urban unemployment in May fell close to its pre-pandemic rate, while year-to-date employment increased by 5.74 million, more than half of Beijing’s annual target.
Other Key Markets
Colombia
Colombian assets were mixed on the week as investors remained uncertain about the country’s fiscal and political outlook. After nearly seven weeks of protests, the National Strike Committee is calling for a temporary halt to demonstrations. This follows the end of talks between the Committee and the government after the former criticized President Iván Duque Márquez's administration for not ceding to its demands. Rather than abandoning its efforts to force change, however, the Committee is launching a campaign to gain broader support by meeting with people in key economic sectors, union members, and students, among others, in an attempt to build a united front. Its goal is to stage a July 20 march to the capitol, with the message being “for life, peace, democracy, and against the neoliberal policies of Duque's government.”
According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the Committee’s demands include strengthening the health sector, ramping up vaccinations, providing a universal basic income for 7.5 million families, promoting national production and food sovereignty, creating jobs and protecting wages and pensions, guaranteeing university enrollment, and ending privatizations. So far, it has achieved the scrapping of proposed tax and health reforms, as well as the resignation of several government officials, including the finance and deputy finance ministers. The Duque government intends to make a second attempt at tax reform—the first proposal back in April is what prompted the beginning of the protests—but not until Congress is back in session the same day as the national strike.
Mexico
Mexican stocks, as measured by the IPC Index, returned about -1.9%.
During the week, in the aftermath of changing some key positions in his administration—specifically the finance minister and the central bank president—following the Morena coalition’s loss of some legislative seats in the June 6 midterm elections, President Andrés Manuel López Obrador (AMLO) resumed pushing his agenda with the announcement of three constitutional reforms. According to Gifford, these proposals would affect the energy sector, electoral rules, and the reach of the defense ministry.
Regarding energy, AMLO wants to reform the electricity sector to give the Federal Electricity Commission—Mexico’s state-owned electric utility company—more than half of the country’s market for generating electric power. He also wants to reduce electricity costs for households relative to large businesses. Gifford notes that AMLO has previously pushed these measures through Congress, but they were subsequently held up by the judiciary for being unconstitutional.
With regard to electoral reform, AMLO wants to streamline the voting system so that it is more consistent with traditional standards—in other words, “winner takes all,” and not proportional representation whereby seats are distributed by political party. He also seeks to change the method for selecting electoral officials to ensure their independence. Finally, AMLO wants the National Guard to be under the jurisdiction of the Ministry of Defense.
Gifford does not consider AMLO’s support for these measures to be surprising or controversial. In fact, Gifford considers it a positive sign that AMLO is going through the appropriate channels for approval and is prepared to accept defeat if the reforms are not approved by the legislature. Nevertheless, Gifford concludes that passage of these reforms through Congress is unlikely due to Morena’s loss of a qualified majority in the midterm elections.
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