Global Markets Weekly Update: February 8, 2021
U.S.
The major benchmarks rebounded from the previous week’s steep losses, helped by fiscal stimulus plans and vaccine optimism. The large-cap S&P 500, Nasdaq Composite, and small-cap Russell 2000 indexes all reached record highs. Energy stocks outperformed as domestic oil prices hit their highest level in over a year on a surprising drawdown in U.S. reserves. Health care shares lagged. It was an active earnings week, with 112 S&P 500 companies scheduled to report fourth-quarter results, according to Refinitiv. Most prominently, shares in Google parent Alphabet rose sharply on Wednesday after the company beat earnings and revenue estimates on better-than-expected advertising growth.
Short squeeze unwinds
On the heels of their worst weekly decline since October, stocks rallied when trading began on Monday. T. Rowe Price traders pointed to several factors behind the shift in sentiment, including better COVID-19 trends, vaccine optimism, monetary and fiscal tailwinds, and signs of renewed strength in the recovery. The social media-coordinated “short squeeze” targeting hedge funds with short positions in GameStop and a few other companies also abated, but buyers turned their attention instead to the silver market, sending silver prices to their highest level since 2013.
(Short sellers borrow shares of a stock and then sell them in the hope of later being able to buy the shares back again at lower price—enabling them to return the shares and close out the loan at a profit. If short sellers are wrong and a stock instead goes up significantly, they may suffer a short squeeze and incur losses on their bearish positions as they “cover” their shorts. If enough bearish investors cover their short positions, they can drive the stock price even higher. The individuals coordinating their buying on the Reddit subgroup “wallstreetbets” appear to have been trying to set this cycle in motion.)
Democrats move ahead on USD 1.9 trillion stimulus
Investors kept a close eye on the Biden administration’s USD 1.9 trillion stimulus proposal during the week. On Tuesday, President Joe Biden met with Republican Senate leaders to discuss a compromise, with Republicans proposing instead a relief bill totaling USD 618 billion. It became increasingly clear, however, that Senate Democrats were prepared to move ahead alone using the so-called “budget reconciliation” process, which would require a simple majority in the chamber (including the tie-breaking vote from Vice President Kamala Harris). Early Friday morning, the Senate passed a budget resolution moving forward legislation authorizing the full USD 1.9 trillion President Biden had requested.
Several of the week’s economic reports surprised on the upside. The Institute for Supply Management’s (ISM’s) gauge of services sector activity rose to its highest level (58.7, with a reading above 50 indicating expansion) since February 2019. According to ISM data, the expansion in the services sector has now matched that in the manufacturing sector, which is less exposed to social distancing measures. Weekly jobless claims fell more than expected and reached their lowest level (779,000) since late November. On Friday, the Labor Department reported that employers had added 49,000 jobs in January, roughly in line with expectations, following the previous month’s downwardly revised decline of 227,000.
Munis see strong demand
The yield on the benchmark 10-year U.S. Treasury note continued moving higher, propelled by vaccine news, improving economic signals, and stimulus hopes. (Bond prices and yields move in opposite directions.) Municipal bonds outperformed for much of the week, helped by strong technical factors. Lower-rated new issues continued to enjoy strong demand, as evidenced by a new general obligation deal from Detroit that was 30 times oversubscribed.
Investment-grade corporate bond credit spreads—the extra yield offered over Treasuries and an inverse measure of the sector’s relative appeal—tightened as several companies reported generally reassuring fourth-quarter earnings and investors monitored fiscal stimulus developments. Our traders noted healthy trading volumes and strong buying in shorter-term securities. Primary issuance quickly beat initial expectations, and the new deals were well subscribed.
Riskier market segments, including high yield bonds, recovered from weakness amid the cooling of the short squeeze trading volatility, as investors seemed to focus on corporate earnings, positive macroeconomic data, and the outlook for additional stimulus. Below investment-grade funds industrywide reported positive flows, and credit spreads tightened across all quality tiers.
Index |
Friday's Close |
Week’s Change |
% Change YTD |
---|---|---|---|
DJIA |
31,148.24 |
1165.62 |
1.77% |
S&P 500 |
3,886.83 |
172.59 |
3.48% |
Nasdaq Composite |
13,856.30 |
785.61 |
7.51% |
S&P MidCap 400 |
2,476.17 |
136.05 |
7.35% |
Russell 2000 |
2,231.12 |
157.49 |
12.80% |
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 with global markets on hopes of a quicker economic recovery, spurred in part by hopes that the pace of coronavirus vaccinations would improve and by the prospect of more U.S. fiscal stimulus. The pan-European STOXX Europe 600 Index ended the week 3.46% higher.
Germany’s Xetra DAX Index and France’s CAC 40 posted solid gains but lagged Italy’s FTSE MIB Index, which rallied 7.00% after Mario Draghi, the former president of the European Central Bank, was given a mandate to form a new government. The FTSE 100 Index advanced 1.28%, as some disappointing earnings reports and a strong UK pound curbed its gains. The currency strengthened after traders reduced bets on a possible interest rate cut and data highlighted the UK’s rapid rollout of its coronavirus vaccination program.
Expectations for a pickup in economic growth reduced demand for core bonds and drove yields higher. Better-than-expected eurozone gross domestic product (GDP) data raised long-term inflation expectations, further lifting yields. Peripheral bond yields broadly fell. In Italy, yields initially rose due to the collapse of Prime Minister Giuseppe Conte’s ruling coalition and then declined sharply midweek after Draghi began discussions to form a new government. Gilt yields followed core markets and received a further boost after the Bank of England (BoE) left monetary policy unchanged and said that lenders would need at least six months to prepare for negative interest rates. This news prompted investors to push out their expectations for an interest rate cut to next year.
UK vaccination program speeds up; Poland begins easing restrictions
The pace of coronavirus vaccination in continental Europe remained slow but picked up in the UK, where more than 10.5 million people have received a first dose. The number of daily coronavirus infections also started to fall in some countries after a month of strict lockdown measures across Europe. Prime Minister Boris Johnson said the government would set a "road map" for cautiously easing restrictions in England later this month. Poland became one of the first European Union nations to begin reopening its economy, allowing the hospitality sector to start operating from mid-month. However, Northern Ireland and Scotland extended their lockdowns until March.
Eurozone GDP shrinks by less than expected; BoE adjusts growth forecasts
The eurozone’s economy contracted less than expected in the fourth quarter, according to Eurostat’s initial estimate, which suggested that GDP fell 0.7% sequentially and 5.1% year over year. France’s and Italy’s economies shrank the most, while GDP expanded 0.1% in Germany and 0.4% in Spain. Economists expect a steeper GDP contraction in the first quarter due to the continuing lockdowns.
The BoE said it expected the UK economy to recover quickly over the year and return to its pre-pandemic size by the first quarter of 2022. The central bank lowered its forecast for economic growth in 2021 to 5% from the 7.25% it predicted in November but raised its estimate of 2022 GDP growth to 7.25% from 6.25%.
Japan
Japan’s stock markets surged for the week. The Nikkei 225 Stock Average advanced 4.0% (1,116 points) and closed at 28,779.19. For the year-to-date period, the widely watched yardstick is ahead 4.9%. The broader equity market benchmarks, the large-cap TOPIX Index and the TOPIX Small Index, logged similar strong weekly gains. The yen weakened and closed above JPY 105 versus the U.S. dollar.
Yields on long-term Japanese government bonds set to climb
According to former deputy governor Kazumasa Iwata, the Bank of Japan (BoJ) is likely to begin allowing long-term Japanese government bond yields to rise through a reduction of long-term bond purchases, which should steepen the yield curve. He thinks the central bank will begin to allow its 0% interest rate target to move more widely. The plan, which Iwata believes will be publicly disseminated in March, should make the BoJ’s policy more sustainable. At the same time, the central bank will also employ loan programs for certain financial institutions.
In a Reuters interview, Iwata said, “The BoJ can indirectly assist efforts to nurture green and digital technology in Japan.” If enacted, the new program and higher long-term yields should also benefit pension funds and life insurance companies. Iwata, who is the president of the Japan Center of Economic Research, also believes the pandemic will cause the country to experience deflation into 2022. “It’s hard to see Japan pull out of deflation any time soon,” he said.
State of emergency extended to March 7
On the recommendation of the government’s coronavirus task force, Prime Minister Yoshihide Suga extended the state of emergency status for 10 prefectures by one month to March 7. Of the 11 prefectures currently under the state of emergency declared on January 7, the only region that was not included in the extension was Tochigi because the infection rate had declined materially. Despite an overall slowing of new coronavirus cases, hospitals and their staff remain under significant pressure, and fatalities remain near record levels.
Suga’s approval rating has suffered due to his handling of the pandemic, falling to 43% from 74% when he took office in September 2020. Tetsuro Fukuyama, secretary general of the main opposition Constitutional Democratic Party, has been a vocal critic of the government’s lockdown measures. Subsequently, parliament enacted laws to fine people and businesses that do not comply with the restrictions to prevent the spread of the disease—patients resisting hospitalization can be fined JPY 500,000 (USD 4,760), and restaurants and bars that fail to cooperate in reducing their operating hours can be fined JPY 300,000. After the Health Ministry approves the use of the Pfizer vaccine on February 15, the government plans to begin its coronavirus vaccination efforts on February 17, starting with health care workers.
China
Chinese stocks rose for the week. The large-cap CSI 300 Index gained 2.5% and outperformed the Shanghai Composite Index’s 0.4% rise. Sentiment improved following reports that Chinese e-commerce leader Alibaba Group, which has been the target of unfavorable regulatory actions, reached an agreement with regulators over the restructuring of its fintech affiliate Ant Group, whose record USD 34.4 billion initial public offering (IPO) was canceled in November. In Hong Kong, a record oversubscription by retail investors for the USD 5.4 billion initial public offering of Kuaishou Technology revealed huge investor appetite for Chinese tech companies. Shares of the video app company surged 161% in its Hong Kong public trading debut on Friday, making it the largest internet IPO since Uber went public in 2019, according to Bloomberg.
In fixed income markets, the yield on China’s sovereign 10-year bond rose four basis points to close at 3.25%. Foreign investor flows into Chinese sovereign debt hit a record USD 18.8 billion in January, the 23rd consecutive month of net foreign buying. Investment-grade bonds also performed strongly, helped by a USD 5 billion deal from Alibaba that drew robust demand in the secondary market. In currency trading, the renminbi fell 0.6% against the U.S. dollar to close at 6.469 per dollar, offering a respite in the currency’s recent strength against the greenback.
Lunar New Year restrictions weigh on services
Following clusters of new coronavirus outbreaks in northern China, Beijing and several other major cities have tightened travel restrictions and testing requirements ahead of next week’s Lunar New Year holiday, normally the busiest travel season for the year. In a normal year, some 280 million migrant workers travel home from their place of work, an annual migration whose economic impact lasts about 40 days, starting two weeks before the holiday. This year, the number of trips in China for the holiday will drop 60% from 2019 to about 1.2 billion, the lowest number in 18 years, according to the country’s transport ministry. Although this year’s “stay put” campaign will likely depress demand for travel and some consumer services, economists believe that the reduced holiday disruption could end up boosting China’s manufacturing sector.
On the economic front, China’s official gauges of industrial and services activities missed expectations in January, though both readings showed that activity remained in expansionary territory. The slowdown in manufacturing activity was confirmed by the private Caixin/Markit survey, which showed that manufacturing in January grew at its slowest rate in seven months. The below-forecast growth in services was likely due to the government’s campaign to discourage travel for the Lunar New Year holiday. But it also showed how China’s services and consumption-driven sectors have lagged the broader economic recovery as coronavirus flare-ups continue to dampen sentiment.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index returned about 3.6%. The equity market seemed unfazed by President Recep Tayyip Erdogan’s call for a new Turkish constitution that would reflect the country’s relatively new executive presidential system and would likely, in the opinion of T. Rowe Price sovereign analyst Peter Botoucharov, reduce the influence of opposition parties and independent voices in Turkey. Botoucharov notes that Erdogan’s ruling coalition government would not have enough votes in parliament to legislate such a change, so the likeliest path would be a constitutional amendment, which would need to be approved in a nationwide referendum.
During the week, the Turkish Statistical Institute (Turkstat) reported that month-over-month consumer price index (CPI) inflation in January and year-over-year CPI inflation were broadly in line with expectations: 1.68% for the month and 14.97% for the 12-month period. Botoucharov notes that inflation is being propelled by food prices and the pass-through effects of lira weakness (the currency fell 20% versus the U.S. dollar last year) and believes that the inflation uptrend will continue for a few more months. He also expects that year-over-year inflation will peak around 16.5% during the spring and that—if the lira remains relatively stable, credit growth stays under control, and the country experiences a normal crop-growing season—headline CPI should decline over the course of 2021 and could finish the year around 11% to 12%.
Mexico
Stocks in Mexico, as measured by the IPC Index, returned about 2.7%. The Mexican government recently released its full-year fiscal 2020 results. T. Rowe Price emerging markets sovereign analyst Aaron Gifford notes that the government was able to hit its primary fiscal surplus target of 0.1% of GDP in December, but this is down sharply from 0.7% in November—which suggests that there was a large ramp-up in government spending in the last month of the year. Part of this is seasonal, such as year-end bonuses, but Gifford believes it’s clear that the government made an effort to allocate more resources to important sectors, such as health care.
Also, Mexico’s overall public sector deficit for the year was -3.9% of GDP, which was better than the budgeted expectations of -4.8%. Total government revenues decreased 4.1% year over year in real (inflation-adjusted) terms led by oil, even while non-oil revenues rose by 3.4% year over year, led by non-tax revenues. Gifford attributes the increased non-oil revenues to the government’s efforts against corporate tax evasion, as well as certain one-off transfers that are classified as revenue, rather than financing sources. Budget expenditures in total rose a mere 0.2% year over year in real terms in 2020, as austerity efforts helped fund some crisis spending that totaled less than 2% of GDP.
All in all, Gifford deems Mexico’s 2020 financial results to be solid, though he acknowledges that the one-off contributing factors will not be applicable in 2021. He believes that it will be important for the government to pursue tax reforms later this year.
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