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Global Markets Weekly Review: Week 25, 2021

Global stocks retained their stand despite minor mid-June pullback spurred by concerns of a Fed policy shift in the previous week, not much has changed in the financial markets or in the outlook for the economy. After moving sideways for most of the last two months, the S&P 500 hit a new high last week, the 33rd this year (an impressive 26% of all trading days in 2021)

United States

Wall Street led global markets in rebounding from the previous week’s declines, bringing the S&P 500 Index and the technology-heavy Nasdaq Composite index to new highs and helping both record their best weekly gains since early April. Energy shares fared best within the S&P 500 as oil prices reached their highest levels since October 2018 on falling global inventories. Utilities and real estate stocks lagged.

Moderating inflation fears may have factored in helping reverse the previous week’s drop. Some signs emerged that supply chain pressures that had caused a spike in commodity prices were easing. Lumber prices continued a sharp decline from record highs, and metal prices came under pressure as China released stockpiles to cool the market.

  High yield spreads (from cycles high to low)
High Yields Bonds U.S Treasury Bonds – Source, bloomberg

Later in the week, economically sensitive securities got a boost from news of an agreement on a bipartisan infrastructure deal. On Thursday morning, President Joe Biden announced that a bipartisan group of 10 Senators had agreed on a plan for roughly USD 1 trillion in infrastructure spending over the next five years. The bill has yet to be drafted, however, and many expect it to face resistance from both ends of the political spectrum.

Treasury prices fell as yields increased through global markets, but strong cash flows into municipal bond funds continued to support the tax-exempt market. In signs of diminishing fiscal strains, Fitch Ratings revised its outlook on State of Illinois bonds to positive from negative, and S&P moved its outlook for the nonprofit health care sector to stable from negative.

Index Friday’s Close Week’s Change % Change YTD
DJIA 34,433.84 1143.76 12.51%
S&P 500 4,280.70 114.25 13.97%
Nasdaq Composite 14,360.39 330.01 11.42%
S&P MidCap 400 2,726.48 114.58 18.20%
Russell 2000 2,334.48 96.73 18.21%
Europe

European shares followed global stocks in volatile trading, buoyed by a reaffirmation of ultra-loose monetary policy and a bipartisan agreement on a huge U.S. infrastructure spending plan. The pan-European STOXX Europe 600 Index ended the week 1.23% higher. The main stock indexes also posted gains. Germany’s Xetra DAX Index rose 1.04%, France’s CAC 40 0.82%, and Italy’s FTSE MIB 1.16%. The UK’s FTSE 100 Index added 1.69%.

Core eurozone government bond yields ended the week marginally higher. German bund yields initially tracked rising Treasury yields and were then lifted further by strong purchasing managers’ index (PMI) data and business confidence readings. However, yields then fell in sympathy with the Bank of England’s (BoE) dovish outlook, before inching back up ahead of Friday’s U.S. inflation print. Peripheral eurozone bond yields also fluctuated, while UK gilt yields ended lower after the BoE reaffirmed its belief that near-term inflation strength would be transitory.

European Central Bank President Christine Lagarde told a European Parliament committee it was important “not to withdraw support too early.” She said the outlook for the eurozone and global economy was “brightening” and economic activity “should improve strongly” in the second half of the year. She also said rising inflation would start declining at the start of 2022 as temporary factors fade out.

Asia

China’s large-cap CSI-300 Index added 2.7% and the Shanghai Composite Index rose 2.3%, ending a three-week losing streak. Financial stocks led the rally, like other global markets, after the People’s Bank of China (PBoC) injected liquidity into the financial system for the first time since February. Renewable energy names did well after China’s National Energy Administration announced that over 50% of rooftop spaces on government buildings would be reserved for solar panels, with lower targets for schools, hospitals, and other types of buildings. Domestic leisure and travel stocks also advanced amid reports that China may not open its international borders this year.

In bond markets, the government’s net bond supply was less than expected in June, helping to take some pressure off yields. The yield on China’s 10-year sovereign bond fell 10 basis points, closing the week at 3.10%. In currency markets, the renminbi began the week on a weak note but subsequently rallied to end flat against the U.S. dollar at RMB 6.453.

Japanese stocks, unlike their global counterparts had a tumultuous start to the week, falling sharply on the first trading day before rebounding on the second. Sentiment soured after the U.S. Federal Reserve’s hawkish pivot increased worries about an earlier-than-expected tapering of its accommodative policies. Reassurances from the central bank that it will continue its supportive stance to ensure the sustained improvement of the economy helped stabilize markets. The Nikkei 225 Index returned 0.35% for the week. The TOPIX was up 0.83%.

Global Markets Nikkei
The Nikkei N225 Share Index, one year technical performance chart

Activity at Japanese private sector businesses remained in contraction territory in June: The au Jibun Bank Flash Japan Composite PMI fell to 47.8 from the previous month’s 48.8. Survey respondents associated disruption of operating conditions to ongoing coronavirus restrictions, coupled with severe supply chain pressures. However, firms have continued to expand employment levels despite subdued demand conditions.

The manufacturing PMI slipped to 51.5, from 53.0 in May, signaling a weaker improvement in operating conditions among manufacturers, and the slowest pace of expansion in four months. The services PMI improved, rising to 47.2 from May’s 46.5, indicating a softer, yet still moderate fall in services output. The overall outlook was more optimistic, driven by non-manufacturers, stemming from hopes that the accelerated COVID-19 vaccine rollout would contribute to easing restrictions and trigger a broader recovery in demand.

Other Key Global Markets
  • Mexico In surprise move, Mexico’s central bank hikes rates. Banxico, Mexico’s central bank, surprised global market observers by raising its key lending rate by a quarter percentage point to 4.25%. The peso gained about 2% versus the U.S. dollar in reaction to the news before pulling back some, while local Mexican bonds sold off. Stocks moved lower immediately following the announcement but finished the day with a gain. Markets were caught off guard, though, as the rate hike came just three weeks after Banxico released its quarterly inflation report where it had highlighted upward risks to inflation but also reiterated the transitory nature of inflation and focused on weak domestic economic conditions even as external demand from the U.S. had improved. Gifford said it is difficult to predict what the bank will do going forward as Banxico offers no forward guidance beyond saying it is dependent on data, but he believes it is likely that rate hikes will continue until inflation starts to recede and upward inflation surprises start to reverse.
  • Thailand – Central bank of Thailand kept their key lending benchmarks at record lows, citing the continued threat that the pandemic poses to a full global economic recovery. In Thailand, central bank policymakers held rates at 0.50%, within a global standard, saying they expected the economic recovery to be slower and more uneven than previously anticipated as the country deals with a third wave of COVID-19 infections. Specifically, they noted that both tourism and domestic demand have been impacted.
  • Philippines – The Philippines central bank followed the global trend and held rates at 2.0%, also said that the economic recovery remains tentative due to risks from the pandemic. In their statement, bank officials said that food price pressures have abated and they expect inflation to ease in 2022 and 2023.
Data Sources: Thomson Reuters, Barrons (Dow Jones & Company), Bloomberg, The Economist Europe, Brazil Business Post, Edward Jones Financial Markets Report.