Global Markets Weekly Update: November 26, 2021
U.S.
Discovery of new coronavirus variant pressures stocks lower
Stocks declined for the holiday-shortened week after Friday’s news about the emergence of a new, potentially more contagious, coronavirus variant in South Africa triggered a sharp sell-off in riskier assets such as equities. Before the Thanksgiving holiday, information technology stocks suffered as rising Treasury yields made expected corporate profits far in the future less valuable in today’s terms. Yields decreased on Friday amid the flight to assets viewed as safe havens. Value stocks held up better than growth companies despite Friday’s selling pressure on stocks related to leisure and travel.
Biden renominates Powell as Fed chair
On Monday morning, President Joe Biden said that he plans to renominate Jerome Powell as Federal Reserve chair. Powell was widely viewed as somewhat less dovish than Lael Brainard, a Fed governor who was the other leading candidate for the position. Biden nominated Brainard to be the vice chair of the Fed’s Board of Governors.
Comments from other members of the Federal Open Market Committee (FOMC) about the potential to accelerate the tapering of the Fed’s bond purchases contributed to the less dovish outlook for Fed monetary policy and helped push Treasury yields higher. The minutes from the November FOMC meeting, released on Wednesday, also showed that some policymakers advocated for a quicker taper.
Oil market shrugs off release from reserve
President Biden also formally announced that the U.S. will release oil from the Strategic Petroleum Reserve to try to pressure gasoline prices, which are a key part of headline consumer price inflation figures, lower. Oil prices actually rose on the news, which was widely anticipated, as the market seemed to think that the Organization of the Petroleum Exporting Countries and Russia (known as OPEC+) will simply reduce its production to offset the move.
Sharp Friday sell-off in stocks
On Friday, stocks fell sharply after scientists in South Africa said that they have found a new variant of the coronavirus that appears to spread more quickly than the delta variant that caused a global wave of cases earlier in 2021. Although it is unclear if the new variant is more effective at evading the immune defenses triggered by current vaccines, the news prompted a sell-off in riskier asset classes and a rally in safe havens, such as Treasuries. The price of West Texas Intermediate crude oil, the U.S. benchmark for the commodity, plummeted more than 10% on Friday on fears that the new variant will damage demand for oil.
Healthy economic data released early in week
Positive economic data—including the lowest level of weekly jobless claims since 1969—helped drive the increase in Treasury yields. (Bond prices and yields move in opposite directions.) The increases were particularly meaningful in short- and intermediate-term maturities. This trend ended abruptly on Friday as investors fled to lower-risk assets amid fears that rising coronavirus cases could lead to renewed lockdowns and economic downturns.
T. Rowe Price municipal bond traders reported positive flows into municipal bond portfolios industrywide and very light deal activity during the holiday-shortened trading week. The firm’s high yield corporate bond traders noted that the market was weak amid lighter-than-average trading volumes. Only one new municipal deal priced on Monday, and there was no new issuance for the remainder of the week.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
34,899.34 |
-702.64 |
14.03% |
S&P 500 |
4,594.62 |
-103.34 |
22.33% |
Nasdaq Composite |
15,491.66 |
-565.78 |
20.20% |
S&P MidCap 400 |
2,779.41 |
-91.31 |
20.50% |
Russell 2000 |
2,245.94 |
-97.22 |
13.73% |
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 fell sharply on fears that the economic recovery might be derailed by the imposition of tight coronavirus restrictions and the spread of a new variant of the virus. In local currency terms, the pan-European STOXX Europe 600 Index ended the week more than 4% lower. The main indexes of Germany, France, Italy, the Netherlands, and Spain also tumbled. The decline of the UK’s FTSE 100 Index was less pronounced, as the pound depreciated against the U.S. dollar. A weaker pound tends to support the index because many of its companies are multinationals with overseas revenues.
Core eurozone bond yields ended roughly flat after the coronavirus news dragged them off the week’s highs. However, peripheral eurozone bond yields stayed higher on inflation and the prospect of central banks tightening their policies, as did UK gilts.
UK, EU move on South Africa travel ban; COVID-19 controls tightened amid protests
The UK banned travel from South Africa and its neighbors to contain the new strain of coronavirus, and the European Union (EU) planned similar moves. Earlier in the week, large-scale protests broke out in the Netherlands, Belgium, Austria, and Italy after they imposed stricter controls due to the spike in infections. However, apart from the Netherlands and Austria, most countries stopped short of imposing lockdowns, and some made booster injections that enhance vaccine effectiveness available to all adults.
New government in Germany; Swedish government falls
Social Democrat leader Olaf Scholz will succeed Angela Merkel as chancellor of Germany after clinching a deal with the Greens and the liberal Free Democrats (FDP) to form a coalition government. FDP Chairman Christian Lindner, a fiscal conservative, will be finance minister. The alliance said its main aims are to upgrade infrastructure to modernize the economy, accelerate measures to combat climate change, and increase the minimum wage and social housing.
Sweden's first female prime minister, Social Democrat Magdalena Andersson, resigned after less than 12 hours in the post when parliament rejected her budget bill, which collapsed her center-left government.
Eurozone PMI unexpectedly rises but coronavirus dents confidence
Eurozone business activity unexpectedly accelerated in November, according to purchasing managers’ indexes (PMI). Even so, the average reading of the main output index in the past two months came in lower than in the third quarter, indicating that the economic recovery is slowing. Optimism about the immediate future for economic activity declined due to further coronavirus waves. Inflation warning signs also intensified, with firms’ costs and average selling prices rising to record levels. Meanwhile, German business confidence fell for a fifth successive month, the Ifo Institute said.
Sweden’s central bank, the Riksbank, maintained its accommodative stance but signaled for the first time that interest rates would rise modestly by the end of 2024.
Japan
Japanese equities battled on gamely for much of the shortened week, only to succumb late in the week as worries about the pace of economic recovery ultimately undermined sentiment. The Nikkei 225 fell below 29,000 points, shedding 3.3% on the way to closing at 28,752. The Topix fared only marginally better, easing 2.91% and falling through the 2,000-point barrier to finish at 1,985.
Overseas coronavirus concerns weigh on markets
Japanese equity markets began the shortened week in cautious fashion, as renewed coronavirus concerns in Europe, as well as rising cases in the U.S., sparked worries about the pace of the global economic recovery. Against this backdrop, areas like airlines and autos saw selling pressure. However, as markets closed ahead of the Thanksgiving Day holiday, early losses had been broadly pared back. The Japanese government’s record USD 490 billion stimulus package announcement in the previous week was likely a supportive factor.
It was a different story upon returning from the public holiday, however, with Japanese equity markets opening on a decidedly weaker trend. The reappointment of Federal Reserve Chair Jerome Powell, on top of recent hawkish comments from other Fed officials, heightened expectations of earlier U.S. interest rate hikes and further policy divergence from Japan. Growth-oriented companies and richly valued technology shares bore the brunt of hawkish bets on rising interest rates.
Domestic data offer encouragement
The weaker trend was short-lived, however, with tech stocks leading a quick recovery. Investors were buoyed by an upward revision to third-quarter U.S. gross domestic product, as well as a number of strong domestic readings.
On the local front, flash data showed the Japan Composite PMI rose to 52.5 in November—a 37-month high—from 50.7 in October, buoyed by loosening coronavirus restrictions and soaring vaccination rates. Similarly, the Japan Services PMI hit a 26-month high of 52.1 in November, up from 50.7 the previous month. And, rounding out the triumvirate of upbeat releases, Japan’s Manufacturing PMI rose to 54.2 in November, up from 53.2 in October. This was the 10th straight month of expansion in factory activity and the strongest pace since January 2018.
Bad news ultimately proves too much
Ultimately, however, news on Friday of a worrying new coronavirus variant in South Africa, as well as rumors that the Fed may be preparing to double the pace of its tapering of bond purchases to USD 30 billion early in the new year, finally proved too much, breaking investors resolve and sending equity markets sharply lower at week’s end.
Yen slides to multiyear lows
Meanwhile, the Japanese yen skidded to a three-year low on Friday, dropping sharply to finish at 113.99 versus the U.S. dollar, its worst week since March 2020. Earlier in the week, the yen hit 115.53, a level not seen since January 2017, as expectations for higher U.S. interest rates increased. Policy outlooks between the Federal Reserve and the Bank of Japan diverged further after the latest Fed minutes showed increasing acceptance among U.S. policymakers of faster tapering and earlier rate hikes to tame inflation.
Despite benchmark 10-year Japanese government bond yields rising to 0.085% during the week—the highest level since November 1—yields ultimately closed little changed by the close, at 0.07%. Appetite for bonds returned sharply amid renewed coronavirus concerns, first in Europe, and then South Africa.
China
Chinese markets weakened, with the CSI index easing 0.6% and the Shanghai Composite Index ending flat amid U.S.-China tensions and rising economic pressures that raised expectations for supportive government measures. Yields on China’s 10-year government bonds fell to 2.881% from the prior week’s 2.946% as investors sought safe-haven assets. The yuan gained marginally to 6.3917 per U.S. dollar from last week’s 6.4009 per dollar.
Relations with the U.S. remained tense over the status of Taiwan and trade issues. The U.S. Commerce Department issued a trade blacklist naming a dozen Chinese companies that it said supported the military modernization of the People’s Liberation Army. In response, a Chinese official said the U.S. should not expect China’s military to compromise regarding Taiwan.
In a separate development, the U.S. Federal Communications Commission (FCC) asked a federal appeals court to reject China Telecom’s bid to continue providing services in the U.S., arguing that China Telecom’s ownership allows Beijing to access and possibly disrupt or misroute U.S. communications. The FCC’s action followed its designation of China’s Huawei Technologies and ZTE Corp as U.S. national security threats last year. Reports that China’s tech watchdog has asked the management of China’s ride-hailing app Didi Global to delist the company from the New York Stock Exchange due to data security concerns also underscored the depth of mistrust between both countries.
On the economic front, Premier Li Keqiang said that China should step up efforts to stabilize employment, financing, and other key areas and that the government was studying policies on tax and fee cuts, along with some reforms, to support businesses. Last week, China kept its loan prime rate unchanged for the 19th straight month. However, monetary policy easing has been taking place through other channels, including looser mortgage lending, deposit rate reforms, and reductions to domestic banks’ reserve required ratio.
The property sector remained under duress. Kaisa Group, the latest high-profile developer trying to avert default, announced a bond exchange program for its creditors. Kaisa has unpaid coupons totaling over USD 59 million that were due on November 11 and 12, with 30-day grace periods for both. If the offer to bondholders fails, “we may not be able to repay the Existing Notes upon maturity on December 7, 2021, and we may consider alternative debt restructuring exercise,” the developer said in a stock exchange filing. Kaisa made headlines in 2015 when it became the first Chinese builder to default on its dollar bonds. The company has the most offshore debt in China’s property sector coming due over the next year after embattled China Evergrande Group.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned about 2.25%. While equities added to recent gains, the lira plunged in value on Tuesday and bonds weakened following comments from President Recep Tayyip Erdogan. The president, who holds the unconventional belief that high interest rates cause elevated inflation—which was recently measured at about 20% year over year—defended the central bank’s recent interest rate reductions as part of an “economic war.” The lira rebounded partially on Wednesday, possibly in response to a central bank statement in which policymakers indicated that they have “no commitment to any exchange rate level” and that the central bank would only intervene in response to “excessive volatility” in the currency market.
T. Rowe Price sovereign analyst Peter Botoucharov believes that the recent price action in the Turkish financial markets—among equities, fixed income securities, and the lira—is concerning and that the risk of the government imposing administrative measures, including reduced access to foreign exchange (FX) swaps and a limited form of domestic capital controls, is rising. That said, he also believes that it would be difficult for Turkey to impose capital controls on nonresidents at this time, considering that Turkey is dependent on external capital flows and that its sovereign debt payments are currently manageable. However, Botoucharov would not be surprised to see some form of domestic capital controls, such as a partial “freezing” of FX assets or limiting withdrawals from FX accounts.
Chile
Chilean stocks, as measured by the S&P IPSA Index, returned about 5.1%. Chilean assets performed well in a relief rally on Monday—although they gave back some gains later in the week—following the results of the elections held on Sunday, November 21.
In the first round of the presidential election, far-right candidate José Antonio Kast did slightly better than far-left candidate Gabriel Boric. These two candidates were generally expected to fare best in the first round, though neither received more than 30% of the ballots cast. As a result, there will be a second-round runoff between them on December 19.
At present, T. Rowe Price emerging markets sovereign analyst Aaron Gifford believes that Boric has a slight advantage, due in part to his platform, which is more in line with what Chilean voters want—including a new constitution, more social rights, and a public pension system. However, according to postelection polls, a substantial portion of the electorate is undecided about which candidate to support in the second round, so the election could go either way.
As for the legislative elections, general expectations were that both chambers of Congress following the elections would lean more to the left. However, right-leaning political parties did better than expected—they won 70 out of 155 seats in the Chamber of Deputies and 25 out of 50 seats in the Senate. Gifford believes that these results will help counterbalance extreme proposals from the left or the right, including the constitutional assembly.
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