Global markets were mixed but mostly lower as inflation concerns hit various central banks after the hits of the Evergrande crisis which has rocked China and looked to be throwing the global real estate sector in awe.
A Friday rally on global markets moderated the losses, but the large-cap benchmarks and Nasdaq Composite index recorded their biggest weekly drops since February and rounded out the worst monthly declines since the onset of the pandemic, seemingly weighed down by inflation and interest rate fears. The S&P MidCap 400 and small-cap Russell 2000 indexes ended with only modest losses. Declines within the S&P 500 were broad-based, with only energy shares notching a gain. Growth stocks fared worse than value shares, which was mirrored in the underperformance of the technology-heavy Nasdaq Composite Index.
Rising Treasury yields across global markets seemed to overhang sentiment throughout the week, with many investors appearing to view the Federal Reserve’s policy statement the previous week in an increasingly hawkish light. Following the meeting, policymakers announced a slight increase in their short-term interest rate expectations, as well as plans to consider tapering their monthly asset purchases.
The fiscal policy environment across global markets also appeared unsettling. The possibility that the federal government would experience another partial shutdown was averted late in the week when the Senate and the House of Representatives passed, and President Joe Biden signed, a short-term spending bill. No progress was made in raising the federal debt limit, however, and Treasury Secretary Janet Yellen warned again that the limit needed to be suspended or raised by October 18 in order for the Treasury to meet its obligations.
Meanwhile, the outlook for the bipartisan, USD 1 trillion infrastructure bill also remained clouded. Democratic leaders abandoned plans for a vote on the bill on Thursday evening, following demands from progressives in the party to link its passage to a separate bill focusing on health care, education, climate measures, and other social policy priorities.
High yield issuers on global markets initially remained active despite the macro backdrop, according to our traders, but the volume of new deals subsided as the week progressed. Negative headlines about energy prices, Chinese property developer Evergrande, and gridlock in Washington weighed on investor sentiment.
Shares in Europe fell sharply like other global markets amid fears that the economy might be sliding into a period of low growth and high inflation. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.24% lower. Germany’s Xetra DAX Index tumbled 2.42%, France’s CAC 40 Index dropped 1.82%, Italy’s FTSE MIB Index lost 1.36%, and the UK’s FTSE 100 Index gave up 1.36%.
Core euro zone bond yields rose amid a sell-off in global developed market bonds and as hawkish Federal Reserve comments raised expectations of imminent U.S. monetary policy tightening. German inflation also reached a 29-year high, like other global markets of 4.1%, which contributed to the uptick in core bond yields. Peripheral and UK government bonds largely tracked core markets.
On a year-over-year basis, eurozone consumer prices jumped 3.4% in August—up from 3% a month earlier and the highest level since September 2008. A consensus estimate had called for a 3.3% increase in consumer prices. Higher energy costs were a big part of this upsurge. Core inflation, a metric that excludes volatile food and energy prices, accelerated to 1.9% from 1.6%. The price of durable goods rose on supply chain and production disruptions.
European Central Bank (ECB) President Christine Lagarde acknowledged in testimony to the European Parliament that inflation in the eurozone could exceed the central bank’s forecasts, which have already been raised twice this year. “While inflation could prove weaker than foreseen if economic activity were to be affected by a renewed tightening of restrictions, there are some factors that could lead to stronger price pressures than are currently expected,” she said. However, the ECB president stuck to the official forecast that an increase in inflation would be temporary.
The left-of-centre Social Democratic Party (SPD), led by Olaf Scholz, won the German general election by only a small margin. The SPD and the center-right alliance of the Christian Democratic Union and Christian Social Union (CDU/CSU), in power for 16 years, are now expected to vie for the support of the Green Party and liberal Free Democrats to form a majority coalition government—likely a lengthy process. Angela Merkel will stay on as a caretaker chancellor.
Chinese stocks ended a holiday-shortened week on a mixed note. The CSI 300 Index of large-cap stocks edged slightly higher, while the Shanghai Composite Index declined from the previous Friday’s close. China’s markets were closed Friday for the weeklong National Day holiday starting on October 1. In the bond market, yields on Chinese government bonds were broadly unchanged from the prior week. China’s currency, the renminbi (RMB), strengthened against the U.S. dollar 0.3% to 6.447 per dollar.
Positive news concerning indebted property developer China Evergrande Group supported global investor sentiment. On Wednesday, Evergrande said that one of its units would sell roughly 20% of its stake in Shengjing Bank Co. to a state-owned enterprise for USD 1.5 billion to help reduce its debt load. News of the asset sale came as Beijing is prodding government-owned companies and state-backed property developers to buy some of Evergrande’s assets, Reuters reported.
Separately, the People’s Bank of China (PBOC) pledged to ensure a “healthy property market” and to protect homebuyers’ rights in a statement following the central bank’s quarterly monetary policy committee meeting. The PBOC has injd stresses in the short term. Some analysts also think that a cut in China’s reserve requirement ratio appears more likely if the economy continues to slow toward year-end.
Japanese stocks followed the lead of other global markets and declined during the week. The Nikkei 225 Index lost 4.89%, with losses concentrated on Wednesday and Friday, but remained in positive territory for the year-to-date period. The broader TOPIX index also lost about 5% for the week. The Japanese yen weakened versus a strong U.S. dollar through Thursday but recovered somewhat on Friday; the yen traded around 111.20 against the greenback at the end of the week. Meanwhile, the yield of the 10-year Japanese government bond climbed slightly midweek before ending nearly unchanged at 0.055%.
Former foreign minister Fumio Kishida won the Liberal Democratic Party’s (LDP) presidential election by beating Taro Kono in the leadership runoff. The victory gives Kishida a nearly certain path to succeed Yoshihide Suga as Japan’s prime minister as the LDP-led coalition has a majority in Parliament.
BoJ Governor Haruhiko Kuroda said a new prime minister will not cause the global central bank to change its policies. Kuroda’s comments at an ECB conference came just a few days after the BoJ’s latest policy meeting, in which it announced it was continuing its asset purchase program at current levels while keeping interest rates very low.
Other Key Global Markets.
- Chile – Chilean stocks, as measured by the S&P IPSA Index, returned about -1.4% in line with other global markets. The market was hurt in part by rising longer-term U.S. interest rates, a stronger U.S. dollar versus the peso, and bearish global sentiment toward risk assets. Chilean assets were also hurt by growing expectations that a new bill allowing for pension system withdrawals—the fourth such legislation since the beginning of the pandemic—could soon become law.
- Peru – Peruvian assets were hurt by risk aversion among global investors. Meanwhile, despite indications that Julio Velarde—the head of the central bank and one of Peru’s top economists—will remain at the helm, no official pronouncements have been made yet. According to different sources, it seems that he has asked for guarantees from the president that include the nomination of board members that he would work well with even if they clash with the ideology of some of Castillo’s more radical allies.