Global Markets Weekly Update: January 29, 2021
U.S.
Equities drop amid higher volatility, volumes
Stocks declined sharply for the week amid much higher volatility and trading volumes. Large-cap indexes generally held up better than mid- and small-cap shares. On Wednesday, equities posted their worst day since October, with the S&P 500 Index falling almost 2.6%. Total trading volume hit a record high of 23 billion shares on Wednesday, a huge jump from the year-to-date average daily volume of about 14 billion.
“Short squeezes” drive unusual price action
Despite a busy earnings week in which 37% of the S&P 500’s market capitalization was due to post quarterly financial results, unusual fluctuations in the prices of certain stocks that are popular with individual investors appeared to drive the market and received the bulk of media attention. Encouraged by message boards on Reddit and other online forums, these investors seemed to collectively target stocks with high percentages of short interest through buying the shares. In a short trade, which is a bearish position, an investor borrows shares and sells them, hoping to buy them back at a lower price in the future.
In a “short squeeze,” a rising stock price can force short investors to buy back the shares at a higher price, incurring 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. GameStop, a video game retailer, and movie theater operator AMC Entertainment Holdings were two of the heavily shorted stocks that experienced short squeezes, causing huge price gains and major losses on short positions.
According to media reports, major hedge funds were among the short investors, and they sold out of other stock positions to cover their losses. This activity appeared to drive much of Wednesday’s steep decline, although the firm’s traders also noted that generalized worries over elevated valuations in the market may have encouraged some profit-taking. Stocks recovered a portion of their losses on Thursday after some online brokerages restricted buying in certain stocks.
Fed policy meeting takes a back seat
Amid the dramatic swings caused by short squeezes, the Federal Reserve’s January policy meeting took a back seat in terms of market focus. In the Federal Open Market Committee’s statement and in Fed Chair Jerome Powell’s post-meeting press conference on Wednesday, policymakers reinforced the message that the economic outlook remains uncertain and that it will be some time before the central bank begins to taper its asset purchases. The government also reported that overall economic growth slowed considerably in the fourth quarter. Gross domestic product (GDP) grew at an annualized rate of 4.0%, in line with expectations, compared with 33.4% in the third quarter.
Treasuries benefit from risk aversion
Yields on intermediate- and long-term Treasuries decreased slightly for the week. The yield on the 10-year Treasury note briefly reached 1.0% on Wednesday, benefiting from its status as a safe-haven asset amid the sharp drop in stocks, before increasing to finish the week. (Bond prices and yields move in opposite directions.) The municipal bond market produced relatively strong returns for most of the week. The constant demand for yield drove interest in municipals while supply underwhelmed, leading to a supportive technical environment.
According to the firm’s traders, investment-grade corporate bonds were pressured in response to concerns surrounding coronavirus vaccine distribution and the status of fiscal stimulus, but healthy demand from a month-end buying trend limited the losses. The general move away from riskier asset classes also weighed on the high yield bond market.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
29,982.62 |
-1,014.36 |
-2.04% |
S&P 500 |
3,714.24 |
-127.23 |
-1.11% |
Nasdaq Composite |
13,070.69 |
-427.36 |
1.42% |
S&P MidCap 400 |
2,340.12 |
-123.06 |
1.45% |
Russell 2000 |
2,073.63 |
-94.64 |
4.84% |
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 shares fell amid worries that the economy could slow due to the raging coronavirus pandemic and delays in the distribution of coronavirus vaccines. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 3.11% lower. Major European indexes also declined: Germany’s Xetra DAX Index fell 3.18%, France’s CAC 40 dropped 2.88%, and Italy’s FTSE MIB slid 2.34%. The UK’s FTSE 100 Index lost 4.30%.
EU to impose export controls on coronavirus vaccines
The European Commission said it would implement a mechanism allowing European Union (EU) countries to block exports of vaccine doses if their purchase orders had not yet been fulfilled, the Politico news website reported. The measures came after setbacks in coronavirus vaccine production at Pfizer and AstraZeneca resulted in severe supply shortfalls, prompting health authorities in Spain, France, and Germany to scale back inoculation programs. T. Rowe Price International Economist Tomasz Wieladek said EU states will only be able to accelerate vaccinations in the second quarter, when the availability of doses should improve.
Governments tighten restrictions to curb spread of new coronavirus variants
France's top medical adviser said a third national lockdown might soon be needed to contain infections. Portugal said it would extend a lockdown until mid-February. The UK tightened its travel curbs, requiring travelers coming from some countries to quarantine in government-sanctioned hotels. Germany prepared to ban all travel from South Africa, the UK, Portugal, Brazil, and other countries where variants of the coronavirus that are more contagious have contributed to surging infection rates. Riots broke out in the Netherlands due to recently imposed curfew restrictions.
European economies resilient in fourth quarter
Germany, France, and Spain reported relatively resilient GDP numbers for the fourth quarter, spurring hopes that the eurozone might avoid a deeper recession. The German economy expanded 0.1% sequentially, thanks to strength in exports and construction; Spain’s GDP unexpectedly grew 0.4%, driven, in part, by increased household consumption. France’s economy shrank 1.3% in the fourth quarter, an upside surprise relative to a consensus estimate that had called for a 4.1% contraction. Bright spots for the French economy in the fourth quarter included robust exports, steady business investment, and a rebound in consumer spending. However, due to continuing lockdowns, the German government cut its 2021 forecast for GDP growth to 3% from its previous estimate of 4.4%.
Italy PM Conte resigns
Italian Prime Minister Giuseppe Conte resigned after losing a parliamentary majority earlier this month and struggling to attract support for his minority administration. His decision paves the way either for a new governing coalition or snap elections. Conte is expected to try to forge a new coalition, a scenario that could allow him to be reappointed as prime minister.
Japan
Japan’s stock markets declined for the week. The Nikkei 225 Stock Average fell 3.4% (968 points) and closed at 27,663.39. For the year-to-date period, the blue chip index is ahead 0.8%. The broader equity market benchmarks—the large-cap TOPIX Index and the TOPIX Small Index—also retreated, giving back most or all of their year-to-date gains. The yen weakened and traded above JPY 104 versus the U.S. dollar.
Third supplementary budget approved
The Japanese government, seeking to swiftly implement measures to curb the third wave of the coronavirus infections, approved a third supplementary budget representing JPY 19 trillion (USD 185 billion). The request for extra monies in fiscal year 2020 (ending March 31, 2021) was passed by the House of Representatives on Tuesday and approved by the House of Councillors on Thursday, amid some concerns that it did not specify the amount of money for medical care efforts versus other projects. Prime Minister Yoshihide Suga dispelled the idea of another round of government stimulus checks; the government issued JPY 100,000 (USD 960) to all of its 126 million residents after the first virus emergency in April 2020. The fiscal 2021 budget, totaling a record JPY 107 trillion, is expected to be approved in March.
The government may extend the state of emergency beyond the current February 7 target to the end of the month for parts of the country that continue to report high numbers of new coronavirus cases. Yasutoshi Nishimura, Japan’s minister in charge of the country’s coronavirus response efforts, said that the government would not wait until the last minute to announce its decision. The Tokyo metropolitan area again reported more than 1,000 new cases per day following a downward trend over the past week.
Global GDP growth recovery delayed by slow vaccine rollouts
Bloomberg’s analysts expect global growth to be weaker for longer amid the latest surge in coronavirus infections and vaccination delays. Tom Orlik, chief economist at Bloomberg Economics, said the harsh reality is that until there is widespread distribution of the vaccine, a return to pre-pandemic global growth is unlikely, citing the impact of the coronavirus on retail spending, hiring, and social unrest. The World Bank recently trimmed its global GDP growth forecast to 4% for 2021 and said that it expects double-dip recessions in Japan, the eurozone, and the UK, in part due to ongoing lockdown measures. A recent Nikkei survey showed that three-fourths of Japanese companies across 32 industries trimmed their capital expenditure plans by an average of 2.9% from fiscal 2020’s initial estimates. Manufacturers trimmed their forecasts by 3.8% while non-manufacturers were expected to trim their spending by 1.7%. The weakest industries included chemicals, air transport, and rubber, while auto-related segments were stronger, reflecting improving demand.
However, the International Monetary Fund (IMF) remained more upbeat and raised its 2021 global economic growth forecast 0.3 percentage points to 5.5% (4.2% for 2022) in its January World Economic Outlook Update. The IMF said that “the strength of the recovery is projected to vary significantly across countries, depending on access to medical interventions, effectiveness of policy support, exposure to cross-country spillovers, and structural characteristics entering the crisis.” The IMF forecasts that Japan’s economy will contract 5.1% in (calendar year) 2020 and generate growth of 3.1% and 2.4% in 2021 and 2022, respectively.
China
Chinese stocks recorded a weekly drop amid fears that the country’s central bank was turning more hawkish after it drained USD 12.1 billion in liquidity from the financial system and a senior central bank official warned of potential asset bubbles. The Shanghai Composite Index fell 3.4%, while the large-cap CSI 300 lost 3.9%.
Southbound equity flows from mainland China to Hong Kong reached a record high during the week, driven by a large number of mutual funds putting cash to work at a time when Hong Kong offered large arbitrage opportunities in Chinese dual-listed shares. Hong Kong’s benchmark Hang Seng Index hovered near a 20-month high, lifted by record inflows from mainland China via the Stock Connect program. Hong Kong has benefited as the exchange of choice for mainland Chinese companies seeking to go public, particularly for domestic tech firms and U.S.-listed Chinese companies seeking a secondary listing. Last year, mainland Chinese companies accounted for 98% of Hong Kong’s initial public offerings, up from 73% in 2019 and 51% 10 years ago, according to the South China Morning Post.
The yield on China’s sovereign 10-year bond increased by five basis points to 3.21%, reflecting concerns of monetary tightening on the horizon. The People’s Bank of China (PBOC) drained over RMB 300 billion from the country’s banking system from Tuesday to Thursday, reported Bloomberg. Now that China’s economy has returned to its pre-pandemic growth level, central bank policymakers are expected to focus on containing financial system leverage.
Last month, China’s statistics bureau reported that the average home price rose in November for the 33rd straight month, a record since the series began in 1991. In response to worries about a property market bubble forming, four major Chinese cities, including Shanghai, announced tougher prudential curbs to control local property markets. Despite the recent tightening measures, China’s central bank has sought to telegraph a measured policy stance. At the virtual Davos summit, PBOC Governor Yi Gang stated that “Monetary policy will continue to prop up the economy, but at the same time we will watch for the risks.”
In economic news, China reported that industrial profits rose 20% in December from a year ago and increased roughly 4% for the full year after a slight decline in 2019. Next month, China celebrates its weeklong Lunar New Year holiday, albeit with tighter restrictions on traveling and gatherings as officials try to contain new virus outbreaks. This year’s restrictions are more targeted than the widespread lockdowns in 2020, however, making it unlikely that they will have a big impact on the broader economy.
Other Key Markets
Pension reform adds to uncertainty in Peru
Stocks in Peru, as measured by the S&P/BVL General Index, were little changed on the week, notwithstanding a pronounced fall on Wednesday. The weakness was caused by an announcement of new lockdowns in the country to contain another wave of COVID-19 cases as well as the approval of a controversial pension reform bill in a special commission in Congress.
The pension reform aims at integrating both the public (ONP) and private (AFP) pension fund systems, despite significant pushback from the industry, regulator, central bank, and finance ministry. While the bill doesn’t do away with AFPs entirely, it would choose private managers in a public auction process and subject them to government oversight. Fears of being nationalized come on top of previous populist bills that have harmed the pension fund industry. These include allowing affiliates to withdraw up to 25% of their retirement account balances due to the pandemic.
T. Rowe Price emerging markets sovereign analyst Aaron Gifford doesn’t believe that the pension reform bill will be approved in its current form due to legal and political challenges. However, he highlights the uncertainty that this and other populist legislation have caused at a time when Peru has already been suffering from its worst political crisis in decades—including the forced removal of two presidents from office—just weeks away from April’s general elections.
Brazilian stocks decline
Stocks in Brazil, as measured by the Bovespa Index, returned about -2.0%. During the week, Brazil’s central bank released the minutes from its monetary policy meeting on January 19–20.
According to the minutes, which seem fairly hawkish, some policymakers “questioned whether it would still be appropriate to maintain an extraordinarily high degree of stimulus, given the normalization of the economic activity observed in recent months.” The central bank has characterized the current degree of monetary stimulus as extraordinary since May 2020. Since that time, policymakers have observed “a reversal of the downward trend on inflation expectations and a decline in economic slack,” and some believe that the central bank “should consider starting a process of partial normalization” of interest rates.
Central bank officials believe that the next set of data releases “will be very informative about the evolution of the pandemic, economic activity, and fiscal policy.” They may be biased to raise rates in March—unless economic activity, inflation data, or fiscal developments discourage them from doing so. If the central bank does act to begin a “partial normalization” in March, there could be a relatively small increase in the benchmark Selic lending rate—currently at 2%—over a period of several months. This might be followed by a “pause” so that policymakers can see how inflation and the economy are responding before deciding on their next steps.
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