Global Markets Weekly Update: March 5, 2021
U.S.
Rising yields continue to dominate sentiment
The major benchmarks finished mixed as longer-term interest rates continued their ascent. The rise in rates again weighed on growth stocks by increasing the discount on future earnings, while value stocks managed gains, according to Russell indexes. Within the S&P 500 Index, energy shares outperformed as oil prices hit their highest levels in over a year. Technology shares were broadly weak, while consumer discretionary stocks continued to be dragged lower by electric vehicle maker Tesla.
Investors seemed divided about whether the rise in longer-term bond yields was due to a welcome upswing in growth expectations or a worrisome increase in inflationary pressures. Trading started out on a strong note, which T. Rowe Price traders attributed in part to continued optimism about the rollout of coronavirus vaccines. On Monday, the federal government began distributing the Johnson & Johnson single-dose vaccine, which regulators had approved over the weekend, and President Joe Biden announced on Wednesday that new deals with drugmakers meant that every American adult should have access to vaccines by the end of May—moving up his timetable by two months.
Biden stimulus bill advances amid overheating concerns
Progress in the Biden administration’s USD 1.9 trillion stimulus package appeared to further bolster growth expectations. On Thursday evening, the Senate approved debate on the package on a party-line vote, with Vice President Kamala Harris breaking the 50-50 tie in the Democrats’ favor. To secure the votes of some centrists in their party, Democratic leaders agreed to more quickly phase out direct payments to higher-income individuals, although it was unclear how much this would reduce the bill’s total size. Most elements of the bill, including the USD 400 per week in federal unemployment benefits, remained intact and in line with the legislation passed in the House of Representatives the previous week.
Critics of the bill continued to point to the danger of reigniting inflation by overheating the economy. The week did not bring any significant inflation data, but Wall Street appeared to keep a close eye on rising Treasury yields, as well as increases in commodity and input prices, particularly in the auto industry. On Tuesday, Federal Reserve governor Lael Brainard remarked in a video that a recent surge in bond yields had “caught [her] eye” and that she was concerned about tightening financial conditions.
Powell comments disappoint
Following Brainard’s comments, hopes appeared to grow that Fed Chair Jerome Powell would outline new initiatives to keep rates low at a jobs panel organized by The Wall Street Journal on Thursday. Powell offered no new commitments to continued asset purchases or other actions, however, while simultaneously restating the policymakers’ willingness to see inflation rise above 2%. Powell’s satisfaction with the current stance of monetary stimulus appeared to disappoint investors broadly, leading to a sharp sell-off in equity and bond markets on Thursday afternoon.
The tension between growth hopes and inflation fears was evident in the market’s reaction to the week’s most closely watched economic data, the February jobs report. The report surprised significantly on the upside, with nonfarm payrolls rising by 379,000, roughly twice consensus estimates. Nearly all the gains came in the leisure and hospitality industry, especially restaurants, reflecting reopening steps in many parts of the country. The unemployment rate also fell a bit more than expected, to 6.2%, a new pandemic-era low. Stocks vacillated on the news: rising, falling, and then rising sharply again.
Muni funds see first outflows in four months
Fixed income markets struggled as longer-term Treasury yields resumed their climb later in the week. (Bond prices and yields move in opposite directions.) The municipal market proved relatively resilient for much of the week, although technical conditions appeared to weaken. According to Refinitiv Lipper, tax-exempt bond funds experienced outflows during the week ended March 3, marking the first period of outflows in nearly four months.
According to our traders, the investment-grade primary calendar was very active, and weekly issuance equated to almost half of the expected level for the month of March. Later in the week, increased selling from Asia, coupled with Fed Chair Powell's comments regarding inflation, challenged sentiment and contributed to widening spreads (the extra yield offered over Treasuries, and an inverse measure of the sector’s relative appeal).
High yield bonds and broader risk markets also experienced weakness after Powell’s comments. On a positive note, OPEC’s decision to maintain current production levels instead of the widely expected increase sent oil prices higher and supported the performance of energy names.
Index |
Friday's Close |
Week’s Change |
% Change YTD |
---|---|---|---|
DJIA |
31,496.30 |
563.93 |
2.91% |
S&P 500 |
3,841.94 |
30.79 |
2.29% |
Nasdaq Composite |
12,920.15 |
-272.20 |
0.25% |
S&P MidCap 400 |
2,506.73 |
10.47 |
8.68% |
Russell 2000 |
2,191.38 |
-9.67 |
10.80% |
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 higher, buoyed by the prospect that easing restrictions implemented to curb the coronavirus’s spread and supportive monetary and fiscal policies could set the stage for an economic recovery. However, gains were curbed by growing expectations that central banks would act to stem inflation. The pan-European STOXX Europe 600 Index rose 0.91% in local currency terms. Major stock indexes also advanced, while the UK’s FTSE 100 Index climbed 2.27% on the week, lifted by finance minister Rishi Sunak’s annual budget, which called for more fiscal stimulus and the Office for Budget Responsibility’s projections that the economy would recover to its former size earlier than previously expected.
Core and peripheral eurozone bond yields rose as long-term inflation expectations strengthened. Uncertainty about whether the European Central Bank would act to suppress the increase in borrowing costs, combined with the Federal Reserve reiterating its dovish stance, gave yields another boost. UK gilt yields broadly moved higher, lifted by Sunak’s unveiling of the annual budget.
Germany extends lockdown; Italy blocks vaccine exports
German Chancellor Angela Merkel and regional chief ministers extended lockdown restrictions until March 28. However, they also eased the rules in areas with low infection rates, allowing bookshops, some stores, garden centers, florists, museums, and art galleries to reopen.
Italy blocked 250,000 doses of the Oxford-AstraZeneca coronavirus vaccine slated to go to Australia—the first such intervention since the European Union (EU) introduced rules governing the shipment of vaccines to countries outside the bloc. Officials said Brussels did not object to the decision. French Health Minister Olivier Veran said France might also block vaccine shipments abroad. The EU is also planning to extend export controls on vaccines until the end of June, Reuters said, citing EU sources.
UK’s Sunak raises economic support, tax hikes loom
In his budget speech to Parliament, Sunak pledged GBP 65 billion of additional fiscal spending in the short term and a temporary tax break for business investment. He extended welfare payments and the jobs-support program until September. But most individuals will have to pay more tax over time, and corporate taxes would rise to 25% in 2023 from 19% currently.
EU accuses UK of breaking Brexit deal
The EU accused the UK of breaking the terms of the Northern Ireland Protocol, a key part of the UK’s post-Brexit deal with the EU, after Britain unilaterally extended grace periods for border checks on food imports to Northern Ireland. The EU said it would take legal action, with a view to imposing tariffs and fines.
Irish paramilitary groups said in a letter to Prime Minister Boris Johnson they would temporarily withdraw support for the 1998 Good Friday Agreement because of the disruption to trade caused by the Northern Ireland Protocol. However, a Loyalist politician who met their umbrella group said there was no sign they would revert to violent opposition, according to the Irish Times.
Japan
Japan’s stock markets generated mixed returns for the week, with the Nikkei 225 Stock Average declining 0.35% and the broader TOPIX Index gaining 1.70%. The yen weakened and closed above JPY 108 versus the U.S. dollar. The yield of the 10-year Japanese government bond finished the week at 0.09%, its lowest level since mid-February, on dovish comments from the Governor of the Bank of Japan (BoJ).
BoJ retains its grip on yield curve control
BoJ Governor Haruhiko Kuroda played down the possibility that the central bank would make its policy on yield curve control (YCC) more flexible; he said the policy had been working well to date. Under its YCC policy, the BoJ caps the 10-year Japanese government bond yield at around zero and allows the benchmark yield to move 40 basis points around this target. There had been some expectation that the BoJ would widen the band and allow yields to move higher. Domestic long-term yields tumbled in response to Kuroda’s comments.
Manufacturing sector returns to growth
According to purchasing managers’ index (PMI) data, the Japanese manufacturing sector grew in February for the first time in close to two years, with domestic manufacturers gradually recovering from the impact of the coronavirus pandemic. The au Jibun Bank Japan Manufacturing PMI rose to 51.4 in February from 49.8 in January. Both output and new orders expanded modestly, and businesses remained optimistic that production would rise over the next 12 months. Higher sales were linked to new product launches and improving demand in key markets such as China. Conversely, the services sector saw a further fall in business activity, as measures to contain the spread of the coronavirus remained in place in Japan. The Services PMI came in at 46.3 in February compared with the prior month’s 46.1 reading. Service providers remained optimistic that business conditions would improve in the coming year, however, on hopes that vaccine rollouts would reduce uncertainty.
State of emergency extended in Tokyo and surrounding prefectures
The Japanese government extended the state of emergency to combat the coronavirus spread in Tokyo and three neighboring prefectures, which had been set to end on March 7, for two more weeks. Seeking to revive the economy and help struggling businesses, Prime Minister Yoshihide Suga had initially been reluctant to declare another extension of the almost two-month state of emergency but conceded that cases were falling too slowly. A recent poll showed public support for the extension. While some government officials had been pushing for it to last even longer, Suga emphasized that two weeks is the limit.
China
Chinese shares fell in choppy trade as rising U.S. yields and inflation expectations spilled into the country’s stock market. The large-cap CSI 300 Index fell 1.4%, while local currency A shares shed 0.2%. Technology shares fell in sympathy with recent highflying names related to consumers, electric vehicles, and property management. Hawkish remarks from China’s banking and insurance regulators signaling the need to deleverage and avoid financial bubbles, along with a dovish article in the state-run China Securities Journal mentioning possible interest rate cuts, fueled significant volatility in financial and technology stocks. Overall, the tone for Chinese stocks was cautious ahead of the annual National People’s Congress (NPC), the country’s highest-profile political gathering that kicked off March 5.
The yield on China’s sovereign 10-year bond rose to end the week at 3.36%, and the renminbi currency ended broadly flat against the U.S. dollar. Analysts believe that the People’s Bank of China has little reason to tighten monetary policy at this point, given the absence of inflation pressures. Moreover, a rate hike would encourage strength in the renminbi, which Beijing is trying to avoid.
On the economic front, China’s official purchasing managers’ indexes for manufacturing and services in February came in below expectations. However, the below-consensus PMI readings reflected a number of factors, including the disruption of the weeklong Lunar New Year holiday and renewed travel restrictions after a coronavirus outbreak in northern China earlier this year. February’s weakness in the official data was confirmed by the private Caixin survey, whose manufacturing index fell to a nine-month low. However, analysts were not alarmed by the weak PMI readings from China, the only major economy to expand in 2020. Many workers who couldn’t travel home for the Lunar New Year returned to factories earlier than usual, which should support activity in the near term. Strong export demand, rising domestic consumption, and a faster pace of vaccinations are also seen as tailwinds for China’s economy in 2021.
NPC to focus on long-term goals
This year’s NPC coincides with the first year of China’s 14th Five Year Plan. Analysts expect that lawmakers will focus on long-term goals, such as doubling the size of the economy by 2035 and achieving full decarbonization by 2060, with peak emissions in 2025.
The question of how soon China will normalize economic policy after the coronavirus crisis is a more pressing concern to investors. On Friday, China unveiled its official 2021 growth target of above 6%, a goal widely seen as conservative. “A target of over 6% will enable all of us to devote full energy to promoting reform, innovation, and high-quality development,” Premier Li Keqiang stated at the opening of the NPC. Beijing also reduced its fiscal deficit target to 3.2% of gross domestic product from 3.6% in 2020, as widely expected.
Other Key Markets
Chile
Stocks in Chile, as measured by the IPSA Index, returned about 3.1%. During the week, the lower chamber of the legislature put in motion a bill that would allow pension participants to withdraw money from their pension accounts. This is the third such legislation since the onset of the pandemic about one year ago.
According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the bill first needs to go to commission and is likely to make it to the plenary. However, unlike the first two pension withdrawal bills that did become law, Gifford believes that this one is less likely to be enacted. He recalls that the country’s Constitutional Court ruled that the second withdrawal bill was unconstitutional and that the “parallel” legislation that was submitted by President Sebastian Pinera was what ultimately became law. Gifford believes this third bill would likely be struck down given opposition by the Pinera administration as well as several members of Congress being concerned about the depletion of nearly four million retirement accounts following the previous two periods of permitted withdrawals.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about 4.7%. Against the backdrop of a new wave of COVID-19 that has overwhelmed hospital capacity and is leading to significant new lockdowns, the legislature is working on an emergency constitutional amendment that will enable the government to provide more pandemic-related assistance to citizens without completely abandoning the mandatory spending cap intended to keep government spending in line with inflation.
During the week, the Senate gave initial approval to the amendment, which only included a marginal amount of fiscal reforms. According to T. Rowe Price sovereign analyst Richard Hall, the current version of the amendment is not especially good, as it has been watered down compared with earlier versions and reduces the structural strength of the spending cap. However, if it becomes law, it will accomplish three things:
- It provides 44 billion reals (0.5% of GDP) of emergency assistance. The bill exempts this amount of emergency assistance in 2021 from the spending cap and fiscal responsibility law. There is general political agreement on new emergency assistance of 250 reals per month for low-income households, running from March to June.
- It delays breaching the spending cap and its consequences. Under current law, if the spending cap is breached, several measures are automatically implemented to reduce spending growth, including limiting increases in the minimum wage to the rate of inflation, as well as a public sector wage freeze. The amendment, however, would force these measures to occur when the Executive’s budget proposal forecasts mandatory primary spending that is 95% of total primary spending. Government projections currently expect mandatory primary spending to reach this 95% threshold in 2025.
- It creates a calamity clause to help address future crises. To avoid having to quickly pass constitutional amendments to respond to future crises, a new calamity clause will be inserted into the constitution that will suspend various fiscal rules if Congress declares a national calamity. For example, if the COVID-19 pandemic persists and the government needs to provide more emergency assistance, Congress would just need to declare a calamity. Hall believes that this creates a potential loophole in the spending cap.
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