Global Markets Weekly Update: October 08, 2021
U.S.
Stocks recover portion of recent losses
Most of the major benchmarks recorded gains, with the S&P 500 Index recovering a portion of the previous week’s losses. Energy stocks led the gains as natural gas prices reached record highs in Europe and major oil exporters decided not to increase production more than their modest previously agreed-upon amount, sending crude oil prices to a seven-year high on Monday. The small real estate sector lagged with modest losses. Investors prepared for the unofficial kickoff of third-quarter earnings reporting season, set to begin with some major bank announcements the following week.
The week started on a down note, which T. Rowe Price traders attributed to several factors: Debt ceiling worries mounted as President Joe Biden said he could not guarantee that the U.S. would not default; Facebook and a host of related Web services went offline; and the spike in oil prices was accompanied by comments from St. Louis Federal Reserve President Jim Bullard that he was “concerned that inflation risks are to the upside.” Debt problems at another Chinese property developer also dampened sentiment, as did rising tensions between China and Taiwan, along with U.S. attempts to force China to meet certain commitments under the Phase One trade deal. Tensions with China appeared to recede somewhat later in the week, however (see below).
Debt ceiling agreement calms worries, if only temporarily
Worries over the debt ceiling were also alleviated late in the week, at least temporarily. Stocks rallied on Thursday, following reports that Senate Republicans had agreed to take up a bill to raise the Treasury’s borrowing limit by USD 480 billion, which would allow the federal government to keep paying its bills through at least early December. Treasury Secretary Janet Yellen had warned that the government might not be able to meet its obligations around October 18 if action was not taken.
The week brought the highly anticipated monthly payrolls report, which seemed to receive a mixed reaction in markets when it was released Friday morning. The Labor Department reported that nonfarm payrolls grew by 194,000 in September, well below consensus expectations of around 500,000. The workforce participation rate also ticked lower, which some viewed as especially surprising given the expiration of extended unemployment benefits during the month. Previous months’ gains were revised higher, however, and the scarcity of job seekers was reflected in another month of strong wage gains. Average hourly earnings rose 0.6%—more than forecast—and average weekly hours worked hit their highest level (34.8) since May. Weekly jobless claims, reported Thursday, also fell more than expected.
Mixed jobs report
The jobs report did appear to foster a rise in longer-term bond yields later Friday morning, building on an increase earlier in the week. The yield on the benchmark 10-year U.S. Treasury note briefly neared 1.62%, its highest level since early June. T. Rowe Price traders noted that debt limit headlines continued to cause distortions in the Treasury bill market, however. One-month bills rallied after a temporary deal was reached, but rates on bills maturing around mid-December—when the government is now expected to run out of cash—more than doubled.
The broad municipal bond market declined amid less favorable technical conditions but fared better than U.S. Treasuries through most of the week. Among a high volume of primary market deals, our municipal traders observed weaker demand for longer maturities, while shorter-term new issues were generally well received by investors. Inflows into municipal bond funds industrywide—a key driver of the market’s performance over the past year—slowed meaningfully, with high yield muni portfolios experiencing outflows in the latest week measured.
Corporate bonds continue to find buyers
Our traders observed a cautious tone in the investment-grade corporate bond market. Volatility in equity markets and the increase in U.S. Treasury yields prompted credit spreads—the extra yield offered over Treasuries and an inverse measure of the sector’s relative appeal—to widen early in the week. Sentiment improved on Thursday, and investment-grade corporate bond spreads tightened, with more volatile auto and energy bonds outperforming. Primary issuance exceeded weekly expectations, and the deals were met with adequate demand.
The high yield corporate bond market was weaker as growth and inflation concerns weighed on the performance of risk assets. D.C. gridlock also seemed to be a primary concern for investors amid continued uncertainty around the Biden administration’s spending agenda. Our traders noted that sellers remained active in the high yield space despite the temporary bipartisan resolution to the debt ceiling issue, which led to improvement in broader markets.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
34,746.25 |
419.79 |
13.53% |
S&P 500 |
4,391.34 |
34.30 |
16.91% |
Nasdaq Composite |
14,579.54 |
12.84 |
13.12% |
S&P MidCap 400 |
2,690.23 |
6.58 |
16.63% |
Russell 2000 |
2,233.09 |
-8.54 |
13.08% |
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 ended higher despite significant volatility. In local currency terms, the pan-European STOXX Europe 600 Index advanced 0.97%, with the financials sector faring well, likely on expectations that potentially higher interest rates and a steepening yield curve would help to boost banks’ net interest margins. Germany’s Xetra DAX Index added 0.33%, France’s CAC 40 Index gained 0.65%, and Italy’s FTSE MIB Index climbed 1.70%. The UK’s FTSE 100 Index advanced by 0.97%.
Core eurozone bond yields rose on inflation concerns stemming from the surge in natural gas prices. They rose further, in sympathy with U.S. Treasury yields, after the U.S. Senate voted to raise the U.S. debt ceiling temporarily to prevent a government default. Peripheral eurozone bond yields and UK gilt yields tracked core markets. Gilt yields rose further after the Bank of England’s new Chief Economist Huw Pill raised concerns about high inflation potentially being more persistent than previously expected.
Natural gas prices surge to record highs
Wholesale natural gas prices surged to record levels in Europe amid global fuel shortages, threatening to increase costs significantly for households and to curb industrial production. Stronger global demand as economies reopened after the pandemic, lower Russian supplies to Europe, greater competition from Asia and Brazil for liquefied natural gas cargos, and depleted reserves after a cold winter and spring were among the many reasons cited for the shortage. Prices declined somewhat after Russian President Vladimir Putin hinted that Gazprom, Russia’s state-backed gas company, might increase supplies of the thermal fuel to Europe.
ECB minutes: Inflation risks “tilted to the upside”
European Central Bank (ECB) policymakers viewed the recent surge in inflation as temporary but acknowledged that the risks to the outlook “were widely regarded as being tilted to the upside,” according to the minutes from its September meeting. Some policymakers were also worried by “upside risks” to inflation, the minutes indicated. They expressed doubt that the forecasting models were accurately capturing changes in the economy and argued that closer attention must be paid to a possible “regime shift” in prices.
In speeches during the week, ECB officials diverged over the official forecast, which sees inflation abating next year. ECB President Christine Lagarde reiterated that “we should not overreact to supply shortages or rising energy prices, as our monetary policy cannot directly affect those phenomena.” At a conference organized by the Cleveland Federal Reserve and the ECB, Chief Economist Philip Lane and Executive Board Member Isabel Schnabel disagreed over the risks surrounding the forecast. Schnabel warned of “more persistent inflationary pressures,” while Lane said there were forces that could drag down price growth. He said that recent higher energy costs were pushing up headline inflation, but together with the rolling back of fiscal support, they were also a headwind for economic growth.
Poland’s central bank increases rates; Germany industrial output falls
Poland’s central bank unexpectedly raised interest rates for the first time in almost a decade to quell a surge in inflation, boosting its key rate 40 basis points to 0.5%. The move follows hikes in the Czech Republic, Hungary, and Romania.
German industrial production in August fell the most in 17 months due to supply chain disruptions, particularly in the auto industry.
Japan
Against the broader backdrop of worries about global inflation, oil prices, and the Chinese property market, Japan’s stock markets lost ground for the third week in a row, with the Nikkei 225 Index falling 2.51% and the broader TOPIX Index down 1.23%. Share price declines were also due to investors’ concerns about the prospective policies of newly inaugurated Prime Minister Fumio Kishida; these stemmed largely from Kishida indicating that he might support a capital gains tax increase, which could be perceived as a step back from efforts to make Japan more shareholder-friendly.
Tracking U.S. Treasury yields, the yield on the 10-year Japanese government bond rose to 0.08%—a multi-month high—from 0.05% at the end of the previous week. The yen weakened to around JPY 111.88 against the U.S. dollar (from around JPY 111.08 the prior week), also pressured by the spike in Treasury yields.
New PM Fumio Kishida formally takes office, appoints cabinet
Kishida, who won the race to lead Japan’s ruling Liberal Democrat Party (LDP) following the resignation in September of predecessor Yoshihide Suga, was confirmed as the country’s 100th prime minister. Upon his inauguration, Kishida announced that a general election would be held on October 31; the LDP is not expected to lose its majority in the powerful lower chamber of parliament, although a loss of seats is possible.
Kishida also announced his cabinet appointments, with the majority of heavyweight jobs going to allies of former Prime Minister Shinzo Abe or outgoing Finance Minister Taro Aso. Takayuki Kobayashi was named to the newly created post of economic security minister, tasked with addressing issues such as supply chain problems that might hobble domestic industry and preventing technology leaks. For Kishida, boosting economic security is one of the top items on his agenda.
Kishida delivers first policy speech
Delivering his first policy speech to the lower chamber of parliament, Kishida outlined his strategy to spark economic growth and to redistribute the fruits of that growth to build up a stronger middle class. He will continue to push for Japan to emerge from deflation, and he identified the "three arrows" from economic plans developed under former Prime Minister Shinzo Abe—aggressive monetary policy, fiscal consolidation, and sustained structural reform—as the key tenets of his administration’s macroeconomic policy management. Kishida also promised to strengthen pandemic management and health care in case of another coronavirus resurgence.
BoJ downgrades some of its regional economic assessments
The Bank of Japan (BoJ) downgraded its economic assessments on five of the country’s nine regions, citing the lingering impact of the coronavirus pandemic and supply shortages that have hit manufacturers. It maintained its views on the remaining four regions, including the Tokyo area. The BoJ said that economic activity, mainly in the services sector, is expected to remain, for the time being, at a lower level than before the spread of the coronavirus; it anticipates, however, that activity will recover as the impact of the pandemic gradually wanes.
China
Chinese markets rose Friday following the weeklong Golden Week holiday as the CSI 300 Index advanced 1.31% and the Shanghai Composite Index added 0.67%, according to Reuters. Investors looked past the government’s regulatory crackdown, property sector turmoil, and a nationwide power crunch and focused on positive economic data. Data released Friday showed the Caixin/Markit services Purchasing Managers’ Index rose to 53.4 from 46.7 in August, rebounding from the lowest level seen since the height of the 2020 pandemic. The 50-point mark separates growth from contraction monthly. Tourism revenues in China during Golden Week fell 5% from the prior-year period, state media reported, which analysts said pointed to a weak outlook for October retail sales.
On Friday, Beijing ordered an immediate increase in coal output to fight the nationwide power crunch, Reuters reported. China has been gripped by power shortages, which hurt production in industries across several regions of the world’s second-largest economy.
News from the property sector continued to dominate investor concerns after developers reported sharply lower sales for September, with more announcements of missed debt payments. Fantasia Holdings, a small developer, said that it failed to pay a USD 206 million debt shortly after a subsidiary missed paying a RMB 700 million loan on the due date. Separately, Sinic Holdings said its subsidiaries said that it had missed interest payments on certain financing arrangements, which resulted in a rating downgrade from Fitch. China Evergrande, the cash-strapped developer that has dominated headlines about a possibly chaotic collapse, reportedly missed payment on a debt guaranteed by the company after having already missed two coupon payments in the past two weeks.
Reports of the defaults came as property sales slowed. The top 100 companies reported a decline of 36% in September over a year earlier, according to China Real Estate Information Corporation. But sentiment remained upbeat, with nearly a fifth of households in China believing that property prices will rise in the fourth quarter, according to a central bank survey.
Yields on China’s 10-year government bonds rose 3 basis points to 2.92%, according to Dow Jones. The renminbi currency was flat versus the dollar at 6.4490 recovering from early losses amid signs of thawing Sino-U.S. tensions. U.S. National Security Advisor Jake Sullivan and China’s top diplomat, Yang Jiechi, had their first face-to-face encounter, which the Chinese side called “constructive.” This contrasted with the last meeting between both countries in March, when differences on various issues were publicly aired.
Other Key Markets
Russia
Russian stocks, as measured by the Russian Trading System (RTS) Index, returned about 5.0%. Russia is a major oil and natural gas exporter, and the equity market—with a substantial weighting in energy companies—has benefited recently from a global increase in energy costs. Other Russian assets have performed well, too, including the ruble.
Over the October 2–3 weekend, a meeting of OPEC nations and non-OPEC members, including Russia, decided to increase global production by only 400,000 barrels per day starting in November, rather than authorize a more substantial increase. Oil-producing nations seem to be more committed to maintaining production discipline. As a result, oil prices reached their highest levels in about seven years in recent days.
Natural gas prices have also reached multiyear levels, as nations in Asia and Europe have been accumulating supplies ahead of winter. Price increases have been especially sharp in Europe, though they backed away from recent highs after Russian President Vladimir Putin suggested that Russia could increase its natural gas deliveries to Europe, particularly in view of the completion of the Nord Stream 2 pipeline.
Peru
During the week, President Pedro Castillo ratified 12 of his 19 cabinet ministers but requested resignations from seven others, one of which was his prime minister, Guido Bellido. T. Rowe Price emerging markets sovereign analyst Aaron Gifford considers this to be a significant move, as Bellido has been a divisive figure and one of the most radical within the president's inner circle. Mirtha Vasquez will instead become prime minister. She is a lawyer, politician, and a previous interim president of Congress, and she is known for her defense of human rights and for going after corruption.
Gifford believes that these cabinet changes suggest that the balance of power is shifting in favor of more moderate voices. That said, most of the new cabinet members are still left leaning, so policy uncertainty will likely remain even if governability risks have been reduced.
In a short speech in which he announced the cabinet changes, Castillo spoke against efforts of departing cabinet members to generate political instability. He also called upon various segments of the economy and society to put Peru above ideologies and party platforms and join in broad unity in order to achieve their common goals.
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