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Global Markets Weekly Update: May 28, 2021
U.S.
Stocks rise in light trading
Stocks recorded solid gains for the week, bringing the large-cap S&P 500 Index to within roughly 0.5% of the all-time intraday high it established on May 7 and leaving it with a small gain for the month. T. Rowe Price traders noted that trading volumes were especially light, however, with Monday marking the fifth-lowest turnover in a non-holiday session since the pandemic began. The technology-heavy Nasdaq Composite and small-cap Russell 2000 indexes performed best.
Growth shares handily outperformed their value counterparts; Facebook and Google parent Alphabet helped communication services stocks outperform within the S&P 500, and a rebound in Tesla boosted consumer discretionary shares. The light trading volumes came in advance of the long Memorial Day weekend, with U.S. markets scheduled to be closed Monday, May 31.
The major indexes were relatively steady for most of the week, which the firm’s traders attributed in part to a seeming lack of directional drivers. Investors did appear to keep a close eye on economic data, although the week’s reports sent conflicting signals. On the positive side, weekly jobless claims fell more than consensus expectations, to a new pandemic-era low of 406,000, and durable goods orders excluding the volatile transportation sector increased by 1% in April, also more than expected. On the downside, some regional manufacturing gauges came in lower than anticipated, although still indicating solid expansion. Negotiations also continued on a new round of infrastructure spending, with Republicans unveiling a USD 928 billion counteroffer to President Joe Biden’s latest proposal of roughly USD 1.7 trillion.
Fed officials stress that inflation pressures should prove temporary
Consumer confidence data pulled back from recent highs, with many polled citing inflation concerns. Indeed, some evidence emerged during the week that consumers were postponing purchases in response to rising prices, particularly in the housing sector—pending home sales fell 4.4% in April, defying expectations for a small gain. According to the S&P CoreLogic Case-Shiller Index, average home prices in major metropolitan areas rose 13.2% in the year ended in March, up from a 12.0% annual rate the prior month and the highest rate of growth since December 2005. The Commerce Department reported that the median price of a new home sold in April was up 20.1% from a year earlier, the strongest annual gain since 1988.
Concerns about inflation resulting from supply chain pressures and the release of pent-up consumer demand may have also restrained the week’s gains. The Commerce Department reported on Friday that its core (less food and energy) personal consumption expenditure price (PCE) index increased 3.1% in the year ended in April, slightly above expectations and the biggest increase in nearly three decades—and well above the Fed’s 2% target for its preferred inflation gauge. Several Fed officials stated that they wouldn’t be surprised to see bottlenecks and supply shortages push prices up in the coming months but that much of those increases should prove temporary.
Corporate bond buyers remain active as Treasury yields decrease
Fixed income investors appeared to be reassured by the Fed officials’ comments, with the yield on the benchmark 10-year U.S. Treasury note decreasing over the week. (Bond prices and yields move in opposite directions.) The broad municipal bond market posted positive returns through most of the week. Light trading activity in the secondary market led to large oversubscriptions for primary market deals, according to the firm’s traders.
The U.S. investment-grade corporate bond market traded with a solid tone for much of the week, supported by generally positive economic signals and better demand out of Asia. Buy and sell activity was mostly balanced, according to our traders, but selling shorter maturities in favor of longer-term bonds was evident. The high yield market was focused on issuance early in the week, with new deals generally met with healthy interest. But sellers were also active amid persistent outflows from below investment-grade funds. Both the primary and secondary markets became noticeably quieter as the holiday weekend drew near, with no new issues announced or priced.
U.S. Stocks1
Index |
Friday's Close |
Week’s Change |
% Change YTD |
---|---|---|---|
DJIA |
34,529.45 |
321.61 |
12.82% |
S&P 500 |
4,204.11 |
48.25 |
11.93% |
Nasdaq Composite |
13,748.74 |
277.75 |
6.68% |
S&P MidCap 400 |
2,727.45 |
37.61 |
18.24% |
Russell 2000 |
2,268.97 |
53.70 |
14.89% |
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 advanced on continued affirmations of ultra-easy monetary policy and reports of a massive U.S. fiscal spending plan. In local currency terms, the pan-European STOXX Europe 600 Index ended the week up 1.02%. France’s CAC 40 gained 1.53%, Germany’s Xetra DAX Index added 0.53%, and Italy’s FTSE MIB Index advanced 0.78%. The UK’s FTSE 100 Index ended roughly flat, in part reflecting the UK pound’s appreciation versus the U.S. dollar. The reopening of the economy and comments from Bank of England (BoE) policymaker Gertjan Vlieghe, who said the central bank could raise interest rates as soon as the first half of next year, helped the currency rise for a fifth consecutive week.
Core eurozone bond yields eased. Germany’s 10-year bund rallied early in the week, supported by dovish comments from European Central Bank policymakers, who said that they saw no evidence of sustained inflationary pressure and that winding down emergency bond purchases would be premature. However, yields abruptly rose toward the end of the week as U.S. Treasury yields dropped. Bond yields in peripheral European markets largely tracked those in the core. UK gilt yields were broadly flat after a turbulent week. They followed core markets lower early on but rose sharply after Vlieghe’s comments regarding the BoE possibly raising interest rates in the first half of next year if the economy recovers faster than expected.
UK offers vaccine to people over 30; France slaps travel ban on UK
The UK widened its vaccination rollout to include anyone over the age of 30, although in some areas of northern England, local authorities have lowered the age threshold to 18 years because of the proliferation of a rapidly spreading variant. Infection rates in the UK, which began lifting restrictions in March, rose 25% this month, although hospital admissions were still flat. Officials said it was still too early to say whether plans to reopen the UK economy would begin on June 21. In light of these developments, France said that, from May 31, anyone arriving from the UK must quarantine for seven days.
Germany confidence hits two-year high; France in recession
The Ifo Business Climate Index for Germany rose to 99.2 in May—its highest level since May 2019—from 96.6 in April, as optimism about the economic outlook strengthened. The French economy slipped into recession in the first quarter, with a preliminary estimate of 0.4% growth revised to a contraction of 0.1% due to weaker-than-expected construction data.
Swiss walk away from EU trade deal
Switzerland abandoned talks on a framework trade deal with the European Union (EU) that would codify access to the single market because of differences over wages and immigration. The end of the seven-year talks means that existing treaties with the bloc’s fourth-largest trading partner might eventually lapse.
Japan
Japan’s stock markets registered a gain for the week, with the Nikkei 225 Index rising 2.94% and the broader TOPIX Index up 2.24%. Signs that Japan was accelerating its COVID-19 vaccine rollout were supportive of sentiment. The yield on the 10-year Japanese government bond was broadly unchanged at 0.08%, while the yen weakened notably to around JPY 109.82 against the U.S. dollar.
Mass vaccination program amid COVID-19 surge
Amid the worsening coronavirus crisis, Japan kicked off a mass vaccination program of people age 65 or older in Tokyo and Osaka, scheduled to stretch over the next three months. The debut of the two mass vaccination centers underscores the central government’s willingness to play a more active role, although municipalities remain responsible for the large chunk of the nation’s vaccine rollout. The country significantly lags other developed nations in its vaccination drive, and its health care system is struggling to cope with the latest surge in cases.
The fourth wave of infections has led authorities to declare states of emergency covering much of the country, including Tokyo, raising some concerns about the Olympic Games due to begin on July 23. Japan, struggling to convince its own public and the international community that it’s ready to host the event, was dealt a further blow by the U.S. State Department issuing a warning that Americans should avoid traveling to Japan.
State of emergency to be extended
The Japanese government is set to extend the COVID-19 state of emergency covering Tokyo and eight other prefectures for three weeks until June 20 as Prime Minister Yoshihide Suga noted that the situation remains highly unpredictable.
Labor market softens
Japan’s unemployment rate worsened in April to 2.8%, up from 2.6% the previous month. Separate data showed Tokyo consumer prices excluding fresh food fell 0.2% in May from a year ago, dropping at the same pace for a second month. The reading was in line with consensus. Prices in the capital are a leading indicator of national inflation trends.
China
Chinese stocks rose strongly, with both the CSI 300 Index and Shanghai Composite Index posting the best weekly gain in more than three months, according to Reuters. Tourism-related names and other stocks leveraged to an economic reopening rose after China passed a milestone of over 500 million COVID-19 vaccinations. In an effort to reduce financial risks, policymakers promised zero tolerance for commodity speculation and further cracked down on cryptocurrency mining. Separately, Chinese regulators turned down applications to issue RMB 154 billion of asset-backed securities from various companies including fintech company Ant Group, according to domestic news portal Sina.com. The amount was twice the amount rejected in 2020 and reflects the government’s renewed focus on curbing financial risks.
In credit markets, the yield on the 10-year sovereign bond ended the week at 3.09%. Huarong Asset Management—whose liquidity issues have raised questions about Beijing’s willingness to backstop state-linked entities—is “nowhere near” defaulting on its onshore bonds, though the company needs to repair the damage caused by its former chairman, reported financial news outlet Caixin. In money markets, short-term rates remained low and stable as they have for most of May. Analysts see this as due to a dovish liquidity bias from the central bank and reduced government bond issuance. In currency trading, the renminbi rose 1.1% against the U.S. dollar to 6.365, its highest level against the dollar since June 2018.
Northbound equity inflows from Hong Kong into China hit USD 3.4 billion on Wednesday, among the largest-ever daily net inflows. The week saw a return of southbound Stock Connect buying of Hong Kong-listed China shares. Mainland funds were active in buying large-cap favorites like Hong Kong Exchanges and Clearing and e-commerce giant Tencent.
Hang Seng Index gets overhaul
On June 1, a long-awaited revamp of the Hang Seng Index (HSI) will see the Hong Kong stock benchmark expand from 55 to 58 names with the addition of auto and battery maker BYD, solar panel glass maker Xinyi Solar Holdings, and real estate services company Country Garden Services. The HSI will add five new stocks each quarter, expanding to 80 in total by mid-2022, when it will cover around 71% of the Hong Kong stock market (versus 57% today). The overhaul of the HSI, first announced in March, reflects the growing influence of China’s tech giants and a bid to increase the index’s relevance since its creation in 1969.
Property sales easily beat expectations
Primary home sales in China remained very strong, according to the China Reality Research May survey. Primary home sales surged 50% from January to April over the prior-year period, according to data from 23 developers. Despite the strong demand, caps imposed by local governments restrained property prices. More than half of the sales managers surveyed reported that sales this year have beat expectations due to surprisingly strong sentiment and the post-pandemic recovery.
Other Key Markets
Mexico
Mexican stocks, as measured by the IPC Index, returned about 0.4%. On Thursday, the Mexican central bank published the minutes from its May 13 monetary policy meeting, at which policymakers kept the key interest rate at 4% but included hawkish elements in their post-meeting statement.
According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the minutes weren’t materially different from the statement, though he noted a number of qualifying statements that seemed to soften the hawkishness somewhat. For example, while central bank officials see green shoots for the economy—mostly because of external demand driven by the U.S.—there were observations that the recovery is not uniform across the country, as well as references to weak investment and services and dismal credit demand. Regarding inflation, central bank officials noted that the balance of risks has moved to the upside, but most still expect higher consumer price inflation to be transitory due to temporary factors like base effects, supply shocks, bottlenecks, higher commodity prices, and the impact of a drought on agricultural prices. Though policymakers still expect inflation to decline over the next 12 months, Gifford believes they are a bit worried about the potential for second-round effects and a decoupling of inflation expectations. They also noted the risk of tighter financial conditions in the U.S.
With regard to monetary policy, central bank officials still have varying opinions, though several seem to be focusing on having limited space to adjust policy—due in part to the lack of its effectiveness in this environment—and the importance of anchoring inflation expectations. While they noted the need to build credibility with investors and convey caution to the financial markets, Gifford sees limited signs that the Governing Board is in a hurry to hike rates anytime soon.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about 2.5%.
During the week, the government reported that its mid-month inflation reading was 0.44% on a month-over-month basis, which was lower than expected. The underlying data reveal a mixed picture. On the positive side, services inflation remains low and is showing no signs of accelerating, as high unemployment remains a disinflationary factor. On the negative side, electricity prices were a major factor given the increase in tariff surcharges, with another increase likely next month given low water reservoir levels. Food price inflation was also a factor, as global agricultural price increases in the early spring are being passed through to consumers. In addition, there has been a pickup in manufactured goods inflation, which was pressured by supply chain issues around the beginning of 2021. Annual inflation in Brazil has increased to 7.3%, and it could approach 8% around midyear.
That said, Brazil may be close to a peak in annual and sequential inflation, with the main risk factor being currency fluctuations in response to political or fiscal developments. The series of price shocks that have pushed headline inflation higher this year are unlikely to repeat. However, services inflation could pick up later this year—and feed into core inflation, which is already at a 4% annual rate—as the economy opens more broadly and a larger portion of the population will have been vaccinated against the coronavirus. In the near term, services inflation may remain low as the country continues to contend with the latest wave of COVID-19 cases.
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