Global Markets touched new highs again last week, with the latest jobs report reflecting the broadly favourable fundamental backdrop. We think the music will play on for this bull market, but the experiences of 1994 and 2010 highlight the potential for the record to skip. Given the parallels, here are a few lessons for investors to consider:
United States
Stocks recorded gains for the week, helping the large-cap benchmarks and the technology-heavy Nasdaq Composite Index to new highs. A sharp rise in longer-term interest rates following Friday’s strong monthly payrolls report augured well for banks’ lending margins and boosted financial shares, and the small utility sector also outperformed. Energy shares lagged within the S&P 500 Index.
Some positive earnings surprises appeared to help the market regain its footing over the next few days, however. Analysts polled by FactSet are currently expecting second-quarter earnings for the S&P 500 to have increased by over 85% versus the year before and, unusually, revenues to have grown by nearly as much.
The Labor Department’s closely watched monthly payrolls report from various global markets seemed to provide stocks with another leg up on Friday—although what it suggested for interest weighed on the growth-focused Nasdaq Composite Index. Employers added 943,000 jobs in June, well above consensus estimates and the best showing since strict lockdowns were eased in the summer of 2020. Other details in the report were also encouraging: April and May gains were revised significantly higher; the labour participation rate and average weekly hours ticked up; average hourly earnings rose more than forecast (4.0% versus 3.8%); and the unemployment rate fell much more than expected to 5.4%, a new pandemic-era low. Investors’ reaction may have been particularly enthusiastic given the disappointment Wednesday over the payroll processing firm ADP’s tally of private-sector job gains, which came in considerably below expectations.
The rest of the week’s heavy global markets economic calendar was arguably also encouraging on balance. The Institute for Supply Management’s (ISM’s) index of July factory activity missed expectations but still showed healthy growth (59.5, with levels over 50 indicating expansion), while the increase in June factory orders surprised on the upside (1.5% versus around 1.0%) off an upwardly revised base in May. The week’s biggest surprise may have been the ISM’s service sector index, which jumped to 64.1, well above expectations of 60.5.
Overnight activity from Asia and secondary trading volumes were relatively muted, but the primary market was active, and the level of new issuance surpassed weekly expectations. High yield investors appeared mostly focused on the firm tone of corporate earnings reports, which seemed to mostly outweigh concerns about the coronavirus and regulatory developments in China.
| Index | Friday’s Close | Week’s Change | % Change YTD |
| DJIA | 35,208.51 | 273.04 | 15.04% |
| S&P 500 | 4,436.52 | 41.26 | 18.12% |
| Nasdaq Composite | 14,835.76 | 163.08 | 15.11% |
| S&P MidCap 400 | 2,717.36 | 13.70 | 17.81% |
| Russell 2000 | 2,247.76 | 21.51 | 13.82% |
Europe
Shares in Europe rose on strong growth in corporate earnings and optimism about an economic recovery. In local-currency terms, the pan-European STOXX Europe 600 Index ended 1.78% higher. Major stock indexes across the various global markets also gained ground: France’s CAC 40 Index advanced 3.09%, Italy’s FTSE MIB Index climbed 2.51%; and Germany’s Xetra DAX Index added 1.45%. The UK’s FTSE 100 Index gained 1.29%.
Core eurozone bond yields trended lower, as an increase in coronavirus cases fueled doubts about the wider economic recovery. Peripheral eurozone bond yields largely tracked core markets. UK gilt, a benchmark for global market yields also fell, broadly following core markets. However, this pullback in yields moderated later in the week due to hawkish messaging from the Bank of England (BoE).
The BoE said that “some modest tightening of monetary policy over the forecast period is likely to be necessary” should the economy evolve broadly in line with the bank’s central projections. The BoE, which left its monetary policy and quantitative easing program unchanged at its latest meeting, now expects interest rates to rise from 0.1% to 0.2% in 2022 and to 0.5% in August 2024. The central bank updated its forecast for inflation, which is likely to peak at 4% either late in 2021 or in early 2022. The outlook still calls for the economy to grow 7.25% this year, but the BoE increased its forecast for 2022 gross domestic product to 6% from 5.75%.
Asia
Japan’s stock markets made gains over the week, with the Nikkei 225 rising 1.97% and the broader TOPIX Index up 1.49%, buoyed by upbeat earnings reports across global markets. However, gains were dented by a worsening in the country’s coronavirus situation, as daily cases in Tokyo topped 5,000 for the first time, with an advisory panel of experts warning that the situation could deteriorate further. Nationwide cases also reached a record high. These developments prompted the government to expand its quasi-state of emergency to eight more prefectures, where the highly contagious delta variant is spreading rapidly. Against this backdrop, the yen was broadly unchanged, finishing the week at JPY109.7 against the U.S. dollar, while the yield on the 10-year Japanese government bond fell slightly to 0.01%.
In an update to its World Economic Outlook forecasts, the International Monetary Fund (IMF) downgraded Japan’s 2021 growth prospects, reflecting tighter coronavirus restrictions in the first half of the year as cases picked up. Japan was the only G7 industrialized nation to face a downgrade. The intergovernmental organization now projects that the country’s economy will grow by 2.8% year-on-year in 2021, down from the 3.3% growth it projected in April. However, the IMF anticipates Japan’s growth will rebound over the second half of the year, as vaccinations continue and the economy fully reopens. It upgraded 2022 growth to 3.0% year-on-year, from 2.5%.
Household spending on the global market unexpectedly fell 5.1% year-on-year in June. Domestic demand remained weak due to state of emergency curbs, while cuts to employees’ summer bonuses also hit consumption. This weakness casts doubt on the Bank of Japan’s forecast that the benefits of an export-driven recovery will spread to households.
Chinese stocks rose as the previous week’s steep declines attracted some buyers. For the week, the Shanghai Composite Index added 1.8% and the large-cap CSI 300 Index ended up 2.3%.
In China’s bond markets, yields stabilized after falling the previous week. The yield on the 10-year government bond declined two basis points to end the week at 2.83%. Foreign investors increased their holdings of Chinese government and policy bank bonds in July, though the pace of inflows has slowed since January.
Overseas investors bought USD 7.7 billion of central government bonds last month, taking their ownership share to 10.6%, according to China Central Depository Clearing (CCDC). The renminbi currency was stable against the U.S. dollar and ended at 6.468 against the dollar in Shanghai on Friday afternoon.
In economic news, China’s official PMI readings for July pointed to slower economic momentum in the country’s manufacturing and services sectors. Analysts attributed this in part to the resurgence of COVID-19 cases in China and overseas, which has dampened business confidence. Additionally, stricter policies regarding residential real estate appeared to dampen momentum in the construction industry.
Other Key Global Markets
- Peru – July was a challenging month for Peruvian assets—stocks fell more than 9%, according to MSCI—but global market investors appeared encouraged at the start of the week by news that Pedro Francke had been sworn in as finance minister in President Castillo’s administration. Francke’s candidacy for the position was in question after he left Castillo’s July 28 inauguration early following the selection of Guido Bellido as prime minister and a cabinet filled with other far-left candidates. Bellido is a member of the Peru Libre party and has close ties to party leader Vladimir Cerron, both of whom are under criminal investigation.
- Turkey – Turkish stocks, as measured by the BIST-100 Index, returned about 3.0% compared to other global markets. July was a solid month for Turkish assets. Stocks rose 6.64% in U.S. dollar terms, helped by a 3% appreciation of the Turkish lira versus the dollar. The lira has been relatively steady in the foreign exchange market in recent months, supported by a better balance-of-payments outlook and the central bank’s extended tight monetary policy stance. Toward the end of the month, the central bank increased its year-end consumer price index (CPI) inflation forecast from 12.2% to 14.1% year over year.
