Global Markets logged one of the largest weekly loss in three months last week as volatile trading in certain pockets of the market continued, raising concerns about speculative excesses. Growth is likely to slow further this quarter, but activity and employment should start rebounding, particularly with the benefit of the $900 billion fiscal stimulus that was passed in December. Despite the extreme swings in some heavily shorted stocks and the negative equity-market returns for January, the fundamental conditions and outlook have not changed, in our view.
United States
Stocks declined sharply for the week amid much higher volatility and trading volumes. Large-cap indexes generally held up better than mid- and small-cap shares. On Wednesday, equities posted their worst day since October, with the S&P 500 Index falling almost 2.6%. Total trading volume hit a record high of 23 billion shares on Wednesday, a huge jump from the year-to-date average daily volume of about 14 billion.
Despite a busy earnings week in which 37% of the S&P 500’s market capitalization was due to post quarterly financial results, unusual fluctuations in the prices of certain stocks that are popular with individual investors appeared to drive the market and received the bulk of media attention. Encouraged by message boards on Reddit and other online forums, these investors seemed to collectively target stocks with high percentages of short interest through buying the shares.
In the Federal Open Market Committee’s statement and in Fed Chair Jerome Powell’s post-meeting press conference on Wednesday, policymakers reinforced the message that the economic outlook remains uncertain and that it will be some time before the central bank begins to taper its asset purchases. The government also reported that overall economic growth slowed considerably in the fourth quarter. Gross domestic product (GDP) grew at an annualized rate of 4.0%, in line with expectations, compared with 33.4% in the third quarter.
Europe
European markets fell amid worries that the economy could slow due to the raging coronavirus pandemic and delays in the distribution of coronavirus vaccines. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 3.11% lower. Major European indexes also declined: Germany’s Xetra DAX Index fell 3.18%, France’s CAC 40 dropped 2.88%, and Italy’s FTSE MIB slid 2.34%. The UK’s FTSE 100 Index lost 4.30%.
Germany, France, and Spain reported relatively resilient GDP numbers for the fourth quarter, spurring hopes that the eurozone might avoid a deeper recession. The German economy expanded 0.1% sequentially, thanks to strength in exports and construction; Spain’s GDP unexpectedly grew 0.4%, driven, in part, by increased household consumption. France’s economy shrank 1.3% in the fourth quarter, an upside surprise relative to a consensus estimate that had called for a 4.1% contraction. Bright spots for the French economy in the fourth quarter included robust exports, steady business investment, and a rebound in consumer spending. However, due to continuing lockdowns, the German government cut its 2021 forecast for GDP growth to 3% from its previous estimate of 4.4%.
The UK tightened its travel curbs, requiring travelers coming from some countries to quarantine in government-sanctioned hotels. Germany prepared to ban all travel from South Africa, the UK, Portugal, Brazil, and other countries where variants of the coronavirus that are more contagious have contributed to surging infection rates. Riots broke out in the Netherlands due to recently imposed curfew restrictions.
Asia
Chinese stock markets recorded a weekly drop amid fears that the country’s central bank was turning more hawkish after it drained USD 12.1 billion in liquidity from the financial system and a senior central bank official warned of potential asset bubbles. The Shanghai Composite Index fell 3.4%, while the large-cap CSI 300 lost 3.9%.
Hong Kong reached a record high during the week, driven by a large number of mutual funds putting cash to work at a time when Hong Kong offered large arbitrage opportunities in Chinese dual-listed shares. Hong Kong’s benchmark Hang Seng Index hovered near a 20-month high, lifted by record inflows from mainland China via the Stock Connect program. Hong Kong has benefited as the exchange of choice for mainland Chinese companies seeking to go public, particularly for domestic tech firms and U.S.-listed Chinese companies seeking a secondary listing. Last year, mainland Chinese companies accounted for 98% of Hong Kong’s initial public offerings, up from 73% in 2019 and 51% 10 years ago, according to the South China Morning Post.
Japan’s stock markets declined for the week. The Nikkei 225 Stock Average fell 3.4% (968 points) and closed at 27,663.39. For the year-to-date period, the blue chip index is ahead 0.8%. The broader equity market benchmarks—the large-cap TOPIX Index and the TOPIX Small Index—also retreated, giving back most or all of their year-to-date gains. The yen weakened and traded above JPY 104 versus the U.S. dollar.
The International Monetary Fund (IMF) remained more upbeat and raised its 2021 global economic growth forecast 0.3 percentage points to 5.5% (4.2% for 2022) in its January World Economic Outlook Update. The IMF said that “the strength of the recovery is projected to vary significantly across countries, depending on access to medical interventions, effectiveness of policy support, exposure to cross-country spillovers, and structural characteristics entering the crisis.” The IMF forecasts that Japan’s economy will contract 5.1% in (calendar year) 2020 and generate growth of 3.1% and 2.4% in 2021 and 2022, respectively.
Also Read: Global Markets Weekly Review: Week 03, 2021
Other Key Markets:
- Peru – Stocks in Peru, as measured by the S&P/BVL General Index, were little changed on the week, notwithstanding a pronounced fall on Wednesday. The weakness was caused by an announcement of new lockdowns in the country to contain another wave of COVID-19 cases as well as the approval of a controversial pension reform bill in a special commission in Congress.
- Brazil – Stock markets in Brazil, as measured by the Bovespa Index, returned about -2.0%. During the week, Brazil’s central bank released the minutes from its monetary policy meeting on January 19–20. Central bank officials believe that the next set of data releases “will be very informative about the evolution of the pandemic, economic activity, and fiscal policy.”
- South Africa – South Africa’s main stock market indices the FTSE/JSE TOP 40 and the JALSH-All Share – edged lower with negative changes of -0,50 percent and -0,65 percent respectively. However on a daily analysis base as at January 27, the JALSH-All Share increased 4351 points (7,32 percent)
