Global markets had to offer a bit of everything for investors, from labor market readings to Federal Reserve minutes to rising uncertainties around COVID variants and their implications for global growth. Stocks logged another solid week, touching new highs. But the headliner was the move in interest rates from the Feds, which have pulled back notably from their highs earlier this year.
The S&P 500 Index and Nasdaq Composite Index , benchmark global indices by United States investors moved to new highs and closed out a fifth consecutive quarterly advance. Large-cap growth stocks led the gains, with the Russell 1000 Growth Index stretching its weekly winning streak to eight. Technology and health care stocks led the gains within the S&P 500, and consumer discretionary stocks were also strong, boosted by a solid rise in Nike shares. Small- and mid-caps underperformed after strong gains the previous week.
Generally favorable economic data seemed to support sentiment. The Conference Board’s index of consumer confidence beat expectations and reached a 16-month high. The spirits of homeowners—if not buyers—may have been lifted by gains in housing prices, which also surprised on the upside. The strong labor market was another factor in making Americans feel more optimistic about their economic prospects. On Friday, the Labor Department reported that employers had added 850,000 nonfarm jobs in June, well above consensus estimates of around 700,000 and the most since last August. Weekly jobless claims also fell more than expected, to a pandemic-era low of 364,000.
|% Change YTD
|S&P MidCap 400
Shares in Europe were down slightly on worries that global inflationary pressures might bring forward interest rate increases. Another headwind was the spread of a highly infectious variant of the novel coronavirus, which clouded the outlook for a global economic recovery. In local currency terms, the pan-European STOXX Europe 600 Index slipped 0.18%. Major indexes were mixed. Germany’s Xetra DAX Index rose 0.27%, while France’s CAC 40 Index fell 1.06% and Italy’s FTSE MIB Index declined 0.89%. The UK’s FTSE 100 Index gave up 0.18% of its value.
Core eurozone government bond yields fell, reflecting growing fears about the spread of the delta variant of the coronavirus in Europe. Comments from European Central Bank (ECB) President Christine Lagarde highlighting the risk of virus variants and their potential effects on the eurozone economic recovery also weighed on yields. Peripheral bond yields broadly tracked core markets. UK gilt yields likewise fell in tandem with core markets. Bank of England Governor Andrew Bailey reiterated the view that the uptick in UK inflation would prove transitory appeared to contribute to the decline in gilt yields.
The eurozone’s index of consumer prices fell to 1.9% in June from 2.0% in May, according to a first estimate from Eurostat. Inflation has ticked up for six consecutive months and is near the ECB’s target of “below but close to 2.0%.” The euro area jobless rate fell to a seasonally adjusted 7.9%, fair for a global economy, in May from 8.1% in April but was up from 7.5% in May 2020. IHS Markit’s eurozone purchasing managers’ index (PMI) came in at 63.4 in June—above the flash estimate and its highest reading on record—suggesting that the expansion in the manufacturing sector was even stronger than initially estimated. (PMI readings greater than 50 indicate an expansion in activity levels.)
Chinese stocks fell for the week. Both the Shanghai Composite Index and large-cap CSI 300 Index, considered a benchmark global index from the east posted a weekly loss after each index recorded its biggest one-day percentage drop since early March on Friday, Reuters reported. Reports of profit-taking by domestic investment funds and open market operations undertaken by China’s central bank to drain funds from the financial system may have contributed to the declines.
Bond yields were unchanged for the week, with the yield on the 10-year sovereign bond ending at 3.10%. In global markets currency trading, the renminbi shed 0.4% against the U.S. dollar to RMB 6.479 per dollar.
Industrial profits growth also remained strong, according to the official monthly survey of profits at larger industrial enterprises. Filtering out pandemic base effects, industrial profits’ two-year average growth slowed slightly from 22.6% in April to 20.2% in May, leading some analysts to believe that industrial profits growth may have peaked this cycle. Sales revenues from January to May surged 9.9% on the same two-year average basis.
Japan’s stock market returns were negative for the week in line with other global markets, as concerns about rebounding coronavirus infection rates eroded optimism about progress in the country’s vaccination drive. The Nikkei 225 Index fell 0.97% while the broader TOPIX Index finished 0.32% lower. The yen weakened to its lowest level since February 2020, closing the week at JPY 111.43 against the U.S. dollar. The yield on the Japanese 10-year government bond declined to 0.046%.
The Bank of Japan’s (BoJ’s) closely watched Tankan survey signaled that the domestic economic recovery was broadening, with sentiment improving in both the manufacturing and services sectors. The headline index for sentiment among large manufacturers rose to 14 in June from 5 in March, the highest level since 2018. Manufacturers’ business confidence has been supported by solid global demand. The auto sector remains a weak spot, however, due to shortages of semiconductor chips.
Other Key Global Markets
- Peru – Peruvian assets were flat to lower this week as political uncertainty increased due to an interesting turn of events. It has been a month since the June 6 second presidential election round, pitting socialist school teacher Pedro Castillo against conservative politician Keiko Fujimori—the most recent tally has Castillo ahead by less than 50,000 votes—but the election still has not been officially decided due to an investigation into Fujimori’s allegations of electoral fraud.
- Mexico – Mexican stocks, as measured by the IPC Index, returned about -0.9%, a flat average from global markets. During the week, the central bank published the minutes from its June 24 policy meeting, at which policymakers surprised investors with an increase in the overnight lending rate from 4.00% to 4.25% in a 3 to 2 vote favoring a rate hike. The consensus among the three who voted for a rate increase was to strengthen the central bank’s credibility across global banks and contain the risk of second-round effects deriving from much higher-than-expected inflation. Even though these policymakers believe that inflation pressures are transitory, they concluded that the benefit of hiking rates outweighed the costs.