Global Markets Weekly Update: April 16, 2021
U.S.
Stocks move to new highs as earnings season begins
Most of the major benchmarks recorded their fourth consecutive week of gains and moved to record highs. The technology-heavy Nasdaq Composite index and the small-cap Russell 2000 Index slightly lagged the large- and mid-cap benchmarks and stayed below their recent highs. Health care shares were particularly strong within the S&P 500 Index, helped by gains in insurance stocks, while rising gold and copper prices boosted mining shares. Energy shares were roughly flat after retreating late in the week.
The week kicked off the unofficial start of earnings season with 22 of the S&P 500 companies scheduled to report first-quarter results, according to Refinitiv. T. Rowe Price traders noted that overall sentiment seemed to get a boost from Wednesday’s release of earnings results from banking giants JPMorgan Chase, Goldman Sachs, and Wells Fargo. Analysts polled by both Refinitiv and FactSet currently expect overall earnings for the S&P 500 to have grown by roughly 25% in the quarter on a year-over-year basis, the most since the sharp cut in corporate tax rates that took effect in 2018.
Vaccine news also appeared to drive sentiment. Futures wavered on Tuesday morning, after U.S. regulators announced that they were suggesting a “pause” in Johnson & Johnson’s coronavirus vaccinations following rare reports of blood clots. On Thursday, however, investors seemed encouraged by Pfizer’s announcement that it could deliver 10% more of its vaccine by the end of May than earlier promised. Moderna said its similar mRNA vaccine was more than 90% effective at protecting against COVID-19 and more than 95% effective against severe disease up to six months after the second dose.
Consumer spending rebounds
The week’s economic signals also seemed supportive. March retail sales, reported Thursday, grew by 9.8%, the most since May. Gains were broad-based and reflected both the continued reopening of restaurants and other retail operations, as well as a recovery from a 2.7% pullback in February due to exceptionally severe weather. Investors also welcomed some more exceptional manufacturing data, with a gauge of mid-Atlantic factory activity hitting its highest level in nearly five decades. Weekly jobless claims came in at 576,000, well below expectations and a new pandemic-era low. The University of Michigan’s preliminary gauge of consumer sentiment also reached its best level (86.5) since the pandemic began but came in a bit below consensus expectations.
The week brought important inflation data. Headline consumer prices rose 0.6% in March, while core (less food and energy) prices rose 0.3%, both moderately above consensus expectations. Import prices rose 1.2% in the month, also above forecasts. News also continued to emerge about price pressures in parts of the economy affected by supply disruptions. The Wall Street Journal, for example, reported a dramatic increase in rental car prices as firms struggle to rebuild fleets because of slowed auto production, which is resulting in turn from the global chip shortage. Inflation concerns may have been tempered by Federal Reserve Chair Jerome Powell’s interview on “60 Minutes” the previous weekend, in which he reiterated that policymakers would like to see inflation “on track to move moderately above 2% for some time.”
Technical factors drive bond yields lower
Despite stronger-than-expected economic data, U.S. Treasury yields fell over the week, with the 10-year Treasury note yield declining to 1.57% from 1.67% the previous Friday. T. Rowe Price traders pointed to stronger demand from Japanese investors and other technical factors as catalysts for the rally. In addition, they noted that upbeat economic data likely caused investors to reduce their expectations for more fiscal stimulus and, relatedly, Treasury issuance.
The broad municipal bond market posted gains through most of the week but underperformed Treasuries. The sector saw further compression in credit spreads—the yield differential between higher- and lower-quality bonds of similar maturity. The asset class continued to be buoyed by robust cash flows into municipal bond mutual funds, which totaled USD 2.5 billion for the week ended April 14, according to Lipper data.
Our traders observed relatively lighter trading volumes and balanced flows in the investment-grade corporate bond market to start the week. Spread movements were fairly limited apart from banking sector spreads, which widened amid post-earnings issuance. The primary market picked up speed as the week progressed, and the new deals were generally met with adequate demand.
The strong economic recovery data, generally positive earnings outlook, and optimism around government spending plans supported the performance of high yield bonds. Our traders noted, however, that robust issuance weighed on some market segments as investors raised cash to participate in new deals.
Index |
Friday's Close |
Week’s Change |
% Change YTD |
---|---|---|---|
DJIA |
34,200.67 |
400.07 |
11.74% |
S&P 500 |
4,185.47 |
56.67 |
11.43% |
Nasdaq Composite |
14,052.34 |
152.15 |
9.03% |
S&P MidCap 400 |
2,723.01 |
52.49 |
18.05% |
Russell 2000 |
2,264.89 |
21.42 |
14.51% |
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 hopes of a strong recovery in the global economy and corporate earnings, despite a resurgence in coronavirus infections. In local currency terms, the pan-European STOXX Europe 600 Index posted a seventh consecutive week of gains, rising 1.20%. Germany’s Xetra DAX Index advanced 1.48%, France’s CAC 40 gained 1.91%, and Italy’s FTSE MIB added 1.29%. The UK’s FTSE 100 Index added 1.5%.
Core eurozone bond yields crept higher as investors sold existing bonds to make space for long-dated issues from several eurozone countries. News reports indicating that Europe would receive additional vaccine supplies in the second quarter also lifted yields. However, yields dipped slightly after the U.S. imposed new sanctions on Russia. Yields in peripheral European economies widely tracked the core markets this week. UK gilt yields broadly followed U.S. Treasury yields lower.
Merkel backs stricter lockdown powers
German Chancellor Angela Merkel urged Parliament to approve new laws that would allow federal authorities to impose strict coronavirus restrictions, such as curfews, on areas with high infection rates. Data showed that infections were rising in Germany, which Merkel said was firmly in the grip of a third wave of the pandemic. England, which has vaccinated almost two-thirds of its population, started reopening shops, personal care services, and outdoor dining this week. Northern Ireland said that it will allow outdoor dining from the end of April, accelerating its exit from lockdown. However, Ireland, where the vaccination programs have progressed more slowly, plans to start lifting measures in May. France, Germany, and Italy began to accelerate their vaccination campaigns, the Financial Times reported.
UK economy expands; Italy raises deficit estimate
The UK economy grew 0.4% in February, helped by an uptick in factory output and retail and wholesale sales, official data showed. The 2.9% contraction that the economy suffered in January was revised to a 2.2% slowdown.
Italy has raised its target for this year’s budget deficit to 11.8% of gross domestic product from an 8.8% forecast made in January, a government source told Reuters. The new target includes the impact of a EUR 40 billion stimulus package signed off by the cabinet, the source said.
Japan
An up-and-down week with markets ending slightly lower
Japanese stock markets were mixed during the week with both the Nikkei 225 Stock Average (-0.6%) and the broader TOPIX (-0.3%) ultimately finishing the period marginally lower. The yen weakened a little against the U.S. dollar, closing in the high JPY 108 range. Meanwhile, benchmark 10-year government bond yields declined, finishing the week at 0.085%.
A sluggish start before rallying on revised outlook
The week began cautiously with investors seemingly content to hold their fire ahead of some significant economic updates from China and the U.S. later in the week. A lack of fresh triggers following the record market highs set last week also contributed to the sluggish start.
However, Tuesday saw Japanese stocks rally as investors were initially encouraged by Fed Chair Jerome Powell’s comments that a rate hike in 2021 is unlikely. The news boosted earnings optimism and hopes for a faster global economic recovery. Sentiment was also given a major lift midweek, as the IMF revised its expectations for regional growth in Asia. The revised outlook sees the Asian economy expanding 7.6% in 2021, up from the previous view in October last year of 6.9%. The IMF also expects a further 5.4% growth in 2022.
Surging coronavirus cases are a major concern
The confident mood was soon undermined, however, by the continued surge in coronavirus infections. A spike in daily cases, notably in Tokyo and Osaka, made likely the prospect of renewed restrictions being imposed on activity. Meanwhile, a jump in oil prices did little to improve sentiment in the world’s second-largest net importer.
The week ended more positively, however. Bank of Japan Governor Haruhiko Kuroda provided a cautiously optimistic view of the economy, saying it would continue to improve as robust global demand lifts business sentiment. Key economic data from China and the U.S. seemed to support his view.
China
The Shanghai Composite broad market index of A-shares fell 0.7% over the week to Friday. The CSI 300 large-cap index, with its higher weight in technology stocks, fell 1.4%. Asian and Chinese markets were broadly higher Friday following key Chinese economic data. T. Rowe Price traders said that mainland investors appeared unsure whether strong GDP data would bring forward liquidity tightening or if disappointing March industrial production data would give the authorities cause to pause. Consumer stocks rallied after a working paper from the government proposed fully lifting restrictions on family size.
Worries over possible default of state-owned asset manager
In China’s bond markets, rumors spread that state-owned asset manager Huarong Asset Management might fail to meet its upcoming bond payments. The price of Huarong’s bonds fell sharply but began to recover on Thursday after Huarong said it would repay an SGD (Singapore dollar) 600 million bond in April. Contagion to other bonds (and equities) due to Huarong has been relatively mild, seemingly due to expectations that Beijing will step in with financial support for the prominent state-owned enterprise.
Nevertheless, the week’s sell-off in Chinese offshore dollar-denominated bonds was the biggest since March 2020. Sentiment in both the domestic (RMB) and offshore (USD) bond markets was hurt by new regulations on Tuesday that local government financing vehicles should choose bankruptcy if they were unable to repay their debt. The timing of this announcement shook investors, coinciding as it did with Huarong's troubles.
The yield on the 10-year Chinese central government bond fell five basis points (0.05%) to 3.18% despite robust economic data. Analysts pointed to a “flight to safety” factor given the volatility in credit markets from Huarong. Assurances on liquidity from the People’s Bank of China, China's central bank, also helped to ease concerns over a potential increase in funding costs. In foreign exchange markets, the renminbi had a good week, gaining 0.5% against the U.S. dollar.
Q1 GDP growth close to consensus at 18.3%
The economy surged 18.3% year over year in the first quarter, albeit versus a very low base in 2020, when stringent shutdowns were imposed to contain the initial COVID-19 outbreak. Earlier in the week, China's Customs reported that exports rose 30.6% in March in U.S. dollar terms. Exports were a key growth driver for China in 2020. Despite the strong headline number, exports slowed in March on a two-year average comparison with 2019. Among the other March data prints, retail sales beat consensus estimates (33.9% versus 28%), while industrial production missed (14.1% versus 18%).
Economists pointed to slower-than-expected sequential GDP growth in the first quarter (0.6% versus 3.1%) due to the virus containment measures at the start of this year and an upward revision to the fourth-quarter data.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned about 1.1%.
On Thursday, the Turkish central bank decided to leave its one-week repo auction rate unchanged at 19%. The decision was in line with the commitment to policy continuity expressed recently by Governor Sahap Kavcioglu, but the new governor is considered an AKP Party loyalist who seems to share President Recep Tayyip Erdogan’s unorthodox view that high interest rates cause high inflation.
In light of the government’s prerogatives for economic growth and job creation, T. Rowe Price sovereign analyst Peter Botoucharov believes that, under the new governor, the central bank is likely to pursue a faster pace of monetary easing in the future than it would have under former Governor Naci Ağbal. Botoucharov believes that Turkey could begin cutting rates as soon as this summer and that policymakers will maintain a looser policy stance. This would likely translate into a higher year-end inflation rate.
Russia
Russian stocks, as measured by the Russian Trading System (RTS) Index, returned about 5.6%.
In recent weeks, there have been media reports of intensified fighting in the Donbass region of eastern Ukraine between pro-Russian separatists and Ukrainian forces—a conflict that has simmered for seven years—as well as a Russian military buildup along its border with Ukraine. On Tuesday, U.S. President Joe Biden and Russian President Vladimir Putin spoke by telephone and, according to a White House statement, Biden “called on Russia to de-escalate tensions…reaffirmed his goal of building a stable and predictable relationship with Russia…and proposed a summit meeting in a third country in the coming months…”
On Thursday, however, Biden signed an executive order expanding the existing set of U.S. sanctions against Russia—some of which were imposed in the aftermath of Russia’s seizure of Ukraine’s Crimean Peninsula in early 2014. The new sanctions are extensive: They include the expulsion of some diplomatic personnel, as well as sanctions on individuals and entities allegedly involved in meddling in the 2020 U.S. presidential election and conducting other malicious cyber activity. The most serious restriction from an investment perspective is that U.S. financial institutions may not participate in the primary market for ruble- and non-ruble-denominated bonds issued by the Central Bank of Russia, the National Wealth Fund, or the Ministry of Finance after June 14. The restrictions on Russian domestic debt are similar to the ones that the U.S. introduced in August 2019 on Russian Eurobonds; these will likely result in a split between “old/pre-sanction” and “new/post-sanction” bonds.
For the time being, Botoucharov says that it is unclear how the new sanctions will affect U.S.-Russia relations, but he will be closely watching several key events in the coming weeks. These include Putin’s annual address to the Russian parliament on April 21, and a Global Leaders Summit on Climate on April 22–23, which will be hosted by Biden, who extended invitations to Putin and to Chinese President Xi Jinping.
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