Global Markets Weekly Update: August 06, 2021
U.S.
Indexes reach new records
Stocks recorded gains for the week, helping the large-cap benchmarks and the technology-heavy Nasdaq Composite Index to new highs. A sharp rise in longer-term interest rates following Friday’s strong monthly payrolls report augured well for banks’ lending margins and boosted financials shares, and the small utilities sector also outperformed. Energy shares lagged within the S&P 500 Index.
The week started off on a down note, which T. Rowe Price traders attributed to ongoing concerns about “peaking” economic growth and profits, along with worries about the delta variant of the coronavirus. Airlines, payment processors, big retailers, cosmetic firms, entertainment companies, and makers of industrial metals—all segments tied to the reopening of the global economy—highlighted some of the areas of weakness. Worries over new regulatory measures in China also seemed to weigh on sentiment.
Some positive earnings surprises appeared to help the market regain its footing over the next few days, however. Analysts polled by FactSet are currently expecting second-quarter earnings for the S&P 500 to have increased by over 85% versus the year before and, unusually, revenues to have grown by nearly as much.
Payrolls grow much more than consensus expectations
The Labor Department’s closely watched monthly payrolls report seemed to provide stocks another leg up on Friday—although what it suggested for interest weighed on the growth-focused Nasdaq Composite Index. Employers added 943,000 jobs in June, well above consensus estimates and the best showing since strict lockdowns were eased in the summer of 2020. Other details in the report were also encouraging: April and May gains were revised significantly higher; the labor participation rate and average weekly hours ticked up; average hourly earnings rose more than forecast (4.0% versus 3.8%); and the unemployment rate fell much more than expected to 5.4%, a new pandemic-era low. Investors’ reaction may have been particularly enthusiastic given the disappointment Wednesday over the payroll processing firm ADP’s tally of private sector job gains, which came in considerably below expectations.
The rest of the week’s heavy economic calendar was arguably also encouraging on balance. The Institute for Supply Management’s (ISM’s) index of July factory activity missed expectations but still showed healthy growth (59.5, with levels over 50 indicating expansion), while the increase in June factory orders surprised on the upside (1.5% versus around 1.0%) off an upwardly revised base in May. The week’s biggest surprise may have been the ISM’s service sector index, which jumped to 64.1, well above expectations of 60.5. T. Rowe Price traders observed that this was the largest beat in the history of the index, which dates back to 1967.
Hawkish Fed comments contribute to rise in yields
Intermediate- and long-term Treasury yields jumped Friday morning following news of stronger-than-expected employment growth in July. (Bond prices and yields move in opposite directions.) According to our traders, hawkish comments from Federal Reserve Vice Chair Richard Clarida and Federal Reserve Governor Christopher Waller added upward pressure on rates earlier in the week. T. Rowe Price municipal bond traders observed light trading in the secondary market but solid demand for primary market offerings. In credit-specific news, S&P Global Ratings revised its outlook on New Jersey general obligation bonds to positive from stable, based partly on the state’s appropriation of some surplus revenues for additional pension contributions.
Our traders noted some weakness in investment-grade corporate bonds early in the week. Overnight activity from Asia and secondary trading volumes were relatively muted, but the primary market was active, and the level of new issuance surpassed weekly expectations. High yield investors appeared mostly focused on the firm tone of corporate earnings reports, which seemed to mostly outweigh concerns about the coronavirus and regulatory developments in China.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
35,935.47 |
273.04 |
15.04% |
S&P 500 |
4,436.52 |
41.26 |
18.12% |
Nasdaq Composite |
14,835.76 |
163.08 |
15.11% |
S&P MidCap 400 |
2,717.36 |
13.70 |
17.81% |
Russell 2000 |
2,247.76 |
21.51 |
13.82% |
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 strong growth in corporate earnings and optimism about an economic recovery. In local-currency terms, the pan-European STOXX Europe 600 Index ended 1.78% higher. Major stock indexes also gained ground: France’s CAC 40 Index advanced 3.09%, Italy’s FTSE MIB Index climbed 2.51%; and Germany’s Xetra DAX Index added 1.45%. The UK’s FTSE 100 Index gained 1.29%.
Core eurozone bond yields trended lower, as an increase in coronavirus cases fueled doubts about the wider economic recovery. Peripheral eurozone bond yields largely tracked core markets. UK gilt yields also fell, broadly following core markets. However, this pullback in yields moderated later in the week due to hawkish messaging from the Bank of England (BoE).
Germany advised to continue COVID controls; UK moves to vaccinate teenagers
Germans should be required to wear masks on public transport and in shops to curb infection by the coronavirus at least until next spring, the health ministry advised in a report sent to the regions and the parliament. Control measures will need to reduce infections among the unvaccinated and prevent the health system from becoming overwhelmed, it said. In a reversal of policy, the UK said it is planning to vaccinate 16- and 17-year-olds to curb the progress of the delta variant. European Union countries’ rollouts to teenagers are already well advanced.
BoE says “modest tightening” is possible
The BoE said that “some modest tightening of monetary policy over the forecast period is likely to be necessary” should the economy evolve broadly in line with the bank’s central projections. The BoE, which left its monetary policy and quantitative easing program unchanged at its latest meeting, now expects interest rates to rise from 0.1% to 0.2% in 2022 and to 0.5% in August 2024. The central bank updated its forecast for inflation, which is likely to peak at 4% either late in 2021 or in early 2022. The outlook still calls for the economy to grow 7.25% this year, but the BoE increased its forecast for 2022 gross domestic product to 6% from 5.75%. The BoE also outlined its plan for weaning the economy off stimulus. T. Rowe Price International Economist Tomasz Wieladek said the BoE’s more hawkish language and higher inflation forecast suggest it may raise interest rates at a faster pace than priced in by the market.
Strong rise in eurozone producer prices
Eurozone producer prices rose 1.4% in June, from 1.3% in May, as energy prices surged. Excluding energy, producer prices ticked up 0.7% in June.
Japan
Japan’s stock markets made gains over the week, with the Nikkei 225 rising 1.97% and the broader TOPIX Index up 1.49%, buoyed by upbeat earnings reports. However, gains were dented by a worsening in the country’s coronavirus situation, as daily cases in Tokyo topped 5,000 for the first time, with an advisory panel of experts warning that the situation could deteriorate further. Nationwide cases also reached a record high. These developments prompted the government to expand its quasi-state of emergency to eight more prefectures, where the highly contagious delta variant is spreading rapidly. Against this backdrop, the yen was broadly unchanged, finishing the week at JPY109.7 against the U.S. dollar, while the yield on the 10-year Japanese government bond fell slightly to 0.01%.
IMF downgrades Japan’s 2021 growth prospects
In an update to its World Economic Outlook forecasts, the International Monetary Fund (IMF) downgraded Japan’s 2021 growth prospects, reflecting tighter coronavirus restrictions in the first half of the year as cases picked up. Japan was the only G7 industrialized nation to face a downgrade. The intergovernmental organization now projects that the country’s economy will grow by 2.8% year-on-year in 2021, down from the 3.3% growth it projected in April. However, the IMF anticipates Japan’s growth will rebound over the second half of the year, as vaccinations continue and the economy fully reopens. It upgraded 2022 growth to 3.0% year-on-year, from 2.5%.
The IMF’s chief economist said that there would be no major economic impact from holding the Tokyo Olympics without spectators, given that most of the infrastructure spending—a key boost to the economy—was done in the past.
Private sector activity remains in contraction territory
Private sector activity contracted for the third straight month in July, as an accelerated fall in the large services sector offset a modest upturn in manufacturing output. The au Jibun Bank Japan Composite PMI Output Index—which measures combined output in the manufacturing and service sectors—dipped to 48.8 in July from 48.9 in June.
The services economy signalled that demand conditions remained subdued in the wake of a resurgence in COVID-19 cases in July, as ongoing restrictions to curb the spread of the virus dampened client confidence and sales. Meanwhile, manufacturers signalled a quicker improvement in operating conditions, amid a faster expansion in production and new order volumes.
Key indicator of private consumption falls
Household spending unexpectedly fell 5.1% year-on-year in June. Domestic demand remained weak due to state of emergency curbs, while cuts to employees’ summer bonuses also hit consumption. This weakness casts doubt on the Bank of Japan’s forecast that the benefits of an export-driven recovery will spread to households.
China
Chinese stocks rose as the previous week’s steep declines attracted some buyers. For the week, the Shanghai Composite Index added 1.8% and the large-cap CSI 300 Index ended up 2.3%. Domestic investors appeared to avoid market sectors that have recently drawn criticism from the government in favor of areas with strong official support, according to T. Rowe Price traders. Negative comments regarding online gaming from state media hurt investor sentiment and raised fears of tighter regulation for the industry. Investors also took profits in many property management companies following positive profit alerts and share buyback announcements.
In China's bond markets, yields stabilized after falling the previous week. The yield on the 10-year government bond declined two basis points to end the week at 2.83%. Foreign investors increased their holdings of Chinese government and policy bank bonds in July, though the pace of inflows has slowed since January. A relatively dovish quarterly policy meeting of the 25-member Politburo, China’s top decision-making body, on July 30 reinforced expectations that the central bank would keep liquidity reasonably ample, according to T. Rowe Price traders.
Overseas investors bought USD 7.7 billion of central government bonds last month, taking their ownership share to 10.6%, according to China Central Depository Clearing (CCDC). The renminbi currency was stable against the U.S. dollar and ended at 6.468 against the dollar in Shanghai on Friday afternoon.
Economic momentum slows
In economic news, China’s official PMI readings for July pointed to slower economic momentum in the country’s manufacturing and services sectors. Analysts attributed this in part to the resurgence of COVID-19 cases in China and overseas, which has dampened business confidence. Additionally, stricter policies regarding residential real estate appeared to dampen momentum in the construction industry.
China faces coronavirus outbreak
On the pandemic front, China grappled with its biggest COVID-19 outbreak since the virus appeared in the city of Wuhan in 2019. On Friday, China reported 124 new confirmed cases for Thursday, up from 85 a day before, marking the highest daily count of an outbreak that began in late July when a group of airport workers tested positive in the city of Nanjing. Despite having some of the world’s strictest virus defenses, the latest outbreak fueled by the delta variant has spread to nearly half of China’s 33 provinces and autonomous regions. Roughly 40% of China’s population is fully vaccinated, according to the Center for Disease Control and Prevention, a level that falls short of herd immunity. As a result, some economists believe that a recovery in domestic consumption on the mainland could slow or even suffer a setback.
Other Key Markets
Peru
July was a challenging month for Peruvian assets—stocks fell more than 9%, according to MSCI—but investors appeared encouraged at the start of the week by news that Pedro Francke had been sworn in as finance minister in President Castillo’s administration. Francke’s candidacy for the position was in question after he left Castillo’s July 28 inauguration early following the selection of Guido Bellido as prime minister and a cabinet filled with other far-left candidates. Bellido is a member of the Peru Libre party and has close ties to party leader Vladimir Cerron, both of whom are under criminal investigation.
According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, Francke—who is a former World Bank economist—represents a moderate voice within the cabinet. While Francke said that he will govern independently of party politics, it's unclear whether he will have much of a mandate given how central the economy and public finances are to Castillo's policy platform. Castillo aspires to have a “social” and “moral” economy combined with a very large increase of the budget.
While a more diverse Congress represents a counterbalancing force to Castillo’s left-wing agenda and cabinet, Gifford notes that governability concerns have also increased given that a government confidence vote must be held within 30 days. Without a vote of confidence from the legislature, Castillo’s cabinet would be dissolved, and a new one would need to be created.
Gifford believes that legislators are being very careful, knowing that if a single government loses two confidence votes, the entire unicameral legislature is also dissolved, and new legislative elections are held within four months. As a result, opposition parties are preparing to present single motions of censure against individual cabinet members in an effort to remove them one at a time unless Castillo heeds calls to replace them himself. Another major uncertainty facing investors is whether the longstanding central bank governor, Julio Velarde, will step down or accept Castillo’s invitation to stay.
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned about 3.0%.
July was a solid month for Turkish assets. Stocks rose 6.64% in U.S. dollar terms, helped by a 3% appreciation of the Turkish lira versus the dollar. The lira has been relatively steady in the foreign exchange market in recent months, supported by a better balance-of-payments outlook and the central bank’s extended tight monetary policy stance. Toward the end of the month, the central bank increased its year-end consumer price index (CPI) inflation forecast from 12.2% to 14.1% year over year. T. Rowe Price sovereign analyst Peter Botoucharov believes that this is a better reflection of Turkish inflation trends and market expectations.
Earlier in the week, the government reported that the CPI for July was 1.8% month over month and 18.9% year over year. The data were higher than expected, and the 12-month inflation reading was above the 17.5% inflation rate for the year ended June 30. As a result, Botoucharov believes that the central bank will keep its one-week repo auction rate at 19% in the near future. Assuming that the lira remains fairly stable and credit growth begins to slow, headline inflation should start to ease in September or in the last three months of the year. Botoucharov believes that policymakers could begin reducing key interest rates in the fourth quarter.
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