Global markets finished the week slightly off record highs, as investors continue to balance positive news with near-term challenges. In focus is the $1.9 trillion fiscal-stimulus proposal from the Biden administration and worsening coronavirus news, coupled with the vaccine rollout. Republicans have shown resistance to such a sizable stimulus plan, concerned about the long-term sustainability of the government’s deficit levels.
The major indices moved higher for the week, hitting new intraday highs on Thursday before a pullback on Friday. Communication services shares led the gains in the S&P 500 Index, boosted by a sharp gain in Netflix shares following its report of surprisingly large subscriber gains in the fourth quarter. Facebook and Google’s parent company, Alphabet, were also strong, as were video-gaming stocks, while energy shares lagged as oil prices fell back on a surprising rise in U.S. inventories. As fast-growing technology-related stocks led the gains, the market’s recent rotation into small-caps and value stocks reversed, at least temporarily.
Hopes for substantial new stimulus under the Biden administration appeared to drive much of the gains early in the week. On Tuesday, former Federal Reserve Chair and Treasury Secretary nominee Janet Yellen told the Senate Finance Committee that it was necessary to “act big” to help the economy deal with lockdowns and high unemployment. Investors may have been further encouraged by her statement that President-elect Joe Biden was focused on supporting the economy rather than raising taxes.
The week’s relatively light economic calendar did not appear to play a major role in driving markets. Weekly jobless claims fell back from a multi-month high but remained elevated, at 900,000, while IHS Markit’s preliminary gauges of both manufacturing and service sector activity in January surprised on the upside. The housing sector remained in outstanding shape, with existing home sales and housing starts at their highest levels since 2006.
|Index||Friday’s Close||Week’s Change||% Change YTD|
|S&P MidCap 400||2,463.18||38.94||6.79%|
European equities finished mostly lower amid continued uneasiness regarding reinstated measures to restrict activity in response to the persistent resurgence in COVID-19 cases across the globe, with the world’s second largest economy of China taking action to try to combat the spread. Economic data in the region added to the skittish mood and illustrated the impact of the restrictions with Markit’s Eurozone Composite PMI falling further into contraction territory for this month, as manufacturing growth slowed but services sector activity—the hardest hit by the pandemic—moved deeper into contraction territory.
The STOXX Europe 600 Index finished the week roughly flat, as U.S. economic stimulus doubts and renewed coronavirus concerns held back gains. Germany’s Xetra DAX Index rose 0.63%, France’s CAC 40 fell 0.93%, and Italy’s FTSE MIB slid 1.31%. The UK’s FTSE 100 Index fell 0.60%, partly held back by the British pound’s strength relative to the dollar and fears that the strict coronavirus lockdown would not end anytime soon. Italy’s FTSE MIB Index dropped 1.5%, and Spain’s IBEX 35 Index fell 1.0%, while Switzerland’s Swiss Market Index ticked 0.2% higher.
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Chinese stocks rallied amid strong economic data and on hopes of warmer U.S.-China relations under President Biden. The Shanghai Composite Index advanced 1.1% to 3,606.8 and the CSI 300 large-cap index rose 2.0%, closing at 5,569.8. In an early test case for U.S.-China relations, China’s three biggest telecom companies appealed the New York Stock Exchange’s recent decision to delist their U.S.-listed shares, a move that is expected to receive a response within 25 days. On the coronavirus front, China now has 22 million people under lockdown as officials try to contain a recent outbreak in Hebei Province. Case numbers remain low compared with other countries, though a high number of asymptomatic infections and the rural location of some clusters have concerned authorities.
China’s economy officially grew by 2.3% in 2020, near forecasts and underscoring the country’s remarkable recovery from prior-year coronavirus lockdowns. Fourth-quarter real gross domestic product growth accelerated to 6.5% year-on-year, making China the only major economy to regain its pre-virus trend.
Japan’s stock markets were relatively unchanged for the week. The Nikkei 225 Stock Average advanced 0.4% (112 points) and closed at 28,631.45 and recorded another multi-decade weekly closing high. For the year-to-date period, the widely watched market yardstick is ahead 4.3%. The large-cap TOPIX Index was about flat, however, and the TOPIX Small Index modestly declined. The yen was little changed for the week and closed near JPY 104 versus the U.S. dollar.
The Bank of Japan’s (BoJ’s) policy committee left long- and short-term policy rates unchanged. The bank’s yield curve control involves maintaining rates on current accounts held by financial institutions at -0.1%, buying Japanese government bonds so that the yield on the 10-year bond remains near 0.0%, and purchasing exchange-traded funds and Japanese real estate investment trusts annually at a pace not to exceed JPY 12 trillion and JPY 180 billion, respectively.
Other Key Markets:
- Turkey – Turkish stocks, as measured by the BIST 100 Index, returned about 1.2%. The central bank’s monetary policy committee met during the week and, as expected, kept the one-week repo auction rate at 17.0%. While monetary policy is not as tight as it was in 2018, when the one-week repo rate rose as high as 24%, and while real (inflation-adjusted) interest rates remain below previous highs, Botoucharov expects central bank officials to keep monetary policy tight at least through June 2021 to ensure that the lira stays relatively stable.
- Brazil – Brazilian stocks, as measured by the Bovespa Index, returned about -2.5%. Brazilian assets struggled amid uncertainty about possible changes in monetary and fiscal policy later this year that may be unwelcome by investors. On Wednesday, the Brazilian central bank unsurprisingly decided to keep its benchmark Selic interest rate at an all-time low of 2%.