Global markets were on the mixed this week. A slew of corporate earnings reports, economic data, a Fed meeting, and the regulatory-induced sell-off in Chinese equities made the last week of July the busiest one this summer. There was a lot of push and pull, with equities finishing slightly lower to where they started the week, but still near all-time highs. We think the fresh data points reveal the following about the health of the economy, the corporate sector, and the future direction of monetary policy:
The major indexes considered as global markets benchmarks were mixed for the week. The large-cap benchmarks and the technology-focused Nasdaq Composite index managed record highs before pulling back Friday to end the week with modest losses. The S&P MidCap 400 Index and the small-cap Russell 2000 Index broke a string of underperformance and recorded gains. Likewise, recently underperforming utilities shares reversed course and were among the best performers in the S&P 500 Index, along with materials and real estate stocks. A decline in Amazon.com shares weighed on the consumer discretionary sector following news Thursday evening that the online retailer missed consensus second-quarter revenue expectations. It was the busiest week of the earnings season for major global markets, with 177 of the S&P 500 companies expected to report second-quarter results, according to Refinitiv.
While earnings reports drove large moves in individual stocks—including several technology and internet-related giants—investors appeared to keep a close eye on macroeconomic concerns.
Investors in global markets also absorbed several high-profile economic data points during the week, many of which indicated strong growth but surprised on the downside. The Commerce Department reported its advance estimate that gross domestic product (GDP) increased at an annualized rate of 6.5% in the second quarter, well shy of consensus estimates of around 8.5%. Nevertheless, it was the second-fastest pace of growth since 2003 and left the economy larger than its pre-pandemic peak.
|Index||Friday’s Close||Week’s Change||% Change YTD|
|S&P MidCap 400||2,703.66||30.92||17.21%|
Shares in Europe were little changed compared to other global markets. Optimism engendered by strong corporate earnings was offset by concerns about the spread of the delta variant of the coronavirus and volatility spurred by Chinese regulators cracking down on domestic technology and education companies. In local currency terms, the pan-European STOXX Europe 600 Index ended flat. Major indexes were mixed. Germany’s Xetra DAX Index fell 0.80%, France’s CAC 40 Index gained 0.67%, and Italy’s FTSE MIB Index rose 0.95%. The UK’s FTSE 100 Index ended was roughly flat.
Eurozone bond yields declined on concerns about the global and local spread of the coronavirus and doubts about reflation expectations and the wider economic recovery. Peripheral market yields generally followed core markets, falling after the European Central Bank (ECB) suggested inflation could temporarily overshoot its 2% target. UK gilt yields also tracked yields in other core markets.
The eurozone economy bounced back from recession in the second quarter, growing by a faster-than-expected 2% relative to the first three months of 2021. The year-over-year growth rate of 13.7% also topped prominent estimates. Output expanded in Germany, France, Italy, and Spain, although the uptick in Germany came in below forecast because of supply bottlenecks that hindered its manufacturing sector.
Euro area inflation accelerated to 2.2% in July from 1.9% in June, lifted by higher energy prices. However, excluding food and fuel prices, the inflation rate held steady at 0.9%.
Japan’s major stock benchmarks faced headwinds as COVID-19 cases in the country reached a record level and the government extended a state of emergency to combat the spread of the virus. The Nikkei 225 Index was down 0.96%, while the broader TOPIX Index lost 0.17%. Equity activity on the global market reopened Monday after a four-day weekend to mark the start of the Tokyo Olympics. The yield on the 10-year Japanese government bond ticked up to 0.020%, while the yen strengthened and finished the week at 109.6 against the U.S. dollar.
In a sign of the continuing impact of the coronavirus pandemic on the Japanese economy, the au Jibun Bank Flash Japan Manufacturing Purchasing Manufacturers’ Index (PMI) declined to 52.2 in July from 52.4 in June and showed a decrease in the ratio of new orders to inventories. The Services Flash PMI also declined, dropping from 48 to 46.4.
Mainland Chinese stocks slumped, one of the worst weeks for global markets, after a regulatory overhaul of the for-profit education sector unveiled July 24 proved to be much tougher than investors had expected, and fears of heightened government oversight spilled into Chinese technology, health care, and property stocks. The large-cap CSI 300 Index sank 5.5% in its worst weekly drop since February, according to Bloomberg. For July, the benchmark shed 7.9%, its biggest monthly drop since October 2018. In Hong Kong, the Hang Seng Index declined 1.4% for the week after the benchmark index shed more than 8.0% on Monday and Tuesday on record-high volumes.
Toward the end of the week, stock markets stabilized as regulatory concerns appeared to ease, albeit without a relief rally. The People’s Bank of China pumped RMB 30 billion into the country’s financial system on both Thursday and Friday via seven-day reverse repurchase agreements, Bloomberg reported. The central bank’s unusually large injection was viewed as a sign of Beijing’s unease with the extent of the downturn and desire to bolster investor confidence—a message amplified in state-run financial media, calling the sell-off overdone.
China’s stock market sell-off had a relatively mild impact on the domestic bond and other global markets currencies. The yield on the 10-year Chinese government bond shed eight basis points to close at 2.85%. The renminbi currency edged up 0.3% against the U.S. dollar to 6.46, a gain that analysts attributed more to dollar weakness than to the broader stock sell-off.
Other Key Global Markets
- Russia – Russian stocks, as measured by the Russian Trading System Index, returned about 1.9% in global markets. Late in the previous week, the Russian central bank raised its key interest rate from 5.50% to 6.50%. The move was widely expected, as the central bank has been raising rates since March due to increased inflation. Based on the acceleration of core CPI readings—a sign of broad-based inflationary pressures—and the global markets central bank’s observation that “steady growth in domestic demand” is exceeding “production expansion capacity in a wide range of sectors,” Botoucharov expects one last rate hike in the current tightening cycle. He believes that policymakers will raise the key interest rate to 7%, which is firmly above the central bank’s 5% to 6% neutral range. He also believes that this restrictive monetary stance will enable CPI readings to start easing by the end of the year.
- Peru – Pedro Castillo was inaugurated as Peru’s new president on Wednesday. In his inauguration speech, President Castillo mentioned that nationalizations and foreign exchange controls are off the table and that he would maintain economic order and predictability to promote private investments from other global markets. However, Castillo has also indicated that he wants to impose price controls over gasoline, medicine, and consumer loans; intervene in the mining sector by making the state a majority partner in projects in order to regain “sovereignty” over natural resources; and increase the influence and role of state-controlled public banks in the financial sector. In addition, critics observed that there was no sign of fiscal discipline in Castillo’s speech, as indicated by his promises of free and universal health care, a doubling of education spending, a path to free university and higher education, and universal pensions.
Data Sources: Thomson Reuters, Barrons (Dow Jones & Company), Bloomberg, The Economist Europe, Brazil Business Post, Edward Jones Financial Markets Report.