Weekly Markets ReviewGlobal Markets Weekly Review: Week 51, 2021

In light of the improving global economic outlook, the Reserve Bank of Australia (RBA) may be positioned to end its quantitative easing (QE) initiatives after its February policy meeting.

Global markets remained mixed for the week as investors awaited the annual santa rally, a period when markets experience higher price movements occasioned by the Pre-Christmas buys and sales on top global markets.

United States

Stocks rebounded from the previous week’s losses on signs that the new omicron variant of the coronavirus might not be disruptive as feared. Trading volumes were low ahead of the upcoming Christmas holiday, with markets scheduled to be closed on Friday. Consumer discretionary and energy stocks outperformed as economic prospects brightened, while the typically defensive utilities and consumer discretionary segments lagged.

Some hopeful news on both fronts helped global markets turn course beginning Tuesday, however. Moderna released preliminary data showing that its booster shot dramatically increased antibodies capable of targeting the omicron variant. Further evidence also emerged that omicron typically resulted in mild symptoms and may be restricted to the upper respiratory tract, while the initial wave of the virus in South Africa seemed to be receding quickly. Investors seemed further reassured by President Joe Biden’s assurances at a press conference Wednesday that there were no plans for “shutdowns or lockdowns” in response to the latest wave of coronavirus cases. Finally, the U.S. Food and Drug Administration granted emergency authorization to Pfizer’s and Merck’s pills for the treatment of COVID-19.

The week’s economic data generally surprised on the upside. Durable goods orders rose 2.5% in November, well above consensus expectations and the best print since May. Measures of consumer attitudes also beat expectations, and surveys indicated that inflation expectations may have peaked alongside gas prices in November. Third-quarter U.S. gross domestic product was adjusted modestly higher in the final reading by the Bureau of Economic Analysis. New home sales were the weak spot, coming in lower than expected in November, while October numbers were revised lower.

Sentiment in the investment-grade and high yield corporate market moved in parallel with the fortunes of the equity market and improved as the week progressed. There was no primary issuance in either during the week, however, and no new deals are expected through year-end.

Index Thursday’s Close Week’s Change % Change YTD
DJIA 35,950.56 585.12 17.46%
S&P 500 4,725.79 105.15 25.82%
Nasdaq Composite 15,653.37 483.69 21.45%
S&P MidCap 400 2,795.83 67.74 21.21%
Russell 2000 2,241.58 67.65 13.51%
Europe

The week leading into Christmas proved a festive one for European and global market investors, with major equity markets ending the shortened week firmly higher. In local currency terms, the pan-European STOXX Europe 600 Index gained 1.35% over the five days ended December 23. Major country indexes also moved higher over this period. Germany’s Xetra DAX Index rose 0.77%, France’s CAC 40 Index gained 1.44%, and Italy’s FTSE MIB Index added 0.87%. The UK’s FTSE 100 Index also climbed 1.55%.

TradingView Chart
Italy’s FTSE MIB Index, one-year technical performance chart.

The week began with a decidedly dour note. Mounting concerns about the rapid spread of the omicron coronavirus variant, leading to tighter restrictions being introduced in many countries, appeared to undermine investor confidence. On Sunday the Netherlands went into a period of lockdown, while tighter travel restrictions were announced in France, Germany, and Austria. Meanwhile, the deadlock across global powerhouse, the U.S. over President Biden’s spending program only added to the gloom.

The ECB kept its main policy rates at existing levels. It also said it would end its emergency asset purchase program in March but temporarily increase its Asset Purchase Program to smooth the transition. The ECB signalled that any exit from the ultra-easy monetary policy would be slow, as the pandemic was again depressing business and consumer sentiment and threatening economic growth.

Eurozone consumer confidence deteriorated for a third straight month for the global market in December, according to survey data from the European Commission. The flash indicator fell to its lowest level since March. In Germany, forward-looking survey results from market research group GfK suggested that consumer confidence could fall sharply in January, likely reflecting inflationary pressures and the restrictions that governments have imposed amid the latest wave of the pandemic.

Asia
  • China

Chinese markets were little changed as of Thursday’s close from the start of the week following a well-telegraphed key rate cut by the central bank for the first time in 20 months. The large-cap CSI 300 Index slipped 0.1% while the Shanghai Composite Index added 0.3% from the prior Friday’s close.

On Monday, the People’s Bank of China (PBOC) cut the one-year loan prime rate (LPR) for the first time since April 2020, while keeping the five-year LPR unchanged. The LPR, which is based on the loan rates charged by 18 domestic lenders for their best customers, is viewed as China’s de facto benchmark funding cost, though it is not an official policy rate. The PBOC’s move was expected by economists and comes after the central bank earlier in December cut its required reserve ratio, or the amount of cash that banks must hold in reserve at the central bank, for the second time this year.

The PBOC’s easing measures mark a striking divergence from the direction of policy in global markets like the U.S., where the Fed said it would end its monthly asset purchase plan sooner than expected and signalled the potential for several interest rate increases in 2022. The policy shift comes as Beijing is trying to stabilize the economy and temper the impact of a nationwide downturn in the property market that has resulted in several high-profile defaults among property developers. Chinese officials are encouraging banks to finance acquisitions of projects from cash-strapped developers and prodding financially strong property firms to make such purchases, the state-backed Financial News reported on Monday.

  • Japan

Japanese shares tumbled on Monday, extending the sharp losses that ended the previous week, as the global spread of the omicron coronavirus variant stoked fears of stagflation and an economic slowdown. However, amid thin volumes, the lost ground was clawed back over subsequent days with the Nikkei 225 and the broader TOPIX reaching 28,798.4 and 1,989.4 points, respectively, at the end of trading on Thursday.

TradingView Chart
Nikkei 225, one-year technical pefromance chart.

Concerns about the imposition of strict restrictions to curb the spread of the highly transmissible omicron variant stoked fears of a slowdown in the pace of global economic recovery. Meanwhile, following last week’s hike by the global central banks; Bank of England, expectations grew that the U.S. Federal Reserve will raise interest rates more aggressively next year. However, Japanese equity markets rebounded well, albeit lacking any clear direction, through the rest of the week. Bargain hunters moved in to boost technology sector returns during the week, while certain health care names were also conspicuous for their strong performance.

Japanese shares held firm after the minutes of the Bank of Japan’s October 27–28 meeting showed that board members unanimously agreed to take additional easing steps, as necessary, to support economic recovery. The Nikkei 225 Index finished the week with a third straight session gain on Thursday, despite Japan reporting the first community infections of the omicron variant.

In the global currency market, the U.S. dollar strengthened against the yen. The Japanese currency finished Thursday notably weaker than it began the week, breaking into the low 114 trading range. Amid omicron variant and economic slowdown fears, Monday saw benchmark 10-year Japanese government bond yields dip to their lowest level (0.035%) since September. However, in line with the improving sentiment that also floated equity markets, yields rose to 0.060% by the end of trading on Thursday.

Other Key Global Markets

  • South Korea – South Korea’s Finance Ministry increased its gross domestic product (GDP) growth assessment to 3.1% for 2022. Despite the rise in coronavirus infections, which recently hit global and local record levels, exports and private spending have continued to rise. While the revised GDP forecast is only modestly higher than earlier projections, it is still below the International Monetary Fund’s 3.3% growth estimate
  • Australia – According to Australia’s Department of Industry, revenues from commodities, including iron ore, metallurgical and thermal coal, and liquid natural gas, are forecast to post record levels (USD 379 billion) in 2022. In light of the improving global economic outlook, the Reserve Bank of Australia (RBA) may be positioned to end its quantitative easing (QE) initiatives after its February policy meeting. Of the 14 economists polled, eight expect the RBA to end QE in February, while the rest believe that the central bank will begin tapering its purchases, with a goal of ending them in May, provided the pandemic situation does not derail the recovery.

 

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