Global Markets Weekly Review – Week 53, 2020

The holiday shortened trading week saw major global indices set fresh record highs within the week as investors rallied against news of another round of unemployment benefits and stimulus checks in the United States. The markets increasingly focused on the size and magnitude of the stimulus bill as well as the rising coronavirus case count and initial stages of the vaccine rollout in major cities, globally.

United States

The major indices hit all-time highs but ended the week mixed, with small-caps recording losses. Stocks closed out a year of solid gains led by the technology-heavy Nasdaq Composite Index, which notched its best annual performance since 2009. Health care shares outperformed within the S&P 500 Index, and consumer discretionary shares were also strong, helped by gains in a new arrival to the index, electric vehicle maker Tesla. Energy stocks lagged, and the large technology sector was also weak. Trading was relatively light ahead of the market’s closure on Friday in observance of the New Year’s Day holiday.

The fading likelihood of larger stimulus payments due to roadblocks in the Senate, along with month-end buying activity, pushed the yield on the benchmark 10-year U.S. Treasury note modestly lower as the week progressed. (Bond prices and yields move in opposite directions.) Meanwhile, the broad municipal bond market recorded modest positive returns through mid-week, outpacing Treasuries. Solid cash flows into muni bond funds continued to support the asset class, and T. Rowe Price traders noted that municipal-to-Treasury yield ratios remained lower than their historical averages.

Shares in Europe rose, lifted by the UK-European Union (EU) trade accord and the approval of a U.S. fiscal stimulus package. The UK’s FTSE 100 Index recorded modest losses, partly due to the stronger British pound, which reached USD 1.3675, its highest level in a year. UK stocks tend to fall when the pound rises because many companies that are part of the index are multinationals with overseas revenues. Most European markets closed early due to the New Year’s Day holiday.

Finland’s Central Bank Governor Olli Rehn said that the European Central Bank was monitoring the euro exchange rate very closely. The euro climbed to its highest level in 2020, to around USD 1.2300, partly due to underlying weakness in the greenback and the post-Brexit trade deal.

The UK was set to exit the EU at 23:00 GMT on December 31 after UK Prime Minister Boris Johnson and EU leaders agreed to a post-Brexit trade agreement. The treaty came into UK law after Parliament voted overwhelmingly in favor of the deal.

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The EU and China agreed on an investment treaty after seven years of talks. EU Trade Commissioner Valdis Dombrovskis said the EU would gain improved access to the Chinese market for automotive, private health care, cloud computing, and air transport services industries, among others. The EU would also receive similar benefits in the insurance and asset management industries to the ones secured by the U.S. in its “Phase 1” trade deal with China. The two sides have yet to ratify the treaty. The EU hopes it will come into effect in 2022.

Asia

Chinese stocks finished a holiday-shortened week at multiyear highs as investors anticipated stronger growth in 2021. The country’s benchmark SSEC Index rallied Friday to its highest close since February 5, 2018, while the blue chip CSI300 Index recorded its highest close since June 15, 2015, according to Reuters. For the year, the SSEC Index advanced 14% and the CSI300 Index rallied 27%, buoyed by signs of an accelerating economy as China became the first major world economy to successfully contain the coronavirus.

Ant Group stayed in the spotlight as the Chinese financial technology giant remained the target of a growing regulatory crackdown. The People’s Bank of China (PBOC) is considering plans to force Ant Group to shed equity investments in some financial companies, a move that would curb its influence over the sector, Bloomberg reported Thursday, citing unnamed individuals. Over the previous weekend, the PBOC summoned Ant executives and told them to “rectify” violations in the company’s lending, insurance, and wealth management businesses, though the central bank stopped short of calling for a widely feared breakup of the company.

Japanese stocks rallied in the holiday-shortened trading week through Wednesday. Japanese equity markets were closed on December 31 for the New Year’s Eve holiday and remained closed for New Year’s Day. The Nikkei 225 Stock Average advanced 3.0% (788 points) and closed at 27,444.17, just off the 30-year closing high set on Tuesday. For the year, the benchmark gained 16.0%. Neither the large-cap TOPIX Index nor the TOPIX Small Index, broader measures of the Japanese stock market, performed as well. In 2020, the TOPIX gained 4.8% and the TOPIX Small Index recorded a -2.2% return. The yen was modestly stronger versus the U.S. dollar and closed the year near JPY 103, about 5.0% stronger versus the U.S. dollar.

Other Key Markets:

• Turkey – Turkish stocks, as measured by the BIST-100 Index, returned about 3.6% through the close of business on Thursday. Investor sentiment was buoyed in part by U.S. President Trump’s recent veto of a military spending bill that would have also forced him to impose sanctions on Turkey for acquiring the S-400 missile defense system from Russia. While the House of Representatives overrode President Trump’s veto earlier this week, the Senate has yet to act, but it only has until Sunday, January 3, 2021, when the new Congress is seated.
• Investor sentiment and the lira currency also benefited from the central bank’s recent action on interest rates. Following the December 24 monetary policy meeting—at which policymakers decided to raise all three major lending rates by 200 basis points—officials indicated that a tight monetary policy “will be decisively sustained” until there are indications that there will be a “permanent fall in inflation.”