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Global Markets Weekly Review: Week 10, 2021

Global markets touched new highs last week as optimism over the global economic recovery continued to fuel market rallies. A tame inflation report and a respite in the recent upward ascent in interest rates were also some of the top contributing factors in the market’s gains, but the headliner was the passage of the American Rescue Plan (ARP), famously known as the stimulus relief plan, with U.S President Joe Biden signing the pandemic-relief bill into law on Thursday.

United States

U.S Stock markets were moved broadly higher for the week, proving a way for the global markets by lifting most of the major benchmarks to new records. Investors seemed to remain focused on fluctuating longer-term bond yields and the discount they place on future earnings, resulting in substantial swings in the technology-oriented Nasdaq Composite Index.

Shares in heavily weighted automaker Tesla rebounded after the previous week’s sell-off, lifting the consumer discretionary sector. The small real estate sector also outperformed within the S&P 500, while health care and energy shares lagged. The small-cap Russell 2000 Index outperformed and extended its recent market leadership, ending the week up roughly 19% on a price (excluding dividends) basis for the year to date.

The Nasdaq gave back some of its gains after Treasury yields bounced back Friday to end higher for the week. (Bond prices and yields move in opposite directions.) The broad municipal bond market posted strong gains through most of the week as cash flowed back into the market and new issuance remained relatively modest.

Index Friday’s Close Week’s Change % Change YTD
DJIA 32,778.64 1282.34 7.10%
S&P 500 3,943.34 101.40 4.99%
Nasdaq Composite 13,319.86 399.71 3.35%
S&P MidCap 400 2,643.98 131.06 14.63%
Russell 2000 2,352.79 160.58 18.96%
Europe

Shares in Europe rose, seeking the global market couterparts as the U.S. prepared to inject a massive amount of fiscal stimulus into the economy and the European Central Bank (ECB) pledged to buy more bonds to counter rising borrowing costs. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 3.52% higher. Germany’s Xetra DAX Index climbed 4.18%, France’s CAC 40 advanced 4.56%, and Italy’s FTSE MIB gained 5.00%. The UK’s FTSE 100 Index added 1.97%.

Global Markets
France’s CAC 40 index performance chart

Core eurozone government bond yields fell. The ECB announced it would accelerate bond purchases in the second quarter to curb the recent rise in yields, pushing bond prices up. Fourth-quarter gross domestic product (GDP) for the region was also revised down slightly, further suppressing yields. Peripheral eurozone government bond yields largely tracked core markets. UK gilt yields also declined broadly. However, optimism stemming from the UK’s vaccine rollout and the final approval of U.S. fiscal stimulus helped to moderate this decline later in the week. Better-than-expected January GDP data for the UK also supported gilt yields relative to other developed markets.

The ECB’s latest estimates call for EU GDP growth at 4% in 2021, an increase from the 3.9% expansion that the central bank forecast in December. The ECB also revised its inflation outlook to 1.5% from 1% for 2021 and adjusted its 2022 estimate to 1.2% from 1.1%. ECB President Christine Lagarde attributed these adjustments primarily to “temporary factors and higher energy price inflation.”

Asia

Chinese stocks posted a weekly loss as the Shanghai Composite Index fell 1.4% and the large-cap CSI 300 Index shed 2.2%. Despite recent weeks’ underperformance, investor appetite for Chinese stocks appeared undiminished. Net inflows into Chinese stocks have turned neutral for the first time since November, according to data from global custodian bank State Street, reflecting improving demand from China’s major trading partners and the country’s ongoing recovery.

The recent weakness in Chinese stocks comes as Beijing appears to be focusing more on longer-term economic restructuring and financial deleveraging amid a strong post-pandemic recovery. In the bond market, the yield on China’s sovereign 10-year bond declined nine basis points to 3.27% for the week.

China’s consumer price index (CPI) declined 0.2% in February from a year earlier, while the producer price index (PPI) jumped 1.7% year on year at the fastest clip since 2018, according to Reuters. Last month’s increase in PPI, or factory gate inflation, was driven by price increases in energy, basic materials, and capital goods. Analysts pay attention to China’s producer prices for their impact on global inflation as supply chains have become more intertwined in recent decades.

Recent reports of African swine fever in parts of China have raised concerns that the virus’s spread could lead to higher prices for pork, which has a large weighting in the CPI. However, policymakers have previously brushed off global inflation caused by soaring pork prices, most recently last year when a viral outbreak pushed the CPI above 5%.

Global Markets
Shenzhen Stock Exchange, one year performance chart

Japan’s stock markets advanced over the week, with the Nikkei 225 Stock Average gaining 2.96% and the broader TOPIX Index up 2.89%. Japanese value stocks continued their strong outperformance relative to their growth peers, amid increased global interest in companies whose fortunes are closely tied to the economic cycle: The TOPIX Value Index has surged so far this year. The yen weakened to near a nine-month low, closing above JPY 109 versus the U.S. dollar. The yield of the 10-year Japanese government bond finished the week at 0.11%, an almost global average.

Second estimates for economic growth showed that Japan’s GDP expanded at a slower rate than initially anticipated over the final quarter of last year. According to data from the Cabinet Office, the economy grew an annualized rate of 11.7% in October–December 2020, weaker than the preliminary reading of 12.7% but one of the best compared at a global perspective. The revision mainly reflected a bigger drag from private inventories. Separate data showed that household spending fell 6.1% in January compared with the same month a year earlier, dampened largely by a second state of emergency declared over the coronavirus. However, declines were smaller than those in April 2020, when the first state of emergency was declared.

Other Key Global Markets
  • Brazil – Stocks in Brazil, as measured by the Bovespa Index, returned about -1.0%. Sentiment toward Brazilian assets was hurt in part by news that a judge annulled all of the existing convictions against former President Luiz Inacio Lula da Silva. This decision restores all of his political rights and would allow him to run for office, including the presidency. In economic matters, the government reported that inflation in February was 0.86% month over month, which was higher than expected. Year-over-year inflation is now 5.2%, the highest since 2017
  • Mexico – Mexican stocks followed their global markets counterparts, as measured by the IPC Index, returned about 3.0%. During the week, the government reported that Mexico’s inflation in February was 0.6% month over month and 3.8% year over year. This was generally in line with expectations, and it marks the fourth consecutive monthly increase in the consumer price index since the 3.3% year-over-year low in November. As a result, 12-month inflation is once again close to the central bank’s 4% upper limit.