Global Markets Weekly Update: May 21, 2021
U.S.
Stocks posted mixed results in a volatile week of trading, with the large-cap S&P 500 Index ending modestly lower and the tech-heavy Nasdaq Composite Index gaining a little ground. These mixed results likely reflect strength in the U.S. economy, as well as concerns about inflation and the timing of when the Federal Reserve might begin to rein in its accommodative policies. Within the S&P 500, the health care posted the largest gain. Energy and industrials lost ground.
Fed hints it may discuss tapering of asset purchases
Minutes from the Federal Open Market Committee’s (FOMC) meeting in late April offered additional insight into policymakers’ thinking on the economy and inflationary pressures. Investors focused on a statement that “a number of participants” suggested that policymakers “begin discussing a plan” for tapering the Fed’s monthly asset purchase program, which stands at USD 120 billion. On the inflation front, FOMC members acknowledged the potential for inflation to run “temporarily” above their 2% target due to “transitory supply chain bottlenecks” that would fade, though some highlighted the risk that price increases could reach “unwelcome levels before they become sufficiently evident to induce a policy reaction.” Still, many policymakers noted that longer-term inflation expectations remain in line with the central bank’s longer-term goals.
Flash PMI readings highlight strength in U.S. economy and inflationary pressures
U.S. equities gained ground on Friday, lifted by the release of preliminary estimates for the IHS Markit Flash U.S. Composite PMI Output Index, which came in at a record 68.1 in May—a significant improvement from April’s 63.5 reading and above the consensus forecast. (PMI readings above 50 suggest an expansion in economic activity.) The service sector component of the survey was especially strong, with the flash PMI reading climbing to a record 70.1 from 64.7 in April. PMI for the manufacturing sector advanced to 61.5, a month-over-month improvement from 60.5. The preliminary PMI data also highlighted inflationary pressures in the U.S. economy, with the rate of input price increases surging to a record and output charges recording their sharpest rise since October 2009, when data collection began.
Bond yields largely unchanged
U.S. Treasury yields were roughly unchanged for the week. T. Rowe Price traders stated that Wednesday’s sharp sell-off in cryptocurrencies sparked a bid for Treasuries. However, yields soon increased following the release of the FOMC’s April meeting minutes, which led investors to pull forward their expected timeline for rate hikes. (Bond prices and yields move in opposite directions.) Municipal bonds recorded modestly positive returns through most of the week. According to the firm’s municipal traders, both high-grade and high yield deals were met with strong demand in the competitive market. The technical environment remained supportive of the asset class, but based on data from Lipper, the pace of flows into municipal bond funds industrywide slowed over the past week.
Strong overnight demand from Asia supported the investment-grade corporate bond market at the start of the week, according to T. Rowe Price traders. Primary issuance was in line with expectations, and the deals that reached the market received adequate demand. The high yield market was fairly quiet as inflation concerns, global coronavirus developments, and reopening growth dynamics influenced investor sentiment.
Index |
Friday's Close |
Week’s Change |
% Change YTD |
---|---|---|---|
DJIA |
34,207.84 |
-174.29 |
11.77% |
S&P 500 |
4,155.86 |
-17.99 |
10.64% |
Nasdaq Composite |
13,470.99 |
41.01 |
4.52% |
S&P MidCap 400 |
2,689.83 |
-32.06 |
16.61% |
Russell 2000 |
2,215.27 |
-9.36 |
12.17% |
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 signs that the economy is rebounding as restrictions instituted to control the coronavirus’s spread begin to ease. However, worries about inflation curbed gains. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.43% higher. Major indexes were mixed: Italy’s FTSE MIB Index advanced, while Germany’s Xetra DAX Index and France’s CAC 40 Index were little changed. The UK’s FTSE 100 Index fell 0.36%, as strong economic data lifted the British pound versus the U.S. dollar.
Core eurozone bond yields ended higher on expectations that the European Central Bank (ECB) could slow its bond purchases. Peripheral eurozone bond yields fell. Uncertainties over Italy’s economic reform plans and the potential slowing of ECB bond purchases initially drove yields higher, but markets began to stabilize, and peripheral yields ended lower. UK gilt yields fell on concerns about the spread of a new coronavirus strain and its potential to delay the full reopening of the UK economy.
Some countries begin phasing out lockdowns
The UK moved to phase two of its plan for lifting coronavirus restrictions—allowing social mixing indoors, greater physical contact, and foreign travel—despite official concerns over a rapidly spreading variant of the coronavirus. Prime Minister Boris Johnson put on hold plans to scrap social distancing rules entirely, and ministers began to consider contingency plans for local lockdowns and delaying the lifting of all controls on June 21. France, Italy, Ireland, Portugal, and the Netherlands also began the gradual reopening of their economies.
Eurozone PMI climbs; UK inflation surges
Eurozone business activity accelerated at the fastest pace in three years in May as virus containment measures eased, a survey of purchasing managers by IHS Markit showed. The flash composite PMI reached 56.9 in May, an improvement from the 53.8 registered in the preceding month. The services sector index climbed to 55.1 from 50.5.
UK consumer price inflation accelerated to 1.5% in April from 0.7% in March, driven by bigger regulated gas and electricity bills and higher clothing prices. In Germany, supply bottlenecks caused factory gate prices to rise the most in almost 10 years in April. ECB officials reiterated that an increase in inflation will be transitory. Meanwhile, as the UK lifted some lockdown controls, retail sales volumes jumped 9.2% year over year in April, and a survey by GfK found that UK consumer sentiment had risen back to levels last seen in March 2020.
Japan
Japan’s stock markets finished the week higher, with the Nikkei 225 Index returning 0.83% and the broader TOPIX Index up 1.13%. Economic data were mixed, with Japan’s gross domestic product shrinking more than expected in the first quarter. Export growth in April was strong, and manufacturers’ business confidence rose to its highest level since late 2018 in May. The yield on the 10-year Japanese government bond fell slightly to 0.08%, while the yen strengthened, finishing the week at around JPY 108.66 against the U.S. dollar.
Economy shrinks by more than expected
After growing at a double-digit rate over the previous two quarters, Japan’s economy shrunk by an annualized 5.1% in the first quarter—a sharper contraction than expected. The decline was mainly due to a drop in private consumption as coronavirus containment measures curbed spending on clothing and dining out. Public consumption expenditure was also weak. Import growth outpaced exports, with growth in the latter slowing markedly as global semiconductor shortages exerted a drag on overseas shipments. Looking ahead, Bank of Japan Governor Haruhiko Kuroda said that, “the economy is likely to recover, with the impact [of COVID-19, the disease caused by the coronavirus] waning gradually and supported by an increase in external demand, accommodative financial conditions, and the government’s economic measures.”
April trade data show strength
Japan’s exports grew the most since 2010 last month, rising by a higher-than-expected 38.0% from a year earlier and lending support to a trade-led recovery. Sales of transport equipment soared, boosted by motor vehicles and cars, while exports of machinery surged, led by power-generating machines. Exports to Japan’s key markets, the U.S. and China, rose by 45.1% and 33.9%, respectively.
Manufacturers’ business confidence highest since late 2018
The Reuters Tankan sentiment index for manufacturers rose to its highest level since December 2018. Sentiment improved markedly among firms in the chemicals, metal products and machinery, and electric machinery industries, while sentiment in the auto industry improved by less. On the whole, manufacturers benefited from solid overseas demand.
China
Chinese stocks recorded a mixed week. The benchmark Shanghai Composite Index shed 0.1%, while the large-cap CSI 300 Index, whose growth stocks have fallen in recent weeks, added 0.5%. In the fixed income market, yields on Chinese bonds fell following disappointing April economic data. In currency trading, the renminbi ended the week roughly unchanged versus the U.S. dollar. The renminbi has strengthened since early April against the dollar, driven by China’s widening current account surplus, foreign direct investment, and foreign portfolio investment in Chinese bonds and stocks. The renminbi’s recent appreciation has pushed the official trade-weighted index—which measures the Chinese currency’s value against a basket of 24 major currencies—close to its 2018 high.
Huarong Asset Management names new president
In corporate news, China named a new president to state-owned Huarong Asset Management, whose onshore bonds sold off after the company delayed reporting its annual results at the end of March, raising questions about Beijing’s willingness to backstop state-linked companies. News of the appointment, however, was overshadowed by a report that the Chinese government is planning an overhaul of Huarong that will require foreign and Chinese bondholders to accept significant losses on their investments, The New York Times reported. Huarong’s onshore bonds sold off as investors worried that Beijing’s stance toward the company may have hardened and that the government might not be willing to inject enough money to pay off all the company’s bonds.
Mixed economic data; some provinces report resurgence in coronavirus cases
Economic data were mixed, with strong external demand offsetting softer domestic demand as residential construction and infrastructure investment slowed. Retail sales growth slowed to 4.3% in April on the two-year average—which analysts use to minimize distortions from the 2020 pandemic—down from March retail sales growth of 6.4%. A resurgence of coronavirus cases in several Chinese provinces has raised worries that COVID-19 still has potential to stifle a recovery in household consumption.
Other Key Markets
Colombia
Colombian assets were volatile this week, in part due to news that credit rating agency S&P Global Ratings lowered Colombia's sovereign credit rating one notch to BB+ with a stable outlook, just one month after reiterating its BBB- rating with a negative outlook. This downgrade into the below-investment-grade universe comes on the heels of President Iván Duque Márquez’s withdrawal of a tax reform bill due to social pressures. While T. Rowe Price emerging markets sovereign analyst Aaron Gifford was not surprised by the downgrade, he notes that it took place much sooner than expected.
Despite the withdrawal of the tax reform proposal, protests in Colombia have continued over the past three weeks. President Duque has held a few meetings with the National Strike Committee, but no progress has been made on their demands, which include social protections and benefits, an end to police brutality, and protecting the right to protest. Gifford says that the price tag of the demands is estimated to be more than three times the revenue that the tax reform bill was intended to generate. According to Gifford, the government thus far is offering little in the way of concessions beyond nominal gestures, such as free education for low-income groups and partially subsidizing salaries for young adults.
Brazil
Brazil’s Bovespa Index advanced by about 0.5%. During the week, the lower chamber of the legislature passed a bill that would enable the government to privatize the state-controlled electric power company Eletrobras, reducing the government’s stake in the company to 45% from 60%. T. Rowe Price sovereign analyst Richard Hall considers this progress on Eletrobras’s privatization a positive development, although he believes that the bill’s passage in the Senate will be more challenging. The government projects that, if approved by the Senate, the privatization could occur by early next year.
Meanwhile, Hall believes that low water levels in reservoirs could weigh on the capacity of Brazilian utilities to generate electricity from hydropower plants, forcing them to rely more on thermal power in the coming months. This scenario, Hall says, could drive tariff surcharges to their highest possible for a time, potentially adding to inflationary pressures.
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