Global markets were on the low as a surprisingly hawkish outcome from the Federal Reserve’s June 15–16 policy meeting and late-week comments from a Fed official about potentially earlier-than-expected rate hikes dragging markets globally reverse some of their post-pandemic gains.
The Dow includes many cyclical companies—those most reliant on global economic growth. On the other hand, the tech-heavy Nasdaq Composite index posted a much more modest loss. The broad market S&P 500 Index declined.
Large-cap equities held up better than small-caps. Growth stocks easily outperformed value as investors sold companies in the energy and financials sectors amid fears that the Fed will remove its accommodative policies and raise rates sooner than markets had anticipated.
U.S. Treasuries were some of the most volatile in global markets following the Fed policy meeting. The 10-year U.S. Treasury yield increased sharply after the Fed meeting on Wednesday before falling on Thursday and Friday. (Bond prices and yields move in opposite directions.) Short- and intermediate-term Treasury yields experienced more sustained increases. The difference in yield on five- and 30-year Treasuries reached a lower level than where it started 2021, a trend that could weigh on financial stocks because banks tend to profit from larger spreads between short- and long-term rates.
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Shares in Europe fell, in line with global expectations, after the U.S. Federal Reserve indicated that it would increase rates earlier than previously expected. In local currency terms, the pan-European STOXX Europe 600 Index slid 1.19%. Germany’s Xetra DAX Index fell 1.56%, Italy’s FTSE MIB Index declined 1.94%, and France’s CAC 40 Index eased 0.48%. The UK’s FTSE 100 Index slipped 1.63%.
Core eurozone government bond yields rose with U.S. Treasury yields after the Fed signaled plans to begin raising interest rates in 2023. However, dovish comments from the European Central Bank (ECB) helped to moderate this move. Peripheral government bond yields broadly tracked core markets.
UK inflation jumped again in May, accelerating to 2.1%, on higher prices for clothing, fuels, and meals in restaurants and bars. The increase was above global economists’ forecasts and the BoE’s target. Governor Andrew Bailey said last month that he would not hesitate to tighten monetary policy if the inflation rate consistently exceeded the BoE’s target. UK payrolls rose for a sixth consecutive month, driven by hiring in the hospitality industry, while the unemployment rate averaged 4.7% in the three months ended April 30.
The European Commission signed off on the first two national recovery plans—those of Spain and Portugal—supported by the EUR 800 billion Next Generation EU fund. Italy’s plan is next in line, with approval expected in coming days.
Industrial production in the eurozone was stronger than expected in April, rising 0.8% sequentially and 39.3% year over year, as the output of consumer goods more than doubled.
Chinese stocks recorded their third weekly loss, against other global trends. The large-cap CSI 300 Index fell 2.3% and the Shanghai Composite Index shed 1.8%. Domestic brokerage CITIC Securities reported tighter A-share liquidity in June as northbound Stock Connect inflows dried up, while domestic mutual funds experienced greater redemption pressures. New energy vehicle (NEV) stocks rallied on Friday after an official at the 2021 China Association of Automobile Manufacturers projected that the NEV share of new vehicles would increase from 20% to 30% within five to eight years. Industry data showed a NEV penetration rate of 12.0%, a historic high, while domestic NEV sales in May jumped 8.3% from April and more than doubled from a year ago.
In global markets currency trading, the renminbi (RMB) weakened slightly against the U.S. dollar to end at 6.44 per dollar. China’s trade-weighted currency basket, the CFETS index, hovered close to its 2018 high of 98 and is up 3.0% this year, compared with the RMB’s 1.6% gain against the dollar. Unlike other Asian countries, most of the shift toward monetary policy normalization has already occurred in China, which some analysts believe could help support the Chinese currency ahead of U.S. policy tightening expected to occur later this year.
Japan’s stock markets generated mixed returns for the week, with the Nikkei 225 Index rising 0.05% and the broader TOPIX Index down 0.38%. The yield on the Japanese 10-year government bond rose to 0.06%, while the yen weakened to JPY 110.23 against the U.S. dollar.
The Bank of Japan (BoJ) left key policy rate targets and guidance unchanged at its June monetary policy meeting, as widely expected. It extended the duration of the special coronavirus financing support program by six months to the end of March 2022, giving Japan’s vaccination drive more time to work. In a surprise move, the BoJ also announced a measure to support climate change mitigation: A new initiative will provide funds for bank lending to climate-friendly businesses. The climate change facility will start operating within the year, and the central bank will provide details at next month’s meeting.
Japan’s exports rose 49.6% year on year in May, the highest growth since 1980. The jump in exports largely reflected a rebound in global shipments from last year’s plunge in the wake of the pandemic shock. The highest export growth was to the U.S., driven by cars and auto parts, while exports to China were also strong, led by chip production equipment and hybrid cars.
Other Key Global Markets
- Mexico – Mexican stocks, as measured by the IPC Index, returned about -1.9% in line with global markets comparison. During the week, in the aftermath of changing some key positions in his administration—specifically the finance minister and the central bank president—following the Morena coalition’s loss of some legislative seats in the June 6 midterm elections. Weaker-than-expected May economic data from the National Bureau of Statistics led some China economists to conclude that the country’s growth momentum has peaked. Retail sales grew a below-forecast 4.5% based on a two-year average annual growth rate, barely above April’s pace and roughly half of its pre-pandemic rate.
- Colombia – Colombian assets were mixed on the week as investors remained uncertain about the country’s fiscal and political outlook from both a local and global perspective. After nearly seven weeks of protests, the National Strike Committee is calling for a temporary halt to demonstrations. This follows the end of talks between the Committee and the government after the former criticized President Iván Duque Márquez’s administration for not ceding to its demands.
Data Sources: Thomson Reuters, Barrons (Dow Jones & Company), Bloomberg, The Economist Europe, Brazil Business Post, Edward Jones Financial Markets Report.