Global Markets Weekly Review: Week 43, 2021

While history often points to October as a volatile month for global markets, this year we saw the opposite in equity markets. After a 5.2% correction in September, markets were up nicely in October, with the S&P 500 returning an impressive 6.6% for the month and up over 1.0% last week1. This was driven by both growth and value sectors, even as the 10-year Treasury yield

The United States.

Most of the major indexes recorded gains and reached new highs. The week was the busiest for global markets as the third-quarter earnings reporting season, with several techs and internet-related giants announcing results, helping to keep trading volumes elevated. Consumer discretionary shares fared best within the S&P 500 Index, boosted by a jump in Tesla shares—bringing the firm’s market capitalization above USD 1 trillion—following news that rental firm Hertz Global agreed to buy 100,000 of its electric vehicles. Energy shares underperformed as oil prices fell back from multi-year highs. Supply chain problems appeared to remain at the forefront globally, with both Amazon.com and Apple (capitalized at roughly USD 1.7 trillion and USD 2.5 trillion, respectively) falling back and dragging the indexes lower on Friday morning after reporting lower growth forecasts because of labour and input shortages.

Stocks across U.S markets regained their footing on Thursday, despite some mixed economic data. The Commerce Department revealed its advance estimate that the economy expanded at an annualized rate of 2.0% in the third quarter, in line with global market figures, a sharp slowdown from the previous quarter’s 6.7% pace and below consensus estimates of roughly 2.7%. A decline in auto sales globally and a slowdown in spending on food services and accommodations—seemingly due to the delta variant of the coronavirus—were largely to blame. Pending home sales also fell unexpectedly. On the bright side, weekly jobless claims fell modestly more than consensus to a new pandemic-era low of 281,000.

Global investors may have been reassured that the flipside of slowing growth appeared to be moderating inflation pressures. The Fed’s preferred inflation gauge, the core (excluding food and energy) personal consumption expenditures index, rose 3.6% over the annual period, slightly below consensus and unchanged from the prior month’s pace. Surveys showed an increase in short-term consumer inflation expectations, however.

Europe.

The pan-European STOXX Europe 600 Index gained 0.77% in local currency terms, supported by solid corporate earnings that may have helped to offset concerns about inflation and the potential for central banks to rein in some of their accommodative policies. Germany’s Xetra DAX Index advanced 0.94%, France’s CAC 40 Index added 1.44%, and Italy’s FTSE MIB Index rallied 1.14%. The UK’s FTSE 100 Index tacked on 0.46%.

Germany’s 10-year bund yield ground lower early on, initially in sympathy with U.S. Treasury yields, before falling further midweek amid growth worries and concerns that central banks could commit a policy error by tightening too early. But core eurozone yields rebounded after European Central Bank (ECB) President Christine Lagarde did little to push back against global markets pricing two rate hikes next year, contrary to expectations. Peripheral eurozone bond yields largely tracked core markets. UK gilt yields fell, as the Debt Management Office reduced the amount of gilt issuance for the rest of the fiscal year by a much larger-than-expected amount.

The European Union’s statistical arm issued a preliminary estimate, indicating that the eurozone economy grew 2.2% sequentially in the third quarter—an uptick from the 2.1% expansion recorded in the second quarter and above the 2.0% consensus estimate reported by FactSet. Among the major economies in the euro area, France and Italy posted stronger-than-expected growth in gross domestic product (GDP).

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The ECB maintained its existing policies and indicated that it would continue buying assets under the auspices of its Pandemic Emergency Purchase Programme (PEPP) at the somewhat moderated rate announced in September. ECB President Lagarde acknowledged that inflation could “take longer to decline than initially expected” but reiterated the view that the rate of consumer price increases should slow to less than 2% by 2023.

Asia

• China.

China’s stock markets retreated, unlike other global markets, amid continued concerns about the strength of the property sector. For the week, the large-cap CSI 300 Index benchmark and the Shanghai Composite Index each lost around 1%. The property sector, which accounts for about one-third of China’s overall economy, has stirred investor anxiety in recent weeks following defaults, credit rating downgrades and, most recently, a proposed tax plan as authorities seek to reduce leverage among leading developers.

Meanwhile, debt-laden China Evergrande paid a delayed coupon within the grace period on Friday, averting what would have been the world’s second-largest emerging market corporate debt default. Evergrande, which is shouldering more than USD 300 billion in liabilities, missed coupon payments totalling nearly USD 280 million on its dollar bonds on September 23, September 29, and October 11, kicking off 30-day grace periods for each. The company has nearly USD 338 million in other offshore coupon payments coming due in November and December.

Yields on China’s 10-year government bonds eased two basis points to 2.986% and the yuan retreated after dollar purchases by state-run banks on Friday pushed the currency to a nearly two-week low. For the week, the yuan lost 0.2% against the U.S. dollar. However, it made the biggest monthly gain since May on expectations of increased foreign demand for Chinese sovereign debt following the inclusion of Chinese bonds in the FTSE Russell’s flagship World Government Bond Index effective Friday.

• Japan.

Ahead of the October 31 general election, Japan’s stock market returns were mixed for the week: The Nikkei 225 rose 0.30% while the broader TOPIX index fell 0.05%. The ruling Liberal Democratic Party, under newly chosen leader Fumio Kishida, is widely expected to stay in power as a result of the election but lose seats in the powerful lower house of parliament. The domestic earnings season had some positive effects on market sentiment.

As the Bank of Japan (BoJ) maintained its dovish stance in line with other global bankers, the yield on the 10-year Japanese government bond dipped initially but finished the week broadly unchanged at about 0.1%. The yen also finished at similar levels to the prior week, at around JPY 113.5 against the U.S. dollar. The yen’s recent weakness stems in part from anticipated policy divergence, with the BoJ expected to remain in easing mode for longer while other major central banks are set to move toward tighter policy.

As widely expected and in line with other global markets, the BoJ kept interest rates and its asset purchase program unchanged at its October monetary policy meeting. While other major central banks have begun to unwind their easing policies—or have indicated that they are ready to do so—the BoJ does not look set to pursue a path toward the normalization of policy anytime soon, given price momentum in Japan is much weaker than in other countries.

Other Key Global Markets.

• Chile – Chilean stocks, as measured by the S&P IPSA Index, were flat for the week compared to other global markets. On Thursday, the Chilean central bank published the minutes from its October 13 policy meeting, at which policymakers unanimously decided to raise the key interest rate from 1.50% to 2.75%.
• Brazil – Stocks in Brazil, as measured by the Bovespa Index, returned about -2.5% in line with other global markets. Brazilian assets remained under pressure this week amid rumours and threats that the government could declare a public calamity for 2022 that would suspend the mandatory spending cap and result in less fiscal discipline.