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Global Markets Weekly Update: March 19, 2021
U.S.
Investors maintain focus on rising bond yields
The major indexes continued to move to record highs early in the week but then lost ground as bond yields reached their highest levels in over a year. Energy stocks fell sharply as oil prices saw their biggest daily drop since the summer, seemingly driven by rising U.S. inventories and demand concerns due to renewed lockdowns and the slow vaccine rollout in Europe (see below). The increase in yields augured well for banks’ lending margins and supported financials shares for most of the week, but the sector fell back on Friday after the Federal Reserve announced that it was not extending an exemption put in place early in the pandemic that allowed banks to hold lower capital reserves. The small-cap Russell 2000 Index fell the most, giving back some of its leadership for the year to date.
The week began on a strong note, which T. Rowe Price traders attributed to a combination of fiscal and monetary policy stimulus, more retail investor support, and the better economic outlook given progress in containing the coronavirus. On Thursday, President Joe Biden announced that the U.S. would reach 100 million coronavirus vaccinations by the next day, well ahead of earlier targets, and was even preparing to lend doses to Canada and Mexico. Case trends remained generally positive, although health officials expressed worries about the premature relaxation of social distancing measures and travel over the spring break vacation season. The Transportation Safety Administration reported that daily airline passenger volumes had reached their highest level since the start of the pandemic.
Fed confirms dovish stance
The equity rally stalled on Tuesday morning after longer-term Treasury yields resumed their rise—over the next two trading days, the yield on the benchmark 10-year note soared roughly 17 basis points (0.17%) and hit a new pandemic-era high of around 1.75% before retreating a bit. The equity market’s reaction to the rise was somewhat muted, seemingly helped by the release of the Federal Reserve’s policy statement on Wednesday. The firm’s traders noted that Wall Street seemed on edge before the release, especially given the sharp sell-off following Fed Chair Jerome Powell’s congressional testimony two weeks earlier. The Fed statement and Powell’s post-meeting press conference forcefully communicated the central bank’s dovish monetary stance, however. Policymakers affirmed that they anticipated no rate hikes until 2023, along with their confidence that any increase in inflation will prove short-lived. The committee also pledged to maintain the current pace of its asset purchases and meaningfully upgraded its projections for economic growth in 2021.
The week’s data arguably supported the Fed’s position that substantial slack remained in the economy, although severe weather across much of the country in recent weeks also appeared to be at work. Weekly jobless claims rose unexpectedly to 770,000, their highest level in a month. Industrial production fell 2.3% in February versus consensus expectations for a slight increase, while an index of homebuilder sentiment fell to a seven-month low as housing starts and permits also saw declines. Retail sales excluding the volatile auto segment slumped 2.7% in February, the biggest decline since April’s 15.2% plunge. A positive outlier was a current gauge of manufacturing output in the mid-Atlantic region, which surged to its highest level in nearly five decades.
Rise in Treasury yields ripples across fixed income markets
Bond traders appeared to look past the mixed economic data and focus instead on the potential for higher inflation, leaving longer-term U.S. government bond yields significantly higher for the week. (Bond prices and yields move in opposite directions.) T. Rowe Price traders noted that the selling activity was also partially due to the Bank of Japan’s decision to widen the trading band around 10-year Japanese government bonds (see below).
The broad municipal bond market sold off following the rise in Treasury yields. Several deals had to reprice to higher yields to clear the market, including a prominent sale of personal income tax revenue bonds by the Dormitory Authority of the State of New York. However, our traders added that technical tailwinds remain intact, with cash flows returning to positive levels.
Fed Chair Powell’s dovish comments provided a tailwind to the investment-grade market, but the drop in oil prices in response to demand concerns weighed on the energy sector. Meanwhile, our traders noted that sellers of longer-duration bonds weighed on the performance of the broader high yield market.
Index |
Friday's Close |
Week’s Change |
% Change YTD |
---|---|---|---|
DJIA |
32,627.97 |
-150.67 |
6.60% |
S&P 500 |
3,913.10 |
-30.24 |
4.18% |
Nasdaq Composite |
13,215.24 |
-104.62 |
2.54% |
S&P MidCap 400 |
2,622.92 |
-23.42 |
13.71% |
Russell 2000 |
2,289.64 |
-63.15 |
15.76% |
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 ended little changed. Although central banks maintained their dovish policy stance to support an economic recovery, concerns about a resurgence in coronavirus infections in some countries limited upside. In local currency terms, the pan-European STOXX Europe 600 Index ended the week roughly flat. Major European indexes were mixed. Germany’s Xetra DAX Index gained 0.82%, while Italy’s FTSE MIB Index advanced 0.36%. However, France’s CAC 40 Index fell 0.80%, and the UK’s FTSE 100 Index declined 0.61%.
Core eurozone bond yields ended slightly higher. Germany’s 10-year bund yield climbed midweek, tracking U.S. Treasuries in response to expectations for an uptick in inflation. Yields eased somewhat on Friday on concerns about the increasing number of coronavirus infections in Europe and consequent constraints on economic activity. Peripheral eurozone yields largely tracked core markets. UK gilt yields also rose, lifted in part by the Bank of England’s (BoE) optimistic tone regarding the economic outlook and its decision to keep interest rates unchanged.
Germany, France, Poland face third wave of pandemic
Germany, France, and Poland took steps to contain a surge in coronavirus infections. The UK government said that it may have to slow the pace of coronavirus inoculations amid delays to vaccine shipments from India. European Commission President Ursula von der Leyen also threatened to introduce emergency controls on vaccine production and distribution and to stop vaccine exports to the UK, where almost half of all adults have had a dose. The European Medicines Agency reached a “clear scientific conclusion” that the Oxford-AstraZeneca vaccine was safe, after many European nations suspended its use amid fears it could cause deadly blood clots. The ruling prompted Germany, France, Italy, and other countries to resume its use.
BoE sticks to bond-buying program; BoF calls for stronger economic growth
The BoE’s policymakers voted unanimously to keep the benchmark interest rate at an all-time low of 0.1% and to continue its existing bond-buying program. The central bank said that global economic developments “had been a little stronger than anticipated” last month and noted that the U.S. fiscal stimulus package should provide “significant additional support.” It said bond yields had increased to reflect the stronger recovery while observing that the prices of risk assets had held up.
The Bank of France (BoF) increased its 2021 forecast for economic growth to 5.4% from 4.8% and said that activity at the end of last year held up better than estimated. The new projections may prove conservative, as they assume that coronavirus restrictions remain through the first half of 2021.
Dutch election: Rutte wins fourth term
Dutch Prime Minister Mark Rutte’s VVD party won a clear victory in the national election to secure a fourth term in office, exit polls showed. Building a coalition may take time, but most observers expect the VVD, the pro-European D66, and two Christian parties to form a new government.
Japan
The performance of Japan’s stock markets was mixed over the week. The Bank of Japan’s (BoJ’s) announcement that it will limit its purchases of exchange-traded funds (ETFs) to those tracking the TOPIX contributed to the index’s 3.13% gain. The Nikkei 225 Stock Average underperformed, returning 0.25%. The yen strengthened slightly, closing at just below JPY 109 versus the U.S. dollar. The yield of the 10-year Japanese government bond finished the week at 0.11%.
Bank of Japan tweaks policy
The BoJ published a long-awaited review of its policy tools following its March 18–19 monetary policy meeting, introducing slight tweaks with a view to keeping easing measures in place for a prolonged period. It removed its guidance to buy ETFs at a set pace: Under the new policy, it will intervene only when necessary, rather than steadily increasing its holdings, while maintaining a JPY 12 trillion ceiling for annual purchases. According to the BoJ, large-scale purchases during times of heightened market instability are effective.
The BoJ deemed it appropriate to continue with yield curve control. It added some flexibility, however, stating that the range of Japanese government bond yield fluctuations would be around plus or minus 0.25% from the target level of around zero. The range was increased slightly from 0.2%. The BoJ also plans to offer incentives for financial institutions that borrow from its various lending programs, to mitigate the side effects of additional interest rate cuts. It reiterated that short- and long-term policy rates are expected to remain at present or lower levels.
Temporary factors weigh on exports
According to Ministry of Finance data, Japan’s exports fell by a faster-than-expected 4.5% year on year in February, due primarily to temporary factors. U.S.-bound shipments dropped by 14.0%, dragged down by declining auto sales that were at least partly due to bad weather. Exports to China also slowed sharply, from a 37.5% year-over-year increase in January to just 3.4% in February, reflecting Lunar New Year effects. Imports rose 11.8% in the year to February, following a series of declines over the past year. Growth was underpinned by a surge in imports from China.
State of emergency in Tokyo region to be lifted
Japan’s Prime Minister Yoshihide Suga formally decided to end the coronavirus state of emergency in Tokyo and three neighboring prefectures on March 21. The central government and public health experts noted that infections have declined from their peak and hospital bed occupancy rates have now fallen sufficiently.
China
Chinese stocks fell for the week, with the Shanghai Composite Index slipping 1.4% and the large-cap CSI 300 Index shedding 2.7%. Chinese stocks underperformed other Asian markets on Friday after negative headlines about the first day’s talks at the U.S.-China meeting in Alaska, with each side criticizing the other. The yield on China’s sovereign 10-year bond rose following the release of strong economic data for January and February but fell on Friday to end at 3.26%, unchanged from the prior week.
Investment-grade bonds stayed resilient as benchmark spreads tightened. Fundamentals for China's domestic bond markets appeared to remain generally positive, with credit growth and economic momentum gradually slowing and monetary policy on hold. Monthly net government issuance should be similar to last year’s level, according to Beijing’s fiscal projections.
In money markets, the seven-day reverse repo rate—the cost of funds in China’s interbank market—hovered close to the central bank’s target of 2.2%, signaling that liquidity fears that rattled markets earlier this year have eased. In currency trading, the renminbi was little changed, closing at 6.509 versus the U.S. dollar.
On the economic front, retail sales in the combined January–February period rose 33.8% year on year, according to the National Bureau of Statistics (NBS). The large increase was due to last year’s lockdowns to contain the coronavirus pandemic, which shuttered economic activity in large parts of China. Even so, retail sales still increased 6.4% over the combined January–February period in 2019, according to the NBS. In other releases, industrial output rose 35.1% year on year in January–February over a year ago and 16.9% over the same two-month period in 2019.
U.S.-blacklisted chipmaker SMIC to build new plant in Shenzhen
In corporate news, China’s largest semiconductor producer, Semiconductor Manufacturing International Corp. (SMIC), said it will partner with the Shenzhen government to build a USD 2.4 billion plant to make 28 nanometer chips. News of SMIC’s plant comes as China is trying to reduce its reliance on U.S. technology and bolster its domestic semiconductor industry amid rising tensions with Western countries. SMIC and several other companies were put on a U.S. investment blacklist in December by the Trump administration, which alleged that the companies had ties to China’s military. However, China's Semiconductor Industry Association recently announced a new working group with its U.S. counterpart to discuss issues such as export curbs, technology standards, and supply chain security.
Other Key Markets
Growing inflation concerns lead to central bank rate hikes
While the U.S. Federal Reserve kept its short-term lending rate steady, central banks in Brazil, Turkey, and Russia raised rates during the week in moves that were either unexpected or more than analysts had predicted.
- Brazil’s central bank surprised investors by making its first rate hike in nearly six years, and its largest interest rate increase in more than a decade, on Thursday. Policymakers increased rates by 75 basis points, from 2.0% to 2.75%, and signaled that another hike of the same size was likely at its next meeting. In a statement, the bank’s monetary policy committee, known as Copom, noted that there were still risks to the economy from the coronavirus, but the policymakers said they thought it was time to start unwinding the “extraordinary stimulus” that had been in place. Copom noted that gross domestic product at the end of 2020 was strong and that inflation forecasts in Latin America’s largest economy were picking up.
- Turkey’s central bank lifted its key lending rate from 17% to 19%—one of the highest levels in the world—in an attempt to address growing inflation risks. Most forecasters had predicted a hike of around one percentage point. The Turkish lira, which has been hit hard by higher U.S. Treasury yields over the past month, rallied after the rate increase was announced.
- Russia’s central bank raised its benchmark lending rate by 25 basis points, from 4.25% to 4.50%. Many analysts had expected the bank to wait at least one more meeting before beginning to hike rates. Similar to its counterparts in Brazil and Turkey, Russian policymakers cited rising inflation risks. Annual inflation through February had risen to 5.7%, higher than the bank’s 4% target.
Biden’s “killer” comment pressures Russian markets
Russian stocks gave up some recent gains and the country’s benchmark sovereign bond yield increased as investors became concerned that Russia could face new sanctions from the U.S. Financial markets in the country came under pressure after U.S. President Joe Biden, in an interview, called Russian President Vladimir Putin a killer who will pay a price for interfering in American elections.
Russia recalled its ambassador from Washington in response to Biden’s comment. While many analysts believe that any potential U.S. response will be focused on individuals in Putin’s government, the possibility of sanctions targeting Russia’s sovereign debt led investors to rotate out of Russian government bonds.
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