Global Markets Weekly Update: August 20, 2021
U.S.
Stocks pull back after S&P 500 doubles from March 2020 low
Stocks pulled back for the week but not before the S&P 500 Index reached a new record high of 4,480 on Monday afternoon, more than double its intraday low of 2,192 on March 23, 2020. Small-cap stocks lagged for the week, with the Russell 2000 Index briefly falling into correction territory, down more than 10% from its March 2021 peak. Energy shares performed worst within the S&P 500, while gains in a wide range of health care stocks boosted the sector. T. Rowe Price traders noted that volumes reached the highest level in a month, reflecting a rebound in trading by retail investors.
The firm’s traders pointed to several factors that seemed to weigh on sentiment over the middle of the week. More signs emerged of an economic slowdown in China (see below), and Securities and Exchange Commission Chair Gary Gensler urged caution when investing in Chinese stocks because of regulatory uncertainty as well as disclosure issues. On the domestic policy front, recent signals from Federal Reserve policymakers that they would soon begin tapering the central bank’s monthly asset purchases also seemed to concern investors. On Wednesday, the Fed released the minutes of its latest policy meeting, in which most members indicated that they thought tapering could begin by the end of the year. Dallas Federal Reserve President Robert Kaplan may have helped spark a rally Friday, however, after he suggested that he might favor delaying tapering if the delta variant takes a deeper toll on the economy.
Retail sales fall more than expected
Worries that growth might be peaking also seemed to hamper sentiment. Stocks fell on Tuesday, after the Commerce Department reported that retail sales slumped 1.1% in July, although off an upwardly revised June base. Much of the decline was concentrated in auto sales, which fell 3.9% as consumers balked at high prices and automakers struggled with the ongoing global semiconductor chip shortage and other supply issues. Home Depot shares fell sharply after missing sales expectations, and consumers reined in spending on a number of “stay at home” categories, such as furniture as well as online purchases. Sales picked up solidly at restaurants and bars, however, suggesting that the latest wave of the pandemic—at least in its early stages—was not necessarily to blame for the pullback.
The rest of the week’s economic data were mixed, particularly in the housing sector. July housing starts fell 7%, much more than consensus expectations, but off upwardly revised May and June numbers. Building permits—a more forward-looking gauge—also rose more than anticipated. A measure of builder sentiment fell back to its lowest level in a year, hampered in part by labor and building supply worries. Conversely, industrial production rose 0.9% in July, more than expected, due in part to automakers moderating or canceling plans to shut down production lines. Weekly jobless claims fell to 348,000, a bigger drop than expected and another pandemic-era low.
Delta concerns push Treasury yields lower
U.S. Treasury yields decreased through most of the week, with the yield on the benchmark 10-year Treasury note touching its lowest level since August 5. (Bond prices and yields move in opposite directions.) T. Rowe Price traders reported that fears surrounding the delta variant, dovish sentiment from some Fed policymakers, and the weaker-than-expected retail sales print supported the week’s rally. The broad municipal bond market was little changed through most of the week and underperformed Treasuries. According to our muni traders, one of the week’s most prominent deals—New York City’s sale of over $1 billion in general obligation bonds—had to reprice to higher yields to sell the newly issued debt.
Investors demanded more yield relative to Treasuries (known as credit spreads) for investment-grade corporate bonds for much of the week alongside concerns about COVID-19 and the rally in longer-term Treasuries. Despite weakness in the macroeconomic backdrop, healthy levels of demand for corporate bonds in both short and long maturities were observed at these wider spread levels. New issuance came in under relatively low weekly expectations, but the deals that reached the market were well-subscribed. Meanwhile, new issuance and overall trade volumes in the high yield bond market were fairly light throughout the week, while investors had a muted response to the minutes from the Fed’s most recent policy meeting. Investors favored higher-rated bonds within the high yield universe, and BB rated bonds outperformed for the week.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
35,120.08 |
-395.30 |
14.75% |
S&P 500 |
4,468.00 |
-26.33 |
18.25% |
Nasdaq Composite |
14,714.66 |
-108.24 |
14.17% |
S&P MidCap 400 |
2,675.67 |
-55.80 |
16.00% |
Russell 2000 |
2,167.60 |
-55.51 |
9.76% |
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
European stock benchmarks pulled back amid global concerns about the spread of the delta variant of the coronavirus, the situation in Afghanistan, and slowing growth in China. After reaching a series of record highs in the first two weeks of August, the pan-European STOXX Europe 600 Index ended the week 1.48% lower in local currency terms. Country specific indexes also declined. France’s CAC 40 Index fell 3.95%, Germany’s Xetra DAX Index was off 1.14%, Italy’s FTSE MIB Index dropped 2.78%, and the UK’s FTSE 100 Index retreated 1.84%.
Core eurozone bond yields drifted lower in the week as investors favored lower-risk assets. Germany’s 10-year bund yield was trading around -0.495% on Friday, compared with highs of -0.456% on Monday. In currency markets, the British pound and the euro both weakened against the U.S. dollar as the greenback benefited from the risk-off environment.
Eurozone inflation outpaces UK
Inflation in the UK rose less than expected in July and cooled from June’s levels. According to the Office of National Statistics (ONS), the annual consumer price index (CPI) increase fell to 2.0% in July, in line with the Bank of England’s target, from 2.5% in June, while the CPI measure that includes housing costs dropped from 2.4% to 2.1% for the annual period. Downward pressure from clothing and footwear was partially offset by rising used car prices. In its announcement, the ONS noted that the change in the 12-month numbers was partially a result of changing base effects as the supply shortages that were seen in some categories during the beginning of the pandemic began to ease by last summer.
Meanwhile, inflation in the eurozone increased 2.2% for the July annual period, up from 1.9% in June and slightly higher than the European Central Bank’s 2% target. Higher inflation in the euro area was driven primarily by rising energy costs. For the European Union overall, prices rose 2.5% for the latest 12-month period, up from 2.2% in June.
UK retail sales decline
Retail sales in the UK fell 2.5% in July compared with June, weaker than consensus expectations, as poor weather likely weighed on results. Other data pointed to a continued recovery in the UK labor market as employers added 182,000 jobs in July and the unemployment rate fell to 4.7%. In the European Union, officials said gross domestic product grew 2% in the second quarter compared with the previous quarter, while employment grew 0.6%.
Norwegian central bank signals September rate hike
Norges Bank, the central bank of Norway, kept its key short-term lending rate at 0% at its August meeting but said it is on track to begin raising rates in September as expected. Policymakers had signaled in their June forecast that rate hikes would likely begin in the autumn. If the central bank goes ahead with the September rate increase, it would be one of the first developed market economies to begin tightening monetary policy. In their post-meeting statement, policymakers said the country’s high COVID-19 vaccination rate and falling unemployment are contributing to a normalizing economic environment. Despite the central bank’s hawkish messaging, the Norwegian krone weakened during the week as a result of the risk-off environment and falling oil prices.
Japan
Japan’s stock markets finished the week sharply lower, with the Nikkei 225 Index falling 3.45% to close at its lowest level this year. The broader TOPIX Index was down 3.03%. News that Japanese carmaker Toyota Motor was to cut production for September by 40% from its previous plan cast doubt on the economic recovery from pandemic lows and led to a sel-loff in the shares of automakers and companies producing materials for autos, such as steel and rubber manufacturers.
The government’s decision to extend the coronavirus state of emergency covering Tokyo and five other areas to September 12, while expanding the measure to seven more prefectures, also dampened sentiment. Positive economic data releases signaling the Japanese economy’s return to growth in the second quarter and improving confidence among manufacturing and service sector firms failed to stem the markets’ losses. Against this backdrop, the yield on the 10-year Japanese government bond ticked down to 0.01%, while the yen finished the week broadly unchanged at around JPY 109.7 against the U.S. dollar.
Japanese economy returned to growth in the second quarter
Japan’s gross domestic product (GDP) expanded by an annualized 1.3% in the second quarter of 2021, ahead of consensus estimates. It followed a 3.7% contraction in the prior quarter. Growth momentum was marginally positive despite pandemic headwinds; the main driver was domestic private demand, helped by strength in private consumption, capital spending, and residential investment, which offset the drag from net exports and inventories. The rebound in Japan’s GDP is much weaker, however, than that seen in the other major developed economies, highlighting the country’s struggles to contain the pandemic.
Improving confidence among manufacturing and service sector firms
According to the latest Reuters Tankan poll, confidence among Japanese manufacturers hit a more than three-and-a-half year high in August and service sector sentiment turned positive. Manufacturing firms were optimistic about demand recovering to pre-pandemic levels due to strong overseas orders for products such as high-tech goods, notably booming demand for semiconductors and related materials. Sources of uncertainty included rising raw material costs.
Consumer price data show Japan’s economy in deflation for 12 months
Japan’s core CPI, which includes oil but excludes fresh food, fell 0.2% in July from a year ago, as lower mobile phone charges remained a big drag despite support from rising energy prices. The fall was in part due to a change in the base year for the CPI that gives a heavier weighting to mobile phone charges. This marked the 12th straight month of decline in core consumer prices, highlighting the challenges the Bank of Japan faces in meeting its 2% inflation target.
China
Chinese stocks slumped as Beijing’s regulatory clampdown on the technology sector stoked uncertainty about what other sectors the government might target next. Liquor stocks slumped after state media reported that the State Administration for Market Regulation was considering new regulations for liquor companies. Health care companies fell on concerns that industry profits would also be curbed by new regulations.
For the week, the Shanghai Composite Index fell 2.5% while the CSI 300 Index of large-cap stocks shed 3.6% to its lowest close since July 28, according to Bloomberg. In Hong Kong, the benchmark Hang Seng Index fell into a bear market, having lost more than 20% from its peak earlier this year. As of Friday, stock markets of China and Hong Kong lost more than USD 560 billion in market value, according to Reuters.
China’s state-run media said that the country’s technology companies should innovate more, assume greater social responsibilities, and promote social values in line with the principles set forth by President Xi Jinping. In remarks publicized Wednesday, Xi stressed the importance of "common prosperity," calling for fairer wealth distribution in the next phase of China's economic development. His comments raised concerns that China might introduce a property or wealth tax, according to T. Rowe Price traders in Asia.
The renminbi currency hit a three-week low of 6.5059 against the U.S. dollar on Friday, weakening past its 200-day moving average and the psychologically key level of 6.50 renminbi per dollar. In the bond market, the yield on the 10-year government bond declined three basis points to close at 2.87%. In credit markets news, government-backed investors said they would recapitalize Huarong Asset Management after the cash-strapped bad debt manager posted a record $15.9 billion loss. The rescue package suggests that Xi Jinping’s government is reluctant to allow one of the country’s most systemically important state-owned enterprises to default despite making clear that it does not intend to prop up every indebted company.
On the economic front, monthly indicators for July missed expectations and showed that economic activity slowed more than expected. Heavy flooding across China and coronavirus outbreaks caused by the delta variant weighed on retail sales and consumer services. The return of strict lockdowns in some cities and domestic travel curbs at the height of the summer vacation season also restrained consumer demand, analysts said.
Higher material costs and supply chain issues continue to dampen profit margins for many Chinese small and medium-sized companies, crimping manufacturing output. Disappointing construction and industrial production data reflected regulatory tightening and slowing global export growth, according to analysts. Given the temporary nature of the shocks hitting activity, Beijing is expected to adopt a “wait and see” strategy before deciding whether further policy easing is needed.
Other Key Markets
Latin American markets were generally pressured during the week by concerns about slower growth in China, a major regional trading partner, and by a recent pullback in prices of some natural resources that are key exports from the region. Markets were also hurt by rising expectations that the U.S. Federal Reserve will soon begin reducing its stimulus efforts by tapering its monthly asset purchases, and by weaker currencies versus the U.S. dollar, which could add to inflation pressures in Latin America and force central banks to accelerate their efforts to normalize interest rates.
In Brazil, the Bovespa Index retreated about 2.5% amid weakness in energy and mining companies. Investors are also concerned about the country’s fiscal situation. The government is struggling to find ways of circumventing a mandatory spending cap in the interest of providing additional financial assistance to its citizens. In Chile, the S&P IPSA Index dropped about 1.0% amid weakness in the price of copper, which is one of the country’s main exports. In Mexico, the IPC Index returned about -0.1%, as a sharp decline on Thursday offset earlier gains.
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