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Global Markets Weekly Update: October 22, 2021
U.S.
Earnings beats feed gains
The S&P 500 Index, Dow Jones Industrial Average, and S&P MidCap 400 Index all moved to record highs, seemingly helped by a series of positive earnings surprises. Further reflecting the strong investor sentiment, the Cboe Volatility Index (VIX) also fell to its lowest level since the beginning of the pandemic. Along with real estate and utilities stocks, health care shares led the gains within the S&P 500, boosted by insurance providers. Communication services shares were strong through much of the week, but social media stocks dropped sharply on Friday following downward guidance from Snapchat parent Snap, which the company blamed on new privacy settings on Apple’s iPhones. Energy shares also underperformed following strong recent gains.
Stocks traded higher throughout much of the week. T. Rowe Price traders observed that investors appeared to be paying close attention to how higher energy and raw materials prices were affecting both third-quarter profits and future guidance, but favorable earnings momentum helped counter elevated inflation concerns. As of the end of the week, analysts polled by FactSet were expecting overall third-quarter earnings for the S&P 500 to have risen 33% versus the year before. This would be down considerably from the second quarter’s pace of 89% but still the third-fastest growth rate since 2010, according to FactSet. The percentage of companies beating revenue estimates was also near record levels.
Stimulus hopes brighten
Hopes for additional fiscal stimulus also appeared to bolster sentiment. Negotiations continued between Democrats in the U.S. Senate over the size of the Biden administration’s proposed social infrastructure bill. According to our traders, rumors circulated at midweek that West Virginia’s Senator Joe Manchin might even leave the party if the cost of the legislation wasn’t trimmed from roughly USD 3 trillion to under USD 2 trillion. But investors seemed cheered by reports that the Democratic leaders were also prepared to scrap tax rate increases to spare the deal. At a CNN town hall event on Thursday evening, President Biden said that his party was close to striking a deal and that increased corporate taxes were unlikely to be included in the legislation.
The week’s economic data were mixed. This was especially true in the housing sector, where both housing starts and building permits came in well below expectations on Tuesday, while existing home sales, reported Thursday, jumped unexpectedly to their highest level since January. Industrial production fell 1.3% in September, but our traders noted that the miss appeared to be explained away by disruptions from Hurricane Ida and ongoing supply chain issues in the auto industry. Weekly and continuing jobless claims fell more than consensus expectations and reached new pandemic-era lows.
Bond yields hit five-month highs
U.S. Treasury yields increased through most of the week, with the 10-year U.S. Treasury note yield briefly trading around 1.69% Friday morning—up from 1.59% the previous week and a five-month high. (Bond prices and yields move in opposite directions.) With monetary policy remaining in focus, five-year notes experienced the most meaningful yield increases and served as the fulcrum for the Treasury yield curve, which pivoted between a steeper and flatter slope throughout the week. Weak demand for the Treasury Department’s 20-year bond auction added upward pressure on long-term rates, according to T. Rowe Price traders.
Municipal bonds posted losses through most of the week but held up better than U.S. Treasuries at the broad market level. Weakness in the tax-exempt market was particularly evident on Thursday, with our traders observing selling across account types as well as meaningful concessions in new offerings, with deals repricing to higher yields to clear the competitive market.
Secondary trading volumes in the investment-grade corporate bond market were relatively light amid an active primary calendar. Early in the week, market sentiment was strengthened by a rally in U.S. equities, strong overnight demand from Asia, and the healthy performance of recent new deals. Spreads tightened in response before widening later in the week alongside an uptick in new issuance.
The high yield market was flat despite the strong performance of equities. According to T. Rowe Price traders, broader risk markets rallied due to positive earnings results that appeared to offset concerns about inflation, Fed asset purchase tapering, and supply chain constraints. While high yield issuance subsided as the week progressed, below-investment-grade funds saw the largest weekly inflow since early April, according to estimates from J.P. Morgan.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
35,677.02 |
382.26 |
16.57% |
S&P 500 |
4,544.90 |
73.53 |
21.00% |
Nasdaq Composite |
15,090.20 |
192.86 |
17.08% |
S&P MidCap 400 |
2,796.84 |
48.56 |
21.25% |
Russell 2000 |
2,291.27 |
25.62 |
16.02% |
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.
UK inflation slows but remains high; BoE’s Pill hints at November rate move
UK inflation unexpectedly slowed to 3.1% year over year in September—down from the 3.2% registered in August but still well above the BoE’s 2% target. BoE chief economist Huw Pill said in an interview with the Financial Times that he would not be shocked to see UK inflation hit or exceed 5% in the coming months. Either scenario would involve a higher inflation rate than the BoE’s official forecast, which calls this metric to peak at about 4% this year or in early 2022. Pill said a rate decision at the November 4 meeting “is finely balanced,” adding “I think November is live.”
PMIs show fall in eurozone business activity and uptick in UK
Eurozone business activity slowed for a third consecutive month in October, amid increasing supply-chain bottlenecks and ongoing coronavirus-related disruptions, according to early data for IHS Markit’s Purchasing Managers’ Index (PMI). The Eurozone PMI Composite Output Index fell to 54.3 from 56.2 in September. Activity in the manufacturing and services sectors remained above 50—the level denoting expansion—but average selling prices rose to the highest level since the survey began in 1998. The UK PMI Composite Output Index unexpectedly rose to a three-month high of 56.8, driven by a pickup in services. However, manufacturing barely grew amid severe shortages of staff and materials.
Bundesbank’s Weidmann resigns early
Jens Weidmann said he would quit as president of Germany’s Bundesbank for personal reasons at year-end—more than five years before his latest contract expires. A strong critic of the European Central Bank’s ultra-loose monetary policy during his 10 years at the helm, Weidmann announced his resignation almost a month after the center-left Social Democratic Party (SPD) defeated the center-right Christian Democratic Union-led government of outgoing Chancellor Angela Merkel in national elections. T. Rowe Price International Economist Tomasz Wieladek said an SPD coalition would likely appoint a more dovish Bundesbank president once in power.
Japan
As campaigning for the October 31 general election began, with the ruling Liberal Democratic Party well ahead in the polls, Japan’s stock markets registered losses for the week, with the Nikkei 225 Index down 0.91% and the broader TOPIX Index falling 1.07%. The yen traded near a four-year low against the U.S. dollar, finishing the week around JPY 113.9, amid the widening spread between U.S. and Japanese sovereign yields, expectations that the Japanese government will introduce further stimulus measures, and the surge in oil prices. The yield on the Japanese 10-year government bond rose slightly to 0.09%.
New minister for economic security seeks to strengthen supply chains for strategic goods
Takayuki Kobayashi, who assumed the newly created post of economic security minister in the cabinet formed by Prime Minister Fumio Kishida, expressed his resolve to strengthen supply chains for strategic goods such as semiconductors and rare earth minerals. Part of Japan’s new growth strategy under Kishida’s leadership focuses on building a self-sufficient semiconductor supply chain that can survive disruptions such as the coronavirus pandemic. Taiwan Semiconductor Manufacturing Company (TSMC), the world’s biggest chipmaker, recently announced that it is gearing up to build its first-ever chip plant in Japan. The government has indicated that, as part of its economic stimulus package, it will support large-scale private-sector investment, citing TSMC’s plant as an example.
Export growth decelerates sharply; Imports rise for eighth consecutive month
According to provisional data from Japan’s Ministry of Finance, the country’s export growth decelerated sharply in September, falling to 13.0% year on year from the previous month’s 26.2%. Positive contributors were steel, coking coal, and tech, while car shipments tumbled as supply chain disruptions in Southeast Asia caused by the coronavirus pandemic and a global semiconductor shortage forced automakers to cut production. On the other hand, imports rose for the eighth consecutive month, growing 38.6% year on year, having expanded 44.7% the prior month. Growth was driven by strong demand for oil, coal, and medicines.
Activity at private sector businesses returns to expansion territory; Consumer prices edge higher
According to the latest flash purchasing managers’ index (PMI) data, private sector output rose for the first time since April 2021 in October. The au Jibun Bank Flash Japan Composite PMI rose to 50.7, from 47.9 in September (a reading above 50 indicates an overall increase compared to the previous month). The dominant services sector registered an increase in activity for the first time since January 2020, while the manufacturing sector continued to expand, and at a faster pace. The slight recovery was commonly attributed to a reduction in COVID-19 cases and looser pandemic restrictions, but firms continued to highlight sustained supply chain pressures and material shortages.
Separate data showed that the core consumer price index (CPI) rose 0.1% year on year in September, a sign that rising energy and raw material costs are gradually pushing up inflation. The rise in the CPI was the first since the early stages of the coronavirus pandemic in March 2020; the uptick is modest compared with other advanced economies, however, and unlikely to affect the Bank of Japan’s monetary easing stance as it is still far off from achieving its 2% inflation target.
China
China’s stock markets advanced as the large-cap CSI 300 benchmark rose 0.6% and the Shanghai Composite Index added 0.3% after officials sought to calm fears about the property sector and China Evergrande Group made a delayed coupon payment, sparking a rally in the cash-strapped developer’s bonds and shares. Chinese stocks got off to a weak start after data released Monday showed that the country’s gross domestic product (GDP) rose a lower-than-expected 4.9% in the third quarter from a year ago as power shortages and property sector curbs reined in expansion. The latest quarterly growth was the weakest since the third quarter of 2020 and considerably slower than the second quarter’s 7.9% pace.
Other data released in the week showed that new home prices stalled in September for the first time in six years, according to Bloomberg, raising expectations of policy support after the property sector endured more negative headlines. China’s property sector is critical since it accounts for as much as one-third of the country’s GDP, according to some estimates, once construction and other property-related goods and services are included.
Property developer struggles continue
Credit agencies continued to downgrade ratings on several developers amid fears of a liquidity crunch resulting from a property sector slowdown and slower economic growth. Moody’s Investors Service, Fitch, and S&P Global Ratings each took rating actions as the outlook for the sector grew more uncertain. Fitch downgraded Central China Real Estate to B+, while Moody’s downgraded Central China Real Estate to B1/B2 and cut its ratings on several other developers. The actions followed S&P’s downgrade of Greenland Holdings and E-House, two of the country’s larger developers, the previous week. Meanwhile, China’s President Xi Jinping called upon the country to “vigorously and steadily advance” legislation for a nationwide property tax. Most analysts believe that such a levy would curb rampant housing market speculation, but the idea has reportedly run into widespread pushback from ruling Communist Party members.
Authorities address energy crunch
On the energy front, Chinese authorities sought to allay a growing energy crunch with state planner National Development and Reform Commission (NDRC), saying that it would “guide coal prices back to a reasonable level.” The NDRC’s assurances sent coal prices plummeting, with some key benchmarks falling by as much as 15% in a single session. However, prices are still up 170% over a year ago after they hit record highs earlier in the week. China is the world’s biggest producer and consumer of coal, viewed as a leading economic indicator since it is used to power about 60% of the country’s power plants.
The renminbi currency cooled after China said it would roll out counter-cyclical measures at an appropriate time if policy tightening by major world economies leads to currency market fluctuations becoming too large. It still ended up gaining 0.6% against the U.S. dollar, the largest weekly gain since May. The yuan touched a high of 6.3794 per dollar on Wednesday, the strongest level since June 2.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned about 5.0%. On Thursday, after holding its regularly scheduled monetary policy meeting, Turkey’s central bank reduced its key interest rate, the one-week repo auction rate, from 18.0% to 16.0%. This 200-basis-point (two percentage point) decline was larger than expected, and it added to existing downward pressure on the lira.
According to the post-meeting statement, the rate cut decision is because policymakers on the Monetary Policy Committee (MPC) have been observing “the decelerating impact” from previous monetary tightening “on credit and domestic demand.” Central bank officials specifically noted that “the tightness in monetary stance has started to have a higher than envisaged contractionary effect on commercial loans.” They also observed that a “strengthened macroprudential policy framework has started to curb personal loan growth.”
According to T. Rowe Price sovereign analyst Peter Botoucharov, the MPC’s statement that “supply-side transitory factors leave limited room for the downward adjustment to the policy rate” through the end of 2021 has little value in the context of 12-month consumer price inflation exceeding 19% and the central bank breaking its earlier commitment to keep interest rates above inflation. While Botoucharov believes that the central bank and other parties may act to help stabilize the lira, he expects monetary policy will continue to reflect President Erdogan’s intentions to bolster the economy and, thus, support his political party and allies in the 2023 elections.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, plunged about 7.2%.
Brazilian assets have been under pressure for several reasons. The central bank has been intervening in the currency market in an attempt to stabilize the real, which has been weakening and contributing to already elevated inflation via higher import prices. Also, the Bolsonaro administration’s renewed efforts to provide more emergency financial assistance to Brazilian families, as well as growing interest in Congress to do so, have raised concerns about a loss of fiscal discipline. In addition, Economy Minister Paulo Guedes, in a recent press conference, spoke about the need for a "waiver" of the spending cap—which was established to keep government spending in line with inflation over time—to deal with the impact of rapidly rising prices on low-income households.
According to T. Rowe Price analyst Richard Hall, investors are likely to remain jittery until Congressional leaders or administration personnel provide a sense of what fiscal spending will look like in 2022. That said, Hall believes there is the potential for the situation to get worse, such as if Guedes or other key administration members leave office—four of Guedes’ aides did resign late in the week—or if truckers, who generally support Bolsonaro, decide to strike in response to continued increases in diesel fuel prices. On Thursday, Bolsonaro proposed that the government should help truckers pay for diesel through the end of 2022—following the October 2022 elections.
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