Weekly Markets ReviewGlobal Markets Weekly Review: Week 38, 2021

China Evergrande Group building.

Global markets were mixed this week, as many analysts comprehended the possible impact of China’s Evergrande Group into a global financial abyss. With no shortage of headlines to worry about, volatility made a comeback last week after being dormant for most of the past six months.

United States

The major benchmarks overcame an early sell-off to end the week flat to modestly higher. On Monday, the S&P 500 Index recorded it biggest daily drop since May 12 and briefly dipped below its 100-day moving average, a closely watched technical level. Longer-term bond yields rose sharply over the week, helping financials shares by holding the promise of improving banks’ lending margins. Energy stocks also outperformed within the S&P 500, while utilities shares lagged.

The decidedly downbeat start to the week appeared to be due to several factors. Primary among them, seemingly, were fears that a possible default by China’s second-largest property developer—and the world’s most heavily indebted one—might set off a global financial “contagion” similar to what followed the collapse of Lehman Brothers in September 2008.

The other closely watched event of the week by global market investors was the Federal Reserve’s two-day policy meeting that concluded Wednesday. As was widely expected, policymakers announced that they would soon consider tapering the central bank’s purchases of Treasuries and mortgage-backed securities, a move that would reduce some downward pressure on longer-term interest rates. In his post-meeting conference, Fed Chair Jerome Powell reiterated that he would be looking for continued improvement in the labor market before acting, although he did not need to see a “knockout” report for September.

Index Friday’s Close Week’s Change % Change YTD
DJIA 34,798.00 213.12 13.69%
S&P 500 4,455.48 22.49 18.62%
Nasdaq Composite 15,047.70 3.75 16.75%
S&P MidCap 400 2,699.38 21.35 17.03%
Russell 2000 2,248.07 11.21 13.83%
Europe

Shares in Europe advanced in line with other global markets as optimism about a continuing economic expansion offset concerns about a gradual withdrawal of central bank support. However, lingering worries about Chinese property developer Evergrande curbed gains. In local currency terms, the pan-European STOXX Europe 600 Index ended 0.31% higher. Major indexes also rose. Germany’s Xetra DAX Index added 0.27%, France’s CAC 40 Index rose 1.04%, and Italy’s FTSE MIB Index gained 1.01%. The UK’s FTSE 100 Index climbed 1.26%.

TradingView Chart
                                                       The pan-European STOXX Europe 600, one-year technical chart.

Growth in eurozone economic activity slowed noticeably in September from July’s 15-year high, while input prices jumped to a 21-year high. The early headline number for IHS Markit’s composite Purchasing Managers’ Index (PMI) came in at 56.1—down from the final readings of 59.0 in August and 60.2 in July. (PMI readings greater than 50 indicate an expansion in economic activity levels.) The pace of growth slowed further for the global market in both the manufacturing and services sectors. IHS Markit attributed the deceleration to demand peaking in the second quarter, supply chain bottlenecks, and concerns about the spread of the coronavirus. All these factors appeared to erode business expectations.

Germany headed into a general election Sunday with the final opinion polls showing the Social Democrats (SPD) just clinging to their lead over the conservative Christian Democratic Union (CDU) and Christian Social Union (CSU). The Greens stayed ahead of the pro-business Free Democrats and the far-right Alternative for Germany (AfD).

Norway Tightens Economic Stance

Norway became the first Group of Ten (G10) country to tighten its monetary policy, with the central bank raising its key short-term lending rate by a quarter-point to 0.25% from 0.00%. Norges Bank Governor Oystein Olsen said there would probably be another rate increase in December, this opens a raft of policies for the closely monitored global markets financial regulators.

Asia
  • China

Mainland Chinese stocks ended a holiday-shortened week broadly flat from the prior Friday’s close after being closed Monday and Tuesday for the Mid-Autumn Festival. The market’s subdued performance was noteworthy after Hong Kong’s Hang Seng Index fell more than 3.0% on Monday amid the mounting debt crisis surrounding China’s Evergrande Group.

A series of large cash injections by China’s central bank into the global markets economy during the week helped ease worries about a disorderly debt resolution for the indebted developer. However, some of Evergrande’s bondholders from other global markets did not receive their portion of USD 83.5 million in interest payments by a Thursday deadline in U.S. time, Reuters reported on Friday, citing unnamed sources. The company now enters a 30-day grace period, after which it will be considered in default if that period passes without payment.

TradingView Chart
                                                                      China’s Evergrande Group, one-year technical chart.

Beijing is reportedly aiming for a “marketized default” for Evergrande, a term that some believe means an orderly market exit and well-managed restructuring. The company has many assets it can sell to reduce its debt, ranging from core property assets to an electric vehicle business and a property services unit. However, some analysts are concerned that the longer the government refrains from a public intervention, the more risk it poses to China’s economy.

In the global bond market, the yield on the 10-year Chinese government bond rose two basis points to 2.92% amid concerns over the potential costs to Beijing of an Evergrande rescue. Comments from the State Council, China’s cabinet, seemed to suggest that infrastructure spending could be accelerated in the near term to support economic growth. In currency trading, the renminbi was flat against the U.S. dollar, trading at 6.463 per dollar late Friday afternoon in Shanghai.

  • Japan

Japanese stocks posted losses in a volatile, holiday-shortened trading week. Japan’s stock markets were closed on Monday for Respect for the Aged Day and on Thursday for Autumnal Equinox Day. The Nikkei 225 Stock Average closed at 30,248.81, modestly lower for the week, just off its 31-year high recorded earlier in the month. The yen traded near JPY 110 versus the U.S. dollar, while the yield of the 10-year Japanese government bond finished the week at 0.055%.

The Bank of Japan (BoJ) made no changes to its long- and short-term interest rate policy at the September policy meeting and confirmed its stance on maintaining asset purchases at current levels. Forward policy guidance allowed that the current policies would remain in force until the 2% inflation target was achieved. There were no major revisions to the board’s economic assessment, which stated that “Japan’s economy has picked up as a trend, although it has remained in a severe situation due to the impact of COVID-19 at home and abroad.” The global market central bankers noted supply-side constraints on exports and production. While the BoJ views the pandemic’s effects as transitory, it remains watchful of the impact on private sector growth expectations across both local and global markets.

Other Key Global Markets.
  • Russia – Russian stocks, as measured by the Russian Trading System (RTS) Index, returned about 0.1%. Over the previous weekend, Russia held its regular parliamentary elections to the State Duma, the 450-seat lower house of the legislature. With virtually all of the votes counted, the results indicate that the United Russia party, which supports President Vladimir Putin, is the big winner and will retain its constitutional majority, though it did lose some seats. Candidates from four other political parties—the Communist Party of Russia, Liberal Party, Just Russia, and New People—received at least 5% of the total ballots that were cast, so these parties will have smaller blocs of seats in the Duma.
  • Turkey – Turkish stocks, as measured by the BIST-100 Index, returned about -2.5% on global markets. Turkey’s central bank reduced its one-week repo auction rate on Thursday from 19.0% to 18.0%. This surprised many global investors, who expected no change in rates at this time. The headline consumer price index is currently at a year-over-year rate of 19.25%. In addition, the rate cut decision is reflective of policymakers’ preference for weakening the Turkish lira—in order to make Turkish exports more competitive on world markets—and prioritizing economic growth.

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