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Global Markets Weekly Review: Week 23, 2021

Global markets were mixed during the week as investors reacted to various economic data from both the U.S Consumer price index and also various economic data from china and from the middle east. Investors were keen to watching also the developments from two Iranian Warships that had for the first time crossed into the Atlantic, and the continuing discussion of bringing back Iranian oil to the market after a previous OPEC+ ban.

United States

A sharp decrease in longer-term bond yields appeared to help push the S&P 500 Index, seen as a global benchmark, to a record high in a week of relatively light summer trading. The decline in yields favored growth stocks by reducing the implied discount on future earnings while weighing on financials by threatening bank lending margins. The technology-heavy Nasdaq Composite Index outperformed and marked its fourth consecutive weekly gain, while the narrowly focused Dow Jones Industrial Average recorded a modest loss. Health care stocks led within the S&P 500, boosted by gains in Biogen. The drugmaker’s shares rose sharply after the Food and Drug Administration surprised some by granting broad authorization to its new Alzheimer’s disease treatment, Aduhelm.

  Select consumer price index components (February 2020=100)
Select consumer price index components (February 2020=100) [Bloomberg]
Interest rates and inflation seemed to continue to dominate the global market sentiment. The yield on the benchmark 10-year U.S. Treasury note decreased throughout most of the week, seemingly pushed lower by recent assurances from Federal Reserve policymakers that they would keep monetary policy highly accommodative for “some time” and that the recent spike in inflation would prove temporary. On Thursday, yields jumped briefly after the Labor Department reported that core (less food and energy) consumer prices had risen 0.7% in May, well above the consensus estimate of 0.4%. The annual headline print reached a 13-year high of 5.0%, while the one-month reading totaled 0.6%, due in large part to a jump in used car prices.

Longer-term inflation expectations appeared to remain contained, however. The University of Michigan’s survey of consumer sentiment, released Friday, showed that Americans expected prices to rise 4% in the current year, versus the previous month’s read of 4.6%. Consumers also grew more confident, with the survey’s overall sentiment gauge reversing much of May’s decline.

Index Friday’s Close Week’s Change % Change YTD
DJIA 34,479.60 -276.79 12.65%
S&P 500 4,247.44 17.55 13.08%
Nasdaq Composite 14,069.42 254.93 9.16%
S&P MidCap 400 2,752.17 23.50 19.32%
Russell 2000 2,335.81 49.40 18.28%
Europe

Shares in Europe gained ground for a fourth consecutive week, lifted in part by the European Central Bank’s (ECB) pledge to continue its high rate of bond purchases into the coming quarter. In local-currency terms, the pan-European STOXX Europe 600 Index ended 1.09% higher. France’s CAC 40 Index rose 1.30%, while Italy’s FTSE MIB Index advanced 0.57%. Germany’s Xetra DAX Index was little changed. The UK’s FTSE 100 Index gained 0.92%.

Eurozone government bond yields largely fell, reflecting the ECB’s commitment to continue its bond-buying program at the current pace for another quarter. The central bank forecast also called for inflation to subside and come in well below its target in 2023. UK gilt yields broadly tracked yield in core global markets.

The ECB left its key policy measures unchanged, just in line with major global central banks, and said that it would maintain emergency bond-buying at a higher pace for the next quarter, even though the central bank’s updated forecasts called for higher rates of inflation and economic growth. ECB President Christine Lagarde said at a press conference that inflation would accelerate this year and then slow in 2022.

The ECB expects eurozone inflation of 1.9% in 2021, up from the previous estimate of 1.5%. The central bank’s revised forecast calls for inflation to slow to 1.4% in 2023. In global market terms, the eurozone economy is expected to grow 4.6% this year and 4.7% next year—in both instances, a 60-basis point increase from the ECB’s previous forecast. The ECB said the risks to growth are now “balanced” rather than skewed to the downside.

Asia

Chinese stocks fell for a second week, leading the drag on global markets average. The CSI 300 Index of large-cap stocks fell 1.1%, while the broader Shanghai Composite Index edged down 0.1%, according to Reuters. News that the authorities in Guangzhou renewed COVID-19 controls in the face of a fresh outbreak in the southern coastal city weighed on sentiment early in the week. In response, Macau banned nonresidents from entering the offshore enclave via neighboring Guangdong province, causing casino shares to weaken.

In China’s bond markets, the trend in yields since late May has been gradually higher. The yield on the 10-year Chinese government bond rose four basis points to close at 3.15% following higher producer price inflation. In currency markets, the RMB (renminbi) finished flat against the U.S. dollar in a week marked by near-zero volatility.

China’s inflation data for May were mixed. The producer price index (PPI) rose to 9.0% year over year from 6.8% in April due to higher commodity prices. The bigger-than-expected jump in the PPI marked its highest level since 2008, according to Bloomberg, raising worries that rising factory gate inflation in China would contribute to inflationary pressures globally.

Japan’s stock market returns were broadly unchanged for the week, with the Nikkei 225 Index up 0.02% and the broader TOPIX Index falling 0.26%, a flat range within global markets range. While the domestic economic recovery remains fragile, sentiment was boosted by the government lifting the coronavirus quasi-states of emergency in three prefectures in the face of steadily declining infection rates and easing pressure on hospitals. The yield on the Japanese 10-year government bond fell to 0.03%, its lowest level since January, as the U.S. Centers for Disease Control and Prevention announced it was easing travel recommendations for more than 110 countries and territories, including Japan just ahead of the Olympics. The yen continued to hover around the JPY 109.5 level against the U.S. dollar.

Nikkei N225
Japan’s Nikkei N225 technical chart performance
Other Key Global Markets
  • Mexico – Mexican stocks, as measured by the IPC Index, returned about 1.6%. Mexican financial assets seem to have responded favorably to the results from Sunday’s midterm elections—one of the largest in the nation’s history. All 500 seats in the Lower House of the legislature were up for grabs (300 by simple majority and 200 by proportional representation). Elections were also held for 15 of the country’s 32 governorships, legislators in 30 states, and thousands of local officials.
  • Brazil – Shares in Brazil, as measured by the Bovespa Index returned about -0.5%. During the week, the government reported that inflation in the month of May was one of the highest globally, measured at 0.83% on a month-over-month basis, which was higher than expected. Brazil’s annual inflation has now reached 8.06% year over year and that—contrary to policymakers’ official stance that the pickup in prices is temporary—the inflationary impulse is starting to look pretty generalized.