Global markets were mixed this week as various economic development from various markets across the markets, in the news was the fear over the possible collapse of Chinese real estate firm, Evergrande.
The small-cap Russell 2000 Index managed a small gain, but most of the major equity indexes ended the week modestly lower, as investors weighed some encouraging economic data against worries about supply chain challenges, elevated valuations, and concerns over how stocks would respond to an eventual tightening in monetary policy. Energy shares within the S&P 500 Index recorded solid gains on the back of rising oil prices, while strength in auto-related shares boosted consumer discretionary stocks.
Global market investors pondered a few significant data surprises during the week. On Tuesday, the Labor Department reported that core (less food and energy) consumer prices increased 0.1% in August, below consensus expectations for a 0.3% increase and the smallest gain since February. Declines in global airfares and used car prices drove much of the shortfall. On Thursday, the Commerce Department reported that August retail sales outside the volatile auto sector jumped 1.8%, defying consensus expectations for a small decline. A gauge of factory activity in the New York region, reported Wednesday, also came in well above expectations.
Tuesday’s mild inflation data appeared to drive a rally in the bond market, helping push the yield on the benchmark 10-year U.S. Treasury note to its lowest intraday level since August 23, but the major equity benchmarks moved lower.
|Index||Friday’s Close||Week’s Change||% Change YTD|
|S&P MidCap 400||2,678.03||-8.50||16.10%|
Shares in Europe weakened as concerns about the impact of the coronavirus’s delta variant on the global economy outweighed expectations of continuing central bank support. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.97% lower. Major indexes were mixed. Italy’s FTSE MIB Index ended modestly higher, but Germany’s Xetra DAX Index slipped 0.77%, and France’s CAC 40 Index lost 1.40%. The UK’s FTSE 100 Index slid 0.93%.
Core eurozone bond yields rose in sympathy with other global market treasuries, with a Financial Times report saying that the European Central Bank (ECB) expects to meet its 2% inflation target by 2025 and is on course to raise interest rates in about two years—significantly ahead of consensus expectations. Peripheral eurozone bonds tracked core yields. UK gilt yields advanced after data indicated that inflation surged in August, sparking concerns that this development might prompt the Bank of England (BoE) to increase interest rates sooner than expected.
ECB Chief Economist Philip Lane told German economists at a private meeting that the central bank expects to hit its 2% inflation target by 2025, the Financial Times reported. This view and the ECB’s new global policy framework suggest that conditions for raising interest rates could be met by 2023, the newspaper said. An ECB spokesperson said that the report was inaccurate. Separately, at an online event, Lane said that he was confident of reaching the inflation target. “If you are persistent with a high level of monetary stimulus, you can get there,” he said. “We think the current set of [monetary policy] instruments is working.”
Meanwhile, UK company payrolls rose by a record 241,000 in August, while the unemployment rate fell to 4.6% in the three months ended July 31. Retail sales for the global market unexpectedly fell for a fourth month in August, contracting 0.9% versus July. Economists had forecast growth of 0.5%.
In China, stocks fell sharply for the week. Weak August economic data, a fresh coronavirus outbreak in Fujian province, the growing debt crisis at embattled property developer China Evergrande Group, and the threat of tighter gaming regulations in Macau dampened investor sentiments for the global market. The CSI 300 index of large-cap stocks fell 3.1%, and the Shanghai Composite Index retreated 2.4%, according to Reuters. Next week, China’s stock markets are closed Monday and Tuesday for the Mid-Autumn Festival and will reopen on Wednesday, September 22.
In the global corporate news watch, worsening debt problems at Evergrande, China’s third-largest developer, dominated headlines as concerns grew about a potential debt restructuring of the company, whose debt load exceeds USD 300 billion. During the week, China’s Ministry of Housing and Urban-Rural Development told banks that Evergrande wouldn’t be able to make its interest payments due on September 20, Bloomberg reported, citing unnamed sources.
Japan’s stock markets rose over the week, with the Nikkei 225 Index up 0.39% and the broader TOPIX Index returning 0.41%. Campaigning began in the race to become the next president of the ruling Liberal Democratic Party (LDP) and thereby succeed Yoshihide Suga as prime minister. On the global pandemic front, the country’s top coronavirus adviser, Shigeru Omi, said that the peak of the fifth COVID-19 wave has largely passed.
He warned, however, that a close eye must still be kept on the country’s overburdened medical system. The government is aiming to ease the scope of coronavirus restrictions in November, once most of the population has been vaccinated. Against the backdrop of the global market, the yield on the 10-year Japanese government bond ticked up to 0.05%, while the yen hovered around JPY 109.9 against the U.S. dollar, little changed from the prior week.
Separate data showed that Japan’s exports rose 26.2% year on year in August, less than expected and following a 37.0% gain in the previous month. The spread of the highly contagious delta variant of the coronavirus in Asia and supply chain blockages impeding auto-shipments both constrained export growth. While shipments of cars fell, exports of iron and steel, chipmaking equipment, and auto parts led gains over the month.
Other Key Global Markets.
- Chile – Chilean stocks, as measured by the S&P IPSA Index, were little changed through global markets at the close of business on Thursday. The stock market was closed for a holiday on Friday. During the week, the central bank published the minutes to its August 31 monetary policy meeting, at which policymakers unanimously hiked the key interest rate by 75 basis points. The rate increase was larger than many expected. However, they ultimately saw that this decision was “totally consistent” with the new scenario, which featured more fiscal stimulus and another piece of pension withdrawal legislation despite the already rapid recovery. Furthermore, they saw that it was “necessary to implement a rapid adjustment of the monetary impulse that would bring the policy rate close to its neutral value by the middle of the first half of 2022.” In the most recent quarterly inflation report, policymakers considered 3.5% to be the neutral rate—neither stimulative nor restrictive.
- Peru – The Peruvian central bank has been in the news recently. Late in the previous week, monetary policy officials held their regularly scheduled meetings and raised the key interest rate by 50 basis points, from 0.50% to 1.00% for the global market, which was in line with expectations. Earlier in the week, newly elected President Pedro Castillo reportedly met for 90 minutes with current central bank governor Julio Velarde. There are reports that Velarde has agreed to stay in his position, though no official announcements have been made. In addition to the governor, who is appointed by the president but ratified by Congress, there are six other central bank board members: Three are designated by the president, and three are nominated by the unicameral legislature.