Weekly Markets ReviewGlobal Markets Weekly Review: Week 45, 2021

The week ended mixed for global markets backed by inflation concerns and the risks of default from Chinese real estate companies led by China Evergrande and Kaisa Holdings Limited.

The week ended mixed for global markets backed by inflation concerns and the risks of default from Chinese real estate companies led by China Evergrande and Kaisa Holdings Limited. On the front line for markets globally was the rising numbers of U.S inflation which data showed remained elevated – with core CPI above 2.0% — for nearly eight months now, since April of 2021, when the economy was reopening and vaccines were becoming more prevalent.

United States

U.S stocks led global markets in retreating from record highs, as investors confronted data showing the highest inflation in three decades. On Tuesday, the S&P 500 Index registered its first decline in nine sessions, ending its longest winning streak since 2017. Consumer discretionary shares led to the declines in the S&P 500 following a steep fall in Tesla after CEO Elon Musk announced plans to sell some of his shares. Energy shares were also especially weak as global oil prices backed away from recent peaks. The small materials sector performed best, seemingly helped by the recent passage of the Biden administration’s USD 1.2 trillion infrastructure bill in the House of Representatives. The week was also notable for the initial public offering of electric vehicle maker Rivian—the largest for a U.S. company since Facebook’s in 2012. Fixed income markets were closed on Thursday in observation of Veterans Day.

The major indexes which provide directions to major global markets fell sharply on Wednesday morning following news that the consumer price index (CPI) jumped 0.9% in October, well above consensus expectations of around 0.6%. The increase brought the year-over-year CPI increase to 6.2%, the highest since December 1990. A surge in energy prices deserved much of the blame, but core inflation, which excludes the volatile energy and food segments, rose 0.6%, also more than expected.2

The upside inflation surprise forced U.S. Treasury yields higher, with the benchmark 10-year U.S. Treasury note’s yield ending the week around 1.58%. (Bond prices and yields move in opposite directions.) Earlier in the week, the 10-year yield fell to 1.41% during intraday trading on headlines surrounding geopolitical tensions between the U.S. and China and news that President Joe Biden had interviewed Federal Reserve Governor Lael Brainard for the role of Fed chair. Governor Brainard is generally viewed by investors as a more dovish alternative to the current Fed chair, Jerome Powell, who was also interviewed by President Biden.

Index Friday’s Close Week’s Change % Change YTD
DJIA 36,100.31 -227.64 17.95%
S&P 500 4,682.85 -14.68 24.67%
Nasdaq Composite 15,860.96 -110.63 23.06%
S&P MidCap 400 2,902.19 -2.92 25.82%
Russell 2000 2,411.78 -25.31 22.12%
Europe.

Shares in Europe rose within range for global markets, as continuing ultra-loose monetary policy and optimism about economic growth helped allay inflation concerns. In local currency terms, the pan-European STOXX Europe 600 Index gained 0.68%. Germany’s Xetra DAX Index tacked on 0.25%, France’s CAC 40 Index climbed 0.72%, and the UK’s FTSE 100 Index advanced 0.60%. However, Italy’s FTSE MIB fell 0.23%.

TradingView Chart
UK’s FTSE 100 Index, one-year technical performance chart.

Core euro zone bond yields rose. While markets initially pared expectations for interest rate increases after dovish comments from the European Central Bank, higher-than-expected U.S. inflation caused a reversal, and yields ended higher. Peripheral eurozone and UK government bond yields broadly tracked core markets.

Eurozone industrial production fell in September, indicating a hit global supply chain, although the magnitude of the decline was less than expected due to the increased output of nondurable consumer goods. Output shrank 0.2% sequentially, for an annual increase of 5.2%. Economists polled by Reuters from across the globe had expected a monthly decline of 0.5%. In its fall report, the European Commission (EC) raised its 2021 economic growth forecast for the eurozone to 5.0% from 4.8%. However, it said that the economy now faced “mounting headwinds,” including supply chain disruption, rising energy costs, and an acceleration in the number of coronavirus cases. The EC estimated that the eurozone economy would grow 4.3% in 2022 and 2.4% in 2023, with inflation projected to come in at 2.4% in 2021, before slowing to 2.2% in 2022 and 1.4% in 2023.

UK economic growth slowed, in line with major global markets, to a 1.3% rate in the three months ended September 30, down from 5.5% in the second quarter and below the 1.5% forecast by the Bank of England. Shortages of goods, labour, and components and rising coronavirus cases weighed on activity. However, the monthly rate of expansion in September was 0.6%—an improvement from 0.2% in August—due to increased health care activity, although data for previous months were revised lower.

Asia
  • China.

Chinese stock markets advanced amid speculation from global market investors and regulators that Beijing would announce easing measures to help indebted property companies as the spectre of defaults continued to loom over the sector. The large-cap CSI 300 Index rose 0.95%, and the Shanghai Composite Index added 1.4%.

The previous week, cash-strapped developer China Evergrande Group averted a last-minute default for the third time in the past month. Meanwhile, Kaisa Group, which has the most offshore bonds of any Chinese developer after Evergrande, approached default as the company reportedly informed creditors that it “may not be able to pay the coupons” on its bonds because of legal and cross-default issues domestically and offshore. Kaisa was the first Chinese builder to default on its dollar bonds in 2015, a landmark event at that time.

In the global markets economic readings, China’s producer price index (PPI) accelerated to a greater-than-forecast 13.5% in October over a year ago, a 26-year high, from September’s 10.7% rise. However, stagflation fears remain muted as analysts point to China’s ability to export inflation amid strong external demand. New bank lending fell sharply in October from the previous month, indicating that tight loan supply could pose a headwind to growth.

TradingView Chart
China’s Shenzhen Component, one-year technical performance chart.

Yields on China’s 10-year government bonds rose four basis points to 2.946% from the prior week as the PPI surge raised inflation worries. The renminbi inched up 0.1% to 6.3961 against the U.S. dollar. The renminbi is Asia’s best-performing currency this year, driven by a strong balance of payments, inflows into China’s bond market, and supportive central bank moves that have protected the downside.

An increase in China’s foreign currency reserves—the world’s largest—has also supported the renminbi. China’s foreign reserves rose to USD 3.218 trillion at the end of October, the foreign exchange regulator reported the first monthly rise since July. The growth came as overseas investors increased their holdings of Chinese government bonds (CGBs) to a new high in October. Foreign investors held CGBs totalling RMB 2.3 trillion (USD 359.49 billion) at the end of October, according to China Central Depository & Clearing Co.

  • Japan

The corporate earnings season mostly confirmed positive effects from yen weakness. Against this backdrop compared to other global markets, the Nikkei 225 and the broader TOPIX indexes generated flat returns. The yen weakened to around JPY 114.05 against the U.S. dollar, from about JPY 113.41 the prior week, due to continued expectations that the Bank of Japan (BoJ) will maintain low-interest rates for longer than other developed markets central banks. The yield on the 10-year Japanese government bond was broadly unchanged at 0.07%.

TradingView Chart
The TOPIX 500 index, one-year technical performance chart.

The BoJ’s latest report on the Corporate Goods Price Index, which measures the price development of goods traded in the corporate sector, showed that producer prices surged 8.0% year on year in October. This marked the fastest pace of increase in around four decades and was attributable to both rising commodity prices and supply chain bottlenecks.

Many companies in the global markets space have, to date, refrained from passing on increased costs to consumers, which has meant there has been limited upward pressure on consumer prices. The BoJ recently slashed its forecast for the CPI to 0% in the fiscal year 2021. The central bank for the global market has reiterated its commitment to ultra-loose monetary policy until it reaches its 2% inflation target, a stance that diverges from other developed market central banks, which are signalling a shift toward monetary tightening.

Other Key Global Markets.
  • Mexico – Mexican stocks, as measured by the IPC Index, returned about -0.9% compared to other global markets. On Thursday, the Mexican central bank decided to raise its key interest rate by 25 basis points, from 4.75% to 5.00%. The decision was not unanimous: Four Governing Board members voted for the increase, but one policymaker preferred no change. The size of the rate increase was generally expected, though some anticipated a 50-basis-point rate increase, especially following this week’s release of October inflation data that showed both headline and core inflation once again surprising to the upside and reaching multiyear highs.
  • Chile – Chilean stocks, as measured by the S&P IPSA Index, returned about 2.2% in line with most global markets. Early in the week, lawmakers in the Senate cast their votes on the latest pension withdrawal legislation, the fourth since the pandemic started. The bill, however, was just one vote shy of the three-fifths majority needed for approval. However, the bill isn’t dead; it will now move to a mixed 10-member committee—composed of five representatives from each of the two chambers of Congress—that will attempt to make changes and return the bill to each chamber for a final vote.

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