Global Markets Weekly Update: April 01, 2022
U.S.
Indexes close out positive month but down quarter
The major indexes ended mixed for the week, with the S&P 500 Index closing out its best month since December but its worst quarter since early 2020. Cyclically sensitive stocks underperformed as investors girded for a slowdown in growth, with the financial services and industrials sectors in the S&P 500 among the losers. Higher interest rate expectations took a toll on the information technology sector, while the typically defensive consumer staples and utilities sectors outperformed.
Ukraine dominates sentiment
Stock prices fluctuated over the week in apparent response to the evolving situation in the war in Ukraine. The week started off on a strong note, which T. Rowe Price traders attributed to reports that Russia was prepared to allow Ukraine to join the European Union in return for a pledge to stay out of NATO as well as progress in ceasefire talks. The S&P 500’s four-day winning streak was broken on Wednesday after a Russian official said that talks with Ukraine yielded no breakthroughs and that Russia was regrouping forces in a push to complete the takeover of the eastern Donbas region. The mood soured further on Thursday, as Ukrainian President Volodymyr Zelenskyy said that Ukrainian forces are preparing for new Russian attacks. After rising briefly on the renewed tensions, oil prices resumed their decline following the Biden administration’s announcement of an extended release from the nation’s Strategic Petroleum Reserve to combat inflationary pressures.
The week brought several closely watched economic reports, most of which came in roughly in line with consensus expectations. The most prominent may have been the March nonfarm payrolls report, which showed that job gains fell somewhat below expectations at 431,000 versus 490,000, but the unemployment rate fell a bit more than expected, to 3.6%. Monthly growth in average hourly earnings met expectations, at 0.4%, as did monthly consumer income gains, at 0.5%. Personal spending, reported Thursday, only rose 0.2%—less than expected and perhaps reflecting a growing unwillingness to pay higher prices. February job openings remained little changed and near record highs.
Bond market suffers its worst quarter since 1980
Prices of U.S. Treasuries rose for the week as the yield on the benchmark 10-year U.S. Treasury note fell slightly, but the Bloomberg U.S. Aggregate Bond Index rounded out its worst quarter since late 1980, and its third-worst quarter since the index’s inception. March was the worst monthly performance for the index since July 2003. (Bond prices and yields move in opposite directions.) Portions of the Treasury yield curve inverted over the week, but our traders noted that the correlation between an inversion and a looming recession may not necessarily hold, as investors appeared to be favoring longer-dated Treasuries due to signals that the Federal Reserve may hike official short-term rates by 50 basis points (0.50%) in May. Municipal bonds underperformed through much of the week.
The investment-grade corporate bond market traded higher on Tuesday, as sentiment was bolstered by encouraging headlines regarding the war in Ukraine. More volatile credits outpaced the broader market, and credit spreads—the extra yield offered over Treasuries and an inverse measure of the sector’s relative appeal—moved wider. Our traders noted that technical conditions were mixed as healthy trading volumes were countered by higher-than-expected levels of new issuance. Our traders also observed that the high yield market saw better-than-average trade volumes as investors appeared to be encouraged by the potential positive headlines out of Ukraine and looked for deals in the secondary market. New issuance remained muted.
Rate insulation benefits leveraged loan market
Some improvement in the economic backdrop seemed to stoke demand for collateralized loan obligations in the leveraged loan market. Higher interest rates also contributed to greater retail flows into the asset class. (Unlike traditional bonds, leveraged loans pay floating coupons that rise alongside interest rates.) Our traders noted healthy demand for names trading at a discount, as the favorable technical conditions created by positive flows and the lull in primary issuance seemed to mostly outweigh fundamental uncertainties.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
34,818.27 |
-42.97 |
-4.18% |
S&P 500 |
4,545.86 |
2.80 |
-4.62% |
Nasdaq Composite |
14,261.50 |
92.20 |
-8.84% |
S&P MidCap 400 |
2,710.15 |
-2.27 |
-4.64% |
Russell 2000 |
2,091.11 |
13.13 |
-6.87% |
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's presentation thereof.
Europe
Shares in Europe gained ground in a choppy week of trading, overcoming concerns about the macroeconomic outlook amid strong inflation and the ongoing Russian invasion of Ukraine. In local currency terms, the pan-European STOXX Europe 600 Index advanced 1.06%. Germany’s DAX Index climbed 0.98%, France’s CAC 40 Index tacked on 1.99%, and Italy’s FTSE MIB Index added 2.46%. The UK’s FTSE 100 Index added 0.73%.
Core eurozone bond yields fluctuated over the week but ended the period roughly level. Higher-than-expected inflation data boosted expectations for further interest rate increases and drove yields higher. The move reversed as optimism over Russian-Ukrainian peace talks faded and European Central Bank (ECB) chief economist Philip Lane said that the ECB should be ready to revise policy should macroeconomic conditions deteriorate significantly. Peripheral eurozone government bond yields broadly tracked core markets. UK gilt yields fell in line with U.S. Treasuries, which declined on geopolitical tensions and fears of a recession.
Russia threatens to halt natural gas supplies if not paid in rubles
President Vladimir Putin signed a decree stipulating that foreign buyers must pay for Russian natural gas in rubles from April 1 onward, raising concerns about possible supply disruptions in Europe and the potential economic implications. The G-7 countries unanimously rejected the directive. Germany said it would continue paying for Russian energy in euros and set in motion an emergency plan for rationing natural gas in case deliveries cease or are curtailed.
Eurozone inflation accelerates further, jobless rate falls to record low
Preliminary estimates showed that the eurozone’s annual inflation rate soared to a record 7.5% in March, compared with 5.9% in February. The increase was driven mainly by the upsurge in energy prices. The unemployment rate dropped to a record low of 6.8% in February, as the economy continued to recover from the lifting of coronavirus lockdowns.
ECB policymakers appear more cautious on outlook
ECB President Christine Lagarde, Vice President Luis de Guindos, and Chief Economist Philip Lane expressed caution about the macroeconomic outlook as fighting continued in Ukraine. Lagarde reiterated at a conference in Cyprus that the eurozone faced slower growth and higher inflation in the short term, but she warned that "the longer the war lasts, the higher the economic costs will be and the greater the likelihood we end up in more adverse scenarios." Under an “adverse” scenario (including stricter sanctions on Russia, persistent energy supply disruption, and increased geopolitical uncertainty), the ECB projects economic growth of 2.5% in 2022, compared with its base case of 3.7%.
UK Q4 gross domestic product revised up but business sentiment plunges
The UK economy grew more quickly than previously thought in the final quarter of 2021, with the rate of expansion revised higher to 1.3% from the previous estimate of 1%. However, the increase was mainly due to coronavirus-related activity in the health sector. Meanwhile, a survey from the Institute of Directors showed business sentiment slumped in March because of deteriorating economic conditions.
Japan
Japanese stock markets fell over the week, with the Nikkei 225 Index declining 1.72% and the broader TOPIX Index down 1.88%. Growing pessimism about the peace talks between Russia and Ukraine and worries about global inflation and the impact of interest rate increases weighed on risk appetite. Sentiment among big Japanese manufacturers fell in the first quarter for the first time since the outbreak of the coronavirus pandemic, the Bank of Japan’s (BoJ’s) Tankan survey of business confidence showed.
The yield on the 10-year Japanese government bond (JGB) fell to 0.21%, from 0.24% the previous week, with bond purchase operations by the BoJ exerting downward pressure on yields. The yen weakened to its lowest level in over six years, to JPY 122.66 against the U.S. dollar from the prior week’s 122.08, on expectations of divergent monetary policy between the BoJ and other major central banks.
Government to compile a new stimulus package
As widely expected, Japan’s government announced that it would begin work on additional measures to boost the economy. It is seeking to cushion the impact of rising fuel and commodity prices on households and firms, amplified by a sliding yen, and help the economy recover from the coronavirus pandemic. Prime Minister Fumio Kishida said that the priority is to deliver the spending plan as soon as possible—by late April, according to the Kyodo news agency. Reserve funds in the fiscal 2022 budget, including those set aside for the government’s coronavirus response, will be used to finance the package.
BoJ stages massive intervention in the bond market
As part of its yield curve control framework, the BoJ has targeted long-term bond yields near 0%, with a view to reaching its 2% inflation target. It was forced to buy progressively more JGBs during the week as the global bond sell-off exerted upward pressure on yields—the 10-year JGB yield reached the 0.25% ceiling the central bank tries to impose. The BoJ initially announced two fixed rate purchase operations (to buy unlimited 10-year JGBs at 0.25%), and later announced, for the first time, multiple purchase operations on consecutive days, which included buying securities across the yield curve. It also unveiled plans for larger outright JGB purchases in the second quarter.
The massive intervention, which reinforced the BoJ’s dovish policy stance, was enough to stabilize the JGB yield curve. Amid concerns that the central bank’s bond buying could be weakening the Japanese yen, BoJ Governor Haruhiko Kuroda asserted that the central bank’s market operations do not directly affect foreign exchange rates.
China
Chinese markets gained for the week, as investors anticipated that Beijing would step in to support the country’s economy and markets. The broad, capitalization-weighted Shanghai Composite Index rose 2.2%, and the CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, climbed 2.4%, according to Reuters.
Delisting concerns continued to pressure technology stocks, as investors worried about the risk of dual-listed Chinese firms getting kicked off U.S. exchanges. On Wednesday, the U.S. Securities and Exchange Commission added five U.S.-listed Chinese internet companies to its growing list of companies facing possible delisting due to China’s refusal to allow U.S. regulators to inspect their audits. Baidu, China’s leading search engine, and its video-streaming unit iQiyi were among those added to the list of companies targeted by the Holding Foreign Companies Accountable Act (HFCAA). The newly identified companies could be subject to delisting from U.S. exchanges if they fail to comply with the HFCAA’s audit requirements for three straight years.
In economic news, China’s purchasing managers’ indexes for manufacturing and services lagged forecasts and fell into contraction in March as outbreaks of the omicron variant of the coronavirus across the country led to lockdowns and disrupted industrial production. Many economists have reduced their economic growth forecasts for China due to the virus’s resurgence and the government’s zero-tolerance approach to outbreaks. Shanghai saw a renewed COVID-19 outbreak with more than 32,000 cases reported in the past month, the biggest spread of infection in China since it first appeared in Wuhan.
The People’s Bank of China published details of its first-quarter Monetary Policy Committee meeting, which noted increasing uncertainties domestically and abroad. The central bank said that conditions warranted strengthening of policy implementation, remarks that some analysts interpreted as a sign of further credit easing while keeping monetary conditions stable.
The yield on the 10-year Chinese government bond ended the week unchanged at 2.825%, and the yuan was steady at around 6.3 against the U.S. dollar.
Other Key Markets
Russia
Russia’s war against Ukraine continued, though there were hopes for a diplomatic end to the conflict based on what one Russian representative deemed “constructive” ceasefire negotiations on Tuesday between the warring parties in Istanbul, Turkey. According to T. Rowe Price sovereign analyst Peter Botoucharov and credit analyst Razan Nasser, the negotiations appear to have brought some very preliminary mutual understanding on a few issues, including discussions on Ukraine’s adoption of a permanent neutral and non-nuclear status, as well as agreement on Ukraine’s application for European Union membership. However, Botoucharov and Nasser note that there are several key issues—including security guarantees and Ukraine’s territorial integrity—where the parties expressed diverging and, in some cases, opposing views.
All in all, they believe that both sides are still far apart on a mutually acceptable ceasefire and peace agreement. They are skeptical about Russia’s intention to de-escalate the conflict. Also, they believe that Ukrainian territorial concessions to Russia could endanger the political standing of the current Ukrainian government and parliament. In addition, they believe that a proposed neutral status for Ukraine could have difficulty being accepted via referendum.
Chile
Chilean stocks, as measured by the S&P IPSA Index, returned about -0.5%.
On Tuesday, Chilean central bank officials, in a unanimous decision, decided to raise the key interest rate by 150 basis points, from 5.50% to 7.00%. This rate increase, while sizable, was at the lower end of a range of expectations. According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the statement issued after the policy meeting was generally more balanced than recent post-meeting statements, as policymakers discussed elevated inflation as well as a weaker growth outlook. They also noted that future increases in the policy rate are likely to be smaller.
Gifford agrees that growth is likely to slow this year—partially due to base effects given the large expansion in 2021, but also because overall economic activity should decline on the back of much tighter monetary and fiscal policy, as well as stalling private investment due to lingering political and regulatory uncertainty. However, he believes that these growth-slowing factors could be offset somewhat by still elevated household liquidity due to government transfer programs and previous pandemic-related emergency withdrawals from the Chilean pension system.
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