Global Markets Weekly Update: July 9, 2021
U.S.
Stocks mixed as investors focus on falling yields
The major benchmarks closed mixed, with large-caps and growth stocks outperforming for the second consecutive week. Within the S&P 500 Index, the interest rate-sensitive real estate sector performed best as longer-term Treasury yields decreased sharply. Energy stocks fared worst on concerns that disagreements among major oil producers would result in some violating output restrictions. Weakness among media firms also weighed on the communication services sector. Markets were closed Monday in observance of Independence Day.
The major driver of sentiment during the week appeared to be the steep decline in U.S. Treasury yields, with the yield on the benchmark 10-year Treasury note hitting a nearly five-month low on Thursday before climbing back somewhat to end the week. Equity investors appeared to welcome the decline early in the week, as falling bond yields typically improve the relative appeal of equities by implying a lower discount on future earnings and by making corporate dividends more attractive in comparison.
Perspectives seemed to shift on Thursday, with equity investors worrying that falling yields also signaled expectations for slowing global growth. T. Rowe Price traders noted that reports that Chinese officials might ease monetary policy to spur its economy seemed to add to such concerns (see below). The global spread of the highly infectious delta variant of the coronavirus also appeared to dim the outlook, especially for travel-related companies.
Economic reports miss expectations
The week’s economic data generally indicated strong growth but surprised modestly on the downside, which may have helped push both equities and Treasury yields lower. The Institute for Supply Management’s (ISM) gauge of service sector activity in June came in lower than expected, and the IBD/TIPP Economic Optimism Index fell back to its lowest level since February. Weekly jobless claims ticked higher, while May job openings rose a bit less than expected.
Sentiment seemed to swing back in a positive direction again on Friday, lifting the S&P 500 and the Nasdaq Composite Index to new records and sending the 10-year Treasury note yield sharply higher. Specific catalysts for the move were difficult to identify, but some pointed to expectations for the arrival of strong second-quarter earnings reports the following week. Analysts polled by both FactSet and Refinitiv are currently expecting overall earnings for the S&P 500 to have expanded by nearly two-thirds over the year before—albeit from a low base, given the shutdown of much of the economy last spring.
10-year yield touches lowest level since February
According to T. Rowe Price traders, the rally in bond prices was driven primarily by technical factors, although the misses in the economic data also played a role. The 10-year Treasury note yield sank to 1.25% in intraday trading on Thursday before partially retracing earlier moves. (Bond prices and yields move in opposite directions.) Minutes from the Federal Open Market Committee’s June meeting, released Wednesday, seemed to evoke little reaction from market participants. The meeting summary revealed that policymakers do not believe the economic recovery has yet reached their goal of “substantial further progress” and suggested that most committee members are not eager to begin tapering the Fed’s asset purchases.
Municipal bonds produced solid positive returns through most of the week but failed to keep pace with Treasuries. Our municipal traders reported that light issuance and high cash balances led to stronger trading activity in the secondary market. Among the primary market’s noteworthy deals, Municipal Electric Authority of Georgia bonds were greeted with robust demand.
Our traders observed relatively lighter secondary trading volumes in the investment-grade corporate bond market. Volatility in rates seemed to dampen sentiment, and credit spreads widened, led by more volatile and energy sector credits. The high yield market was mostly quiet at the beginning of the week, as investors evaluated OPEC negotiation news, oil price movements, ISM data, and interest rate volatility. The Fed’s meeting minutes that reconfirmed policymakers’ uncertainty on tapering seemed to have a muted impact on sentiment. But the high yield and broader risk markets later experienced weakness, given increased global growth concerns.
U.S. Stocks1
Index |
Friday's Close |
Week’s Change |
% Change YTD |
DJIA |
34,870.16 |
83.81 |
13.93% |
S&P 500 |
4,369.55 |
17.21 |
16.33% |
Nasdaq Composite |
14,701.92 |
62.59 |
14.07% |
S&P MidCap 400 |
2,706.42 |
-3.15 |
17.33% |
Russell 2000 |
2,280.01 |
-25.75 |
15.45% |
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.This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.
Europe
Shares in Europe ended little changed, recovering from a sharp pullback stemming from concerns that a surge in coronavirus cases might hobble global economic growth. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.19% higher. Major indexes were mixed. Germany’s Xetra DAX Index ticked up 0.24%, France’s CAC 40 Index declined 0.36%, and Italy’s FTSE MIB Index dropped 0.91%. However, the UK’s FTSE 100 Index ended the week flat.
Core eurozone bond yields tracked U.S. Treasury yields lower as global bonds rallied. The rapid spread of the delta variant of the coronavirus and weak U.S. services activity data sparked concerns about the economic outlook and drove demand for high-quality government bonds, pushing yields lower. Peripheral eurozone government bonds and UK gilts largely tracked core markets this week.
Coronavirus infections still rising; UK to lift self-isolation rules mid-August
Coronavirus infection rates continued to surge in the UK and across continental Europe, where Spain experienced the worst outbreak, partly due to the spread of the highly transmissible delta variant. In France, Health Minister Olivier Véran warned that the country could suffer a fourth wave of the pandemic by the end of July and urged as many people as possible to get vaccinated. In Spain, the number of cases exceeded the counts in Portugal and Russia, and some regions, including Catalonia, began to reimpose restrictions. In the UK, which is facing a new wave of coronavirus infections, Health Minister Sajid Javid said that from August 16, no children or double-vaccinated adults will need to quarantine after coming into contact with an infected person, and there will be no obligation that contacts should have daily tests. He said vaccines had reduced the risk of contagion and serious illness.
ECB adopts new inflation target
The European Central Bank (ECB) adopted a 2% inflation target over the medium term—abandoning the previous objective of “below, but close to, 2%”—after reviewing its strategy. ECB President Christine Lagarde said the new target meant that the central bank “considers negative and positive deviations of inflation from the target to be equally undesirable.” She said that the ECB would use “especially forceful or persistent monetary policy action” when interest rates are close to their lower limit and inflation remains below its target. The shift “may also imply a transitory period in which inflation is moderately above target.” Lagarde said that the new strategy was “quite squarely” not the same as the U.S. Federal Reserve’s average inflation policy. The ECB will also incorporate climate change into the framework of monetary policy operations in the areas of disclosure, risk assessment, corporate asset purchases, and collateral policy to take account of an issuer’s carbon emissions.
UK economy slows; German industry output falls
UK economic growth unexpectedly slowed to 0.8% between April and May, the Office for National Statistics said. A strong rebound in the hospitality and leisure sectors was offset by stalling growth in retail, construction, and manufacturing.
German industrial production defied forecasts for an increase in May, falling 0.3% sequentially due to a drop in production of capital goods and energy. Production rose 17.3% on the year compared with 27.6% in April.
Japan
Japan’s stock markets registered sharp losses for the week, with the Nikkei 225 Index falling 2.93% and the broader TOPIX Index down 2.25%. Sentiment was dampened by concerns that the spread of the delta variant of the coronavirus would stall a global economic recovery. The yield on the 10-year Japanese government bond retreated to 0.03% amid expectations that the major central banks will not tighten monetary policy any time soon while the pandemic continues to pose risks to growth. The yen strengthened to JPY 110.01 against the U.S. dollar on safe-haven demand.
Tokyo to be placed under fourth state of emergency
The government decided to place Tokyo under another coronavirus state of emergency in an effort to curb a recent rise in infections. The state of emergency, the fourth imposed by the government, will start on July 12 and last throughout the Olympics until August 22. The declaration means that the Games will be held without spectators in the capital—health experts, including the government’s top COVID-19 adviser, have repeatedly warned that the event could trigger a surge in infections. Prime Minister Yoshihide Suga said that if the situation improves as more people get shots and the strain on the medical system eases, the government will consider lifting the state of emergency early.
BoJ governor reiterates central bank’s readiness to ease monetary policy further
Bank of Japan (BoJ) Governor Haruhiko Kuroda reiterated that the central bank is keeping a close eye on the economic impact of the coronavirus pandemic and won’t hesitate to take additional monetary easing steps as needed. The BoJ will focus on maintaining a range of pandemic-relief measures that aim to channel cash to smaller firms hit by state of emergency curbs via commercial banks. Kuroda also said that, while economic activity is expected to remain below pre-pandemic levels for the time being as curbs to prevent the spread of the virus weigh on service industries, Japan’s economy is likely to recover as the pandemic’s impact subsides, with solid export demand underpinning corporate profits and capital expenditure.
Services sector activity contracts, although at a slower pace
Services sector activity contracted in June, although at a slower pace than in May: The au Jibun Bank Japan Services Purchasing Managers’ Index (PMI) rose to 48.0 from 46.5. Services providers indicated that coronavirus restrictions continued to hinder activity. However, softer declines in both domestic and international sales signaled that demand conditions were beginning to pick up. Service providers also maintained strong optimism that business conditions would improve over the year ahead. Firms cited hopes that the pandemic would recede as the vaccine rollout accelerates, triggering a broad-based recovery in demand.
China
Chinese stocks were mixed for the week, with the benchmark Shanghai Composite Index edging slightly higher and the large-cap CSI 300 Index recording a modest loss. Selling was pronounced in technology stocks amid heightened regulatory risk on reports that Beijing will tighten oversight of U.S.-listed Chinese companies, many of which are in the tech sector, as well as the government’s continued crackdown on domestic tech companies.
On Friday, the People’s Bank of China unexpectedly announced that it would cut its reserve requirement ratio (RRR), the amount of cash most banks must hold in reserve at the central bank. The move will unleash about RMB 1 trillion of long-term liquidity into the economy, according to Bloomberg, and effectively allow banks to increase lending to smaller companies hurt by rising costs. The RRR cut occurred two days after China’s cabinet, the State Council, had called for such a move.
Policy analysts said that the RRR cut was less about monetary easing and more about the government trying to reallocate credit to China’s small and medium-sized enterprises. Still, the timing and size of the reduction—days before China reports its second-quarter GDP on July 15—suggested that Beijing was worried about flagging economic growth. For the week, the yield on China’s 10-year sovereign bond fell eight basis points to 3.02%. The renminbi currency shed 0.2% to close at 6.487 against the U.S. dollar.
Earlier in the week, the State Council released guidelines pledging greater data scrutiny of Chinese tech companies for national security reasons and stepped-up supervision of overseas listings, mainly directed at U.S.-listed American Depositary Receipts. Regulators are mulling closing a loophole whereby domestic technology and e-commerce companies have skirted Chinese regulations by structuring their U.S. initial public offerings as special purpose vehicles called variable interest entities (VIEs), under which foreign investors do not directly own Chinese shares.
Caixin Services PMI drops in June
The private Caixin services Purchasing Managers’ Index (PMI)—the last of China’s four PMI readings for June—was regarded as disappointing. Analysts said the drop in the June PMI to 50.3 from May’s 55.1 reading reflected the resurgence of coronavirus cases in the southern province of Guangdong.
In other economic readings, the producer price index appeared to have peaked, easing to 8.8% in June from a year ago versus May’s 9.0% year-over-year increase. Meanwhile, the consumer price index (CPI) rose a lower-than-expected 1.1%. Core CPI inflation, which excludes food and energy prices, has remained consistently below 1.0% year over year in recent months.
Other Key Markets
Peru
Peruvian assets were flat to lower this week as political uncertainty increased due to an interesting turn of events.
It has been a month since the June 6 second presidential election round, pitting socialist school teacher Pedro Castillo against conservative politician Keiko Fujimori—the most recent tally has Castillo ahead by less than 50,000 votes—but the election still has not been officially decided due to an investigation into Fujimori’s allegations of electoral fraud. This week, according to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the stakes were raised by new evidence implicating both presidential candidates.
Prosecutors have filed for the arrest of 20 members of Castillo’s Peru Libre party after evidence was leaked that it had used public funds originating from the Junín regional government, where party leader Vladimir Cerrón had served as governor. Castillo denied any knowledge of this illicit activity and promised to cooperate fully with any investigations, but Fujimori called on the National Jury of Elections (JNE) to disqualify him because of it.
Just days later, separate investigations were opened to review claims of money laundering within Fujimori’s own Fuerza Popular party as well as bribes made to JNE magistrates by a party insider to overturn Castillo’s victory. Fujimori also has dismissed the charges, but the fact that she went to prison before being released on bail last year for illegal campaign financing related to a previous presidential election run makes her position even more tenuous.
While Gifford believes that the new president—who is supposed to take office on July 28—is likely to be Castillo, he sees great uncertainty prevailing in the coming weeks. The JNE plans on declaring the winner of the second presidential election round by July 15.
Mexico
Mexican stocks, as measured by the IPC Index, returned about -0.9%.
During the week, the central bank published the minutes from its June 24 policy meeting, at which policymakers surprised investors with an increase in the overnight lending rate from 4.00% to 4.25% in a 3 to 2 vote favoring a rate hike. According to Gifford, the most interesting details in the minutes are related to the reasoning behind each board member’s voting decision.
The consensus among the three who voted for a rate increase was to strengthen the central bank’s credibility and contain the risk of second-round effects deriving from much higher-than-expected inflation. Even though these policymakers believe that inflation pressures are transitory, they concluded that the benefit of hiking rates outweighed the costs.
On the other hand, the two who voted for no rate increase were convinced that raising rates preemptively would send the wrong signal—that surprising investors who expected no change in rates would make the central bank seem counterproductive, erratic, and unpredictable. In their view, a hike would suggest that inflation shocks are actually more permanent in nature, thus unanchoring inflation expectations.
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