Global Markets Weekly Update: August 27, 2021
U.S.
Full FDA approval of Pfizer vaccine boosts sentiment
Stocks gained as full Food and Drug Administration (FDA) approval of the Pfizer-BioNTech COVID-19 vaccine supported sentiment toward an ongoing economic recovery. The tech-heavy Nasdaq Composite index outperformed the broad market S&P 500 Index and the large-cap Dow Jones Industrial Average. The Russell 2000 Index of small-cap stocks posted particularly impressive gains. Stocks in the energy sector jumped higher as crude oil prices gained about 10% for the week. T. Rowe Price’s equity traders noted that trading volumes were generally very light, as is typical for late summer.
Monday’s news about the FDA providing full approval of the Pfizer shot, which could convince more employers to mandate use of the vaccine, boosted stocks early in the week. However, stocks fell on Thursday as an attack at the Kabul airport in Afghanistan amid the U.S. military’s withdrawal from the country resulted in casualties. Speeches by three regional Federal Reserve (Fed) presidents expressing support for a faster start to tapering the central bank’s bond purchases also weighed on sentiment.
Fed Chair’s Jackson Hole speech turns out to be nonevent
Market participants were anticipating Friday’s speech by Fed Chair Jerome Powell at the Kansas City Fed’s Jackson Hole conference (held virtually for the second consecutive year) to see if he would provide any signs that the central bank could accelerate or slow its eventual tapering. However, the speech turned out to be a nonevent as Powell did not signal any deviation from the central bank’s recent assessment of economic conditions or outlook for removing policy accommodation.
The week’s economic data releases were generally positive. July existing home sales rose 2% from June, a slightly higher increase than consensus expectations, likely because of more inventory available on the housing market. July new home sales were up 1% from June but down 27% from July 2020.
Weekly initial jobless claims ticked up but remained near their lowest levels of the pandemic, indicating that the labor market is still strengthening even as the delta variant spreads in the U.S. The Commerce Department’s revised estimate of second-quarter gross domestic product growth showed that the economy expanded at a 6.6% seasonally adjusted annual rate, slightly above the 6.5% initial reading.
Treasury yields increase
U.S. Treasuries posted negative total returns as yields increased. (Bond prices and yields move in opposite directions.) The week’s positive economic data helped push yields higher, while improving sentiment toward riskier assets such as equities also weighed on demand for Treasuries, which investors view as a lower-risk asset class. The broad municipal bond market registered modestly negative returns through most of the week but held up better than Treasuries. T. Rowe Price muni traders observed softening conditions in secondary trading, though technical factors remained supportive of the overall market.
Our investment-grade corporate bond traders observed that credit spreads, or additional yield relative to similar-maturity Treasuries, tightened throughout the week alongside relatively healthy risk sentiment, the move higher in Treasury yields, and subdued primary issuance. The outlook for limited new issuance until after Labor Day and steady demand supported the performance of high yield bonds.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
35,455.80 |
-395.30 |
14.75% |
S&P 500 |
4,509.37 |
67.70 |
20.06% |
Nasdaq Composite |
15,129.50 |
414.84 |
17.39% |
S&P MidCap 400 |
2,767.06 |
91.39 |
19.96% |
Russell 2000 |
2,277.15 |
109.55 |
15.31% |
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 gained ground on central banks’ accommodative policies, signs that economic growth remained strong in August and hopes that higher vaccination rates might help to prevent hospitalizations and deaths stemming from COVID-19 from reaching previous highs as economies reopen and case counts increase. In local currency terms, the STOXX Europe 600 Index advanced 0.75%. Country-specific indexes also moved higher. France’s CAC 40 Index climbed 0.84%, Italy’s FTSE MIB Index ticked up 0.34%, and Germany’s Xetra Dax Index added 0.28%. The UK’s FTSE 100 Index gained 0.85%.
Core and peripheral eurozone bond yields rose this week, largely reflecting moves in U.S. Treasuries. UK gilt yields broadly followed core markets this week.
Eurozone economy and inflationary pressures remained strong in August
The eurozone economy appeared to remain in expansion mode in August, with the early headline number for IHS Markit’s composite Purchasing Managers’ Index (PMI) coming in at 59.5, a strong reading that was down modestly from the 15-year high of 60.2 registered in July. (PMI readings greater than 50 indicate an expansion in economic activity levels.) The pace of growth in both the manufacturing and services sectors moderated slightly from the preceding month but remained robust relative to historical levels. Inflation in input costs and selling prices remained elevated, likely reflecting the combination of supply chain constraints and the rebound in demand.
ECB governing council members reiterate view that inflation should prove temporary
Philip Lane, chief economist of the European Central Bank (ECB), told the Reuters news agency that he regards recent inflationary pressures as temporary, citing muted wage growth. Bloomberg reported that fellow ECB governing council member François Villeroy de Galhau expressed similar sentiments at a conference, saying, “We continue to think and hope that these supply difficulties are temporary given our experience of past recoveries.”
UK PMI drops on services sector slowdown; plan to distribute booster shots of COVID-19 vaccine
The flash reading for IHS Markit’s UK composite PMI tumbled to 55.3 in August compared with 59.2 in July. Whereas the reading for the manufacturing sector slipped 30 basis points to 60.1, the PMI for the services sector contracted to 55.5 from the 59.6 record during the previous month. The news release noted that survey participants cited staffing shortages as one constraint on the recovery.
The Financial Times reported that the UK government would roll out a program to deliver booster shots of the coronavirus vaccine to the most vulnerable populations, beginning in early September, and later expand eligibility to those 70 years and older.
Japan
Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 2.31% and the broader TOPIX Index up 2.01%, despite more negative developments on the coronavirus front. The yield on the 10-year Japanese government bond ticked up slightly to 0.02% (from 0.01% the prior week) while the yen fell to JPY 109.9 against the U.S. dollar (from the previous week’s JPY 109.7).
COVID-19 state of emergency extended
The Japanese government extended its COVID-19 state of emergency to eight more prefectures, with the measures set to last until September 18. Prime Minister Yoshihide Suga said that infections are spreading on an unprecedented scale in most regions across the country and acknowledged that the medical system is in a severe situation. However, Japan has been speeding up its belated vaccination drive in recent months, and Suga highlighted that about 60% of the country’s population will have been fully vaccinated by the end of September.
Poll defeat in Yokohama adds to Suga’s woes
Suga faced a big setback as Takeharu Yamanaka, an opposition-backed candidate, won the Yokohama mayoral race. Yokohama is the second-largest city in Japan by population and home to the constituency of Suga's seat in the House of Representatives. Already having to contend with waning public support for his government’s handling of the coronavirus crisis, Suga also faces competition to remain leader of the ruling Liberal Democratic Party (LDP), with former Foreign Minister Fumio Kishida formally announcing his candidacy and other candidates expressing their interest. The LDP leadership election is scheduled for September 29, ahead of a general election set to be held by November 28.
Survey signals sharp drop in services output; expansion in manufacturing softens
Business activity in Japan’s large services sector shrank at the fastest pace in August since May 2020 (when Japan’s economy went through a deep coronavirus slump): The au Jibun Bank Flash Japan Services Business Activity Index fell to 43.5 from 47.4 in July. Survey respondents saw new business inflows contract and export demand deteriorate, highlighting the increasingly heavy toll a recent wave of COVID-19 infections is taking on the economy.
Meanwhile, expansion in the manufacturing sector softened slightly in August: The au Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index fell to 52.4 from 53.0 in July. New order inflows saw a sustained increase, and manufacturers were confident that demand would continue to increase. Severe disruption to supply chains hampered the receipt of inputs for production, however.
China
Chinese stocks continued to recover from their late-July lows. The Shanghai Composite Index rose 2.8% and the large-cap CSI 300 Index gained 1.2%. In the bond market, the yield on the 10-year central government bond edged up two basis points to 2.89%. The renminbi currency appreciated slightly against the U.S. dollar to close at 6.480.
In credit market news, liquidity problems at debt-laden property developer China Evergrande Group weighed on the Asian high yield offshore market, where new issues have dropped below USD 2 billion for two straight months.
Early in the week, the People’s Bank of China (PBOC) met with leading financial institutions to urge them to strengthen credit support to the economy. The meeting is significant because credit growth accelerated after the central bank held similar meetings in 2018 and 2019, according to CLSA, and suggests that policy is shifting toward further easing amid an uneven economic recovery. Possible easing measures for the PBOC include accelerated government bond issuance, an expansion in the loan quota for some banks, or a cut in banks’ required reserve levels.
In regulatory news, the China Securities Regulatory Commission pledged to cooperate with their U.S. counterparts regarding the auditing of Chinese companies that trade in the U.S. The years-long dispute with the U.S. stems from China’s refusal to provide full access to the financial data of Chinese companies that trade in the U.S. on national security grounds. Separately, China sought to clarify misconceptions over the term “common prosperity,” a slogan recently emphasized by President Xi Jinping amid a crackdown on the technology sector. The term refers to a long-term goal that involves economic growth, wages, taxation, and income distribution and is not aimed at privately owned internet platform companies, according to a senior Communist Party official.
On the coronavirus front, China’s daily cases dropped to single-digit levels following tough measures in recent weeks. The city of Nanjing, where the delta variant outbreak began, restored commercial flights on August 26 after its airport was closed for a month. A closed terminal at the port city of Ningbo is scheduled to reopen next week, earlier than planned. The early easing of pandemic restrictions could result in improved economic data for China in September, economists believe. Next week’s Purchasing Managers’ Index surveys for August will give the first evidence of the economic impact of the latest COVID-19 outbreak.
Other Key Markets
Korea hikes rates
The Bank of Korea is the first major Asian central bank to raise its benchmark policy interest rate since the coronavirus pandemic began in the spring of 2020. South Korea’s central bank decided to hike rates 25 basis points to 0.75% from 0.50% this week. The move was generally expected as the bank wants to stem rising inflation, higher household debt, and a surge in housing prices. The central bank kept its gross domestic product growth forecast steady at 4.0% and 3.0% for this year and next, respectively. However, it increased its inflation projection to 2.1% for the fiscal year from 1.8% and ratcheted up its inflation forecast for 2022 to 1.5% from 1.4%. Central Bank Governor Lee Ju-yeol stated that the bank would adjust interest rates gradually in response to the economic recovery, with the assumption that the coronavirus infection rate would start to decline in October. He warned that there are growing imbalances in the economy, and future rate adjustments would be made in response to pandemic conditions, the current state of the economy, and inflation assessments.
Southeast Asia growth slowdown expected
Reuters reports that Southeast Asia’s strong economic recovery from the pandemic lows is stalling due to the surge in the number of cases of the delta variant of the coronavirus. Lockdowns in the region are crimping economic activity in both the services and manufacturing sectors, which is likely to cause a slowdown in corporate profit and gross domestic product growth in the third quarter. The hyper-contagious nature of the delta variant coupled with low vaccination rates, especially in emerging markets, has taken the wind from the sails of many companies in the region. According to Refinitiv Eikon analysis of more than 1,000 companies, Southeast Asia is forecast to suffer its first quarter-over-quarter decline in six quarters in the period ended September 30 (although year-over-year data should remain strong due to the weakness versus the year-ago period). Most analysts agree that based on July’s poor factory production data, economic activity will ease in the current quarter. Supply chain bottlenecks (especially for businesses that rely on auto parts and semiconductors sourced from Thailand, Vietnam, and Malaysia) are expected to impact many of the largest manufacturers in the region.
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