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Global Markets Weekly Update: March 26, 2021
U.S.
Stocks end mixed
The major indexes were mixed for the week, as investors seemed to continue weighing optimism about reopening against inflation and interest rate concerns. Small-cap stocks lagged for the second consecutive week, signaling a potential pause or reversal in their recent market leadership. Similarly, communication services stocks fared worst within the S&P 500 Index, dragged down by sharp declines in shares of several traditional media companies following a stretch of strong performance. The closure of the Suez Canal because of a disabled cargo ship raised worries about already stressed global supply lines but boosted oil prices and energy stocks. Consumer staples, utilities, materials, and real estate shares were also strong.
Conflicting signals on pandemic fight
As they had the previous week, stocks started off on a strong note but sacrificed a portion of their gains over the following days. Conflicting signals about progress in fighting the coronavirus appeared to be a major driver of sentiment. On Monday, investors seemed encouraged by AstraZeneca’s release of data showing its vaccine was highly effective and safe in U.S. trials. The government’s Data and Safety Monitoring Board questioned whether the data were outdated, however, leading AstraZeneca to take the unusual step of releasing revised results on Wednesday. The new data showed that the vaccine was slightly less effective at staving off infection but still 100% effective in trials at preventing severe disease and hospitalization.
Stocks also seemed to come under pressure from rising infection numbers in many states, as well as renewed lockdowns in Europe (see below). On Thursday, however, President Joe Biden may have contributed to an afternoon rebound by stating that he now aims to vaccinate 200 million Americans in the first 100 days of his administration instead of the 100 million originally targeted. Several states also announced plans to begin opening vaccination to all residents over 16.
February weather takes a toll on economy, while inflation remains tame
The week brought a number of downward surprises in economic data, although the severe winter weather in February seemed to deserve a large part of the blame. February existing home sales fell 6.6%, roughly twice expectations, while new home sales tumbled 18.2%, nearly triple consensus estimates. Poor weather and supply chain issues appeared to take a toll on business investment, with nondefense durable goods orders excluding aircraft falling 0.8% in February. IHS Markit’s current gauges of manufacturing and service sector activity remained elevated, however, suggesting that economic activity was bouncing back in March. The University of Michigan also revised its gauge of March consumer sentiment higher, while weekly jobless claims fell much more than expected and reached a new pandemic-era low of 684,000.
Inflation data—perhaps at the top of the list of recent investor concerns—remained muted. The core (excluding food and energy) personal consumption expenditures index increased by 1.4% year over year in February, down from 1.5% in January and still well below the Federal Reserve’s 2% target. On Wednesday, both Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen testified before Congress that they saw little danger of an overheating economy.
10-year yield falls back below 1.7%
The yield on the benchmark 10-year U.S. Treasury note decreased through much of the week but appeared to rise somewhat in response to Thursday’s claims data. (Bond prices and yields move in opposite directions.) According to T. Rowe Price traders, municipal bonds benefited from broad-based support that was most evident in the new issue market, where bonds across the quality spectrum saw double-digit over-subscription. Meanwhile, the technical picture, most notably the amount of cash in the market, remained strong.
Strong overnight buying from Asia provided a tailwind for the investment-grade corporate bond market, according to our traders. Healthy trading volumes in the secondary market countered an active primary calendar and concerns about the public health situation in Europe. New issuance surpassed expectations for the week, and the majority of deals were well subscribed.
Stability in the 10-year U.S. Treasury note’s yield aided the performance of high yield bonds. However, the asset class experienced some weakness due to ongoing virus concerns across Europe. Below investment-grade funds industrywide reported negative flows.
Index |
Friday's Close |
Week’s Change |
% Change YTD |
---|---|---|---|
DJIA |
33,072.88 |
444.91 |
8.06% |
S&P 500 |
3,974.54 |
61.44 |
5.82% |
Nasdaq Composite |
13,138.72 |
-76.52 |
1.94% |
S&P MidCap 400 |
2,609.80 |
-4.35 |
13.14% |
Russell 2000 |
2,221.48 |
-66.07 |
12.32% |
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 rose on hopes of an economic recovery, reversing earlier losses stemming from concerns about additional restrictions to curb the spread of the coronavirus and the European Commission’s (EC) threat to halt vaccine exports. In local currency terms, the pan-European STOXX Europe 600 Index added 0.85%. Major stock indexes were mixed: France’s CAC 40 ended the week down modestly, while Germany’s Xetra DAX Index, Italy’s FTSE MIB, and the UK’s FTSE 100 Index posted gains.
Core and peripheral eurozone government bond yields fell overall. Concerns over Europe’s slow vaccine rollout amid the onset of a fresh wave of coronavirus infections drove demand for high-quality government bonds. Data showing a EUR 7.1 billion increase in the European Central Bank’s weekly bond purchases also weighed on yields. Gilt yields declined on fears that the EC might block vaccine exports to the UK, potentially slowing the country’s inoculation campaign. Weaker-than-expected inflation data, which pushed out expectations for the Bank of England to tighten its monetary policy, also pulled yields lower.
Lockdowns extended; tensions over vaccine supplies
France extended its lockdown to the city of Lyon and two more regions. The new lockdown, now covering a third of the country, is looser than earlier rounds, with many shops allowed to stay open. Belgium said that schools, nonessential shops, and hairdressers will be closed for the next four weeks. The German government extended its lockdown to mid-April but was forced to abandon plans to keep people at home over the Easter break after a backlash from businesses, politicians, and the public. Health experts said the current surge in infections in Germany could be worse than the two previous waves.
After a spat over vaccine supplies, Britain and the EC issued a joint statement saying they discussed developing a “reciprocally beneficial relationship” to tackle the pandemic. Both sides said they would work together “to create a win-win situation and expand vaccine supply for all our citizens.”
Eurozone business activity rebounds
Eurozone business activity unexpectedly grew in March, a survey of purchasing managers showed. The flash composite Purchasing Managers’ Index (PMI), which combines services and manufacturing, rose in March to 52.5—the highest level since late 2018—compared with 48.8 in February. (PMI readings above 50 indicate an increase in activity levels; readings below 50 suggest a contraction.) Activity in the manufacturing sector expanded the most in 23 years, offsetting continued weakness in the service sector.
Japan
Equities post losses
Japanese stock markets posted sizable losses despite managing to recover some lost ground later in the week. The Nikkei 225 Stock Average declined 2.1% while the broader TOPIX gave up 1.4%. The yen weakened, closing at just below JPY 110 versus the U.S. dollar. The yield of the 10-year Japanese government bond finished the week lower, at 0.08%.
Renewed lockdowns undermine recovery hopes
Japanese equities opened sharply lower on Monday, with the Nikkei 225 dropping below the 29,200 level amid ongoing concerns about the prospects of a global economic recovery. While the recent lifting of the state of emergency in the Tokyo region provided some optimism, news of the return of coronavirus lockdowns in Europe dented hopes of a broad economic reopening. Wednesday saw Japanese shares close lower for a fourth consecutive day, with the Nikkei 225 Index dropping a further 2% while the TOPIX closed 2.2% lower.
As sentiment improves, markets end on a rising trend
Although a generally cautious mood prevailed, Japanese shares rose strongly into the end of the week. On Thursday, beaten down cyclical stocks helped to snap the four-day losing streak, with further gains posted on Friday, sending the benchmark Nikkei 225 back above the 29,000 mark. A record budget announcement, some upbeat signals from the U.S., and better-than-expected labor market data contributed to the improved sentiment. Select technology and banking stocks were notable gainers.
Japanese government approves record budget
On Friday, Japan’s Diet approved a record JPY 106.61 trillion (USD 976 billion) budget for the 2021 fiscal year to help mitigate the fallout from the coronavirus pandemic as well as rising social security and defense costs. Once again forgoing fiscal consolidation, the House of Councillors passed the budget for the year starting on April 1, following its approval by the House of Representatives in early March.
China
Chinese stocks recorded a weekly gain, thanks to a rally on Friday after the country’s central bank signaled that it was not about to tighten monetary policy. The Shanghai Stock Exchange Composite (SSEC) Index rose 0.4% to 3418.3, while the large-cap CSI 300 Index ended up 0.6% at 5038.0, its first weekly gain after five straight weeks of losses. Since reaching a record high on February 18, the CSI 300 has fallen 15%, while the SSEC is 8% below a 5½-year high also touched on February 18. In the A share market, consumer staples and health care stocks led gainers as strong northbound Stock Connect inflows from Hong Kong boosted sentiment. Hong Kong-listed China stocks also performed strongly, particularly property services and real estate management companies. Similar to other major markets, China is experiencing a rotation from growth stocks to value stocks as the economic recovery broadens.
In China’s bond markets, the yield on the sovereign 10-year bond closed at 3.22%, off four basis points from the previous week, amid expectations that monetary policy would remain supportive in the near term. After a meeting with major lenders to discuss expectations for credit growth in 2021, the People’s Bank of China (PBOC) said that monetary policy should remain “neutral” since “the recovery of the real economy is not yet solid and weak links still need to be adjusted,” according to state-run media. The PBOC kept the loan prime rate (LPR)—which serves as a reference rate for new renminbi bank loans—unchanged for the 11th straight month, as expected. In foreign exchange trading, the renminbi weakened slightly against the U.S. dollar to close at 6.540.
In other economic news, Moody’s Investors Service said that China’s conservative economic growth target and gradual policy normalization, two goals that the government revealed at its recently concluded National People’s Congress, were positive for the country’s outlook. Both measures may enable Beijing to focus on the quality, rather than the quantity, of output and address some of the structural issues facing China without a further buildup of leverage, according to the credit ratings agency.
Green energy investment: China's new growth driver
On the environmental front, China will need to spend USD 6.4 trillion on green power generation to meet President Xi Jinping’s goal of carbon neutrality by 2060, according to research and consultancy firm Wood Mackenzie. Transitioning to green energy is a key objective of China’s latest Five-Year Plan, which calls for the peak year for carbon emissions to occur within the next few years. Last year, China installed over 50 gigawatts of wind power—twice the amount in 2019 and around 70% of the world total, according to recent data from the Global Wind Energy Council. The country’s shift to renewables is expected to increase global demand for raw materials and minerals, such as copper, nickel, aluminum, cobalt, and lithium.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned -9.6%. Turkish assets, including the lira, were rocked by news over the previous weekend that President Recep Tayyip Erdogan was replacing the central bank’s Governor Naci Agbal with Sahap Kavcioglu, an AKP Party loyalist who, like Erdogan, favors unorthodox economic policies. Kavcioglu represents Turkey’s fourth central bank governor in the last two years; his appointment took place just a couple of days after Turkey’s central bank raised its key one-week repo auction rate from 17% to 19%.
According to T. Rowe Price sovereign analyst Peter Botoucharov, this surprising and untimely replacement of Agbal after serving for only four months confirms that Turkey has two fundamental weaknesses. One is that Erdogan has concentrated decision-making power under the presidential system; the other is that there is a long-standing imperative for the ruling AKP Party to pursue economic growth and employment creation to maintain popular support and remain in power.
With regard to a possible policy shift under the new central bank governor, Botoucharov believes that there will be no near-term change in monetary policy or imposition of capital controls in view of the country’s macroeconomic challenges, high financing needs, and low level of foreign exchange reserves. However, he does believe that there is a risk of a faster monetary policy reversal later this year given Turkey’s preference for growth and low real (inflation-adjusted) interest rates.
His greater concern is whether Turkey will be able to rebuild investors’ confidence over the medium term. The change in central bank leadership was likely driven by both broader political considerations ahead of an expected government reshuffle, as well as an AKP Party symposium on March 24. Given President Erdogan’s disagreement with a policy of high real rates, Botoucharov is uncertain about Turkey’s commitment to a sustained policy adjustment over the medium term.
Mexico
Mexican stocks, as measured by the IPC Index, returned about 0.9%. On Thursday, the Mexican central bank held its regularly scheduled monetary policy meeting and decided to keep the overnight interbank interest rate at 4.00%. While the decision was generally expected, T. Rowe Price emerging markets sovereign analyst Aaron Gifford believes that the unanimous vote among policymakers was a surprise to many, especially considering the varying opinions among central bank officials when they met and agreed to a rate cut on February 11.
In the central bank’s post-meeting statement, Gifford noticed a couple of references to less supportive financial conditions and an acknowledgment of inflation being a bit above the bank’s most recent projections. He also noted that policymakers mentioned upside inflation risks before downside risks and that they introduced “external inflationary pressures” as a new upside risk to monitor. Gifford believes this is a clear reference to U.S. fiscal stimulus efforts by the Biden administration.
An important observation, according to Gifford, is that the post-meeting statement did not announce any explicit actions to address market illiquidity. While such actions could occur in the future, he believes that some market participants were hoping for some kind of central bank support at this time. Overall, Gifford considers the statement to be indicative of policymakers’ caution, though he notes that they did not explicitly rule out further monetary policy adjustments. He concludes that central bank officials are comfortable keeping rates steady at this time while they monitor incoming economic and inflation data.
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