Global markets were perched at a record highs earlier in the week, supported by a foundation composed of the budding economic recovery, rising corporate profits. Markets however dipped on news of U.S President Joe Biden’s proposal to hike the capital gains tax rate rattled the equity markets last week. The proposal would hike the rate to 39.6% from the current 20% rate for those earning more than $1 million per year.
United States
U.S Stocks finished little changed in an up-and-down week amid some of the lightest daily trading volumes of 2021. Small-caps performed slightly better than large-caps, and the technology-heavy Nasdaq Composite Index modestly lagged the broad market. No particular theme—such as companies that would most benefit from economic re-openings or stocks popular with individual investors—dominated the week’s activity, although semiconductor stocks were notably weak.
Quarterly earnings season was in full swing, and the week’s earnings reports provided more evidence that the economy is gradually transitioning to a post-pandemic environment. Netflix reported that its number of new lglobal subscribers declined steeply in the first quarter and said that it expects to add even fewer subscribers in the second quarter as consumers spend less time at home. Major airlines, including United, American, and Southwest, posted another quarter of weak earnings but said that they are seeing a meaningful pickup in travel demand as more people are vaccinated and become comfortable traveling.
| Index | Friday’s Close | Week’s Change | % Change YTD |
| DJIA | 34,043.49 | -157.18 | 11.23% |
| S&P 500 | 4,180.17 | -5.30 | 11.29% |
| Nasdaq Composite | 14,016.81 | -35.53 | 8.76% |
| S&P MidCap 400 | 2,745.71 | 24.63 | 19.04% |
| Russell 2000 | 2,271.86 | 9.19 | 14.86% |
Shares in Europe slipped, following other global markets, on concerns that a rising coronavirus caseload could slow the pace of the economic recovery. These fears overshadowed strong corporate earnings. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.78% lower. Major country benchmarks also fell: Italy’s FTSE MIB declined 1.45%, Germany’s Xetra DAX Index slid 1.17%, and France’s CAC-40 Index pulled back by 0.46%. The UK’s FTSE 100 Index dropped 1.15%.
Core eurozone bond yields ended the week roughly flat. Optimism about the vaccine rollout drove yields higher early in the week. This move reversed, however, after the European Central Bank (ECB) President Christine Lagarde said it was too early to withdraw stimulus. UK gilt yields fell, tracking U.S. Treasury yields, amid volatility in equity markets and the Biden administration’s proposal to raise taxes on higher-income earners.
As expected, the ECB kept its main policy measures unchanged and restated its determination to keep borrowing costs low, saying it would maintain its recently increased pace of bond purchases until the eurozone’s economy is firmly on the path to recovery. “The governing council expects purchases under the PEPP [Pandemic Emergency Purchase Programme] over the current quarter to continue to be conducted at a significantly higher pace than during the first months of the year,” Lagarde said.
Asia
In China, the large-cap CSI 300 Index advanced 3.4%, following global markets for the week, while the country’s benchmark Shanghai Composite Index added 1.4%. Chinese stocks rose steadily since Monday, when mainland equity markets received inflows totaling USD 2.5 billion from Hong Kong via Stock Connect, marking the third-largest single-day inflow from Hong Kong investors.
In the bond market, the yield on China’s sovereign 10-year bond increased one basis point to 3.18%. The People’s Bank of China left the loan prime rate (LPR), a reference rate for new bank loans, on hold for the 12th straight month. In currency trading, the renminbi strengthened slightly against the U.S. dollar to close at 6.491.
In other global financial markets reform news, the Shanghai and Shenzhen Stock Exchanges on Thursday issued new guidelines aiming to tighten the onshore bond approval process. Credit assessment, corporate governance, financial disclosure, capital structure, and the pledging of assets are among the areas covered by the guidelines. The guidelines also singled out for criticism China’s property and local government financing vehicles (LGFVs) bond issuers for having strong operating subsidiaries but financially weak holding companies. LGFVs with assets below RMB 10 billion, or a credit rating of AA or less, were discouraged from issuing bonds, except for refinancing
Despite a brief rally on Thursday, it was a disappointing week for Japanese equity markets—weighed down by weakness across all sectors as the government enhanced its response to tackle surging coronavirus cases.
The Nikkei 225 Index shed more than 650 points over the week, one of the worst in global market performance, briefly falling below the 29,000 mark before finishing the week 2.2% lower at 29,020.63. Meanwhile, the broader TOPIX Index also closed down. The yen weakened against the U.S. dollar, trading just below JPY 108 on Friday, while the yield of the benchmark 10-year Japanese government bond reflected the more cautious landscape, finishing the week lower at 0.069%.
Other Key Global Markets
- Mexico – Mexican stocks, as measured by the IPC Index, returned around 0.8%, a fair average from other global markets. During the week, the Mexican government reported that inflation in the first half of April increased 6.1% year over year. This was higher than expected and well above the central bank’s 2% to 4% inflation target range.
- Russia – Russian stocks, as measured by the Russian Trading System (RTS) Index, returned about 1.0%, fairly above the global markets benchmarks. Tensions between Russia and its neighbor Ukraine remained elevated in the early part of the week, pressuring Russian assets, amid media reports of a continuing Russian military buildup along its border with Ukraine—ostensibly to conduct training exercises. Geopolitical tensions also increased as the Russian government made good on its threat to “reciprocate” as a response to new U.S. sanctions. Late last week, Russia decided to sanction eight U.S. officials and to ask 10 U.S. diplomats to leave the country.
Data Sources:Thomson Reuters, Barrons (Dow Jones & Company), Bloomberg, The Economist Europe, Brazil Business Post, Edward Jones Financial Markets Report.
