2021 was a better-than-average year for global markets. Stock market returns, economic growth, policy stimulus and inflation all ran hot while volatility was historically cool. 2022 won’t be a carbon copy, in our view, as progressing Fed policy settings and economic trends are consistent with mid-cycle conditions, a backdrop that will produce more moderate growth and market performance. Nevertheless, the past year’s gains can be appreciated while also put into a broader perspective.
Most of the major indexes recorded gains for the week, as a global “Santa Claus rally” lifted the S&P 500 Index to record highs. The technology-heavy Nasdaq Composite lagged and finished flat. The real estate, utilities, and materials sectors outperformed within the S&P 500, while the larger communication services and information technology sectors—which together account for over one-third of the index—lagged.
Despite daily coronavirus cases rising to record highs, waning fears over the omicron variant appeared to deserve much of the credit for the gains, according to our traders. Hospitalization rates remained contained, and, on Wednesday, the Centers for Disease Control and Prevention (CDC) reduced the recommended quarantine period for asymptomatic people who have tested positive from 10 days to five days.
U.S. Treasury yields were generally steady against a backdrop of light trading volumes in global markets and few key economic data releases. According to our traders, technical factors supported a modest rise in rates through the middle of the week, with the 10-year U.S. Treasury note yield reaching an intra-month high of 1.55% on Wednesday. The 10-year yield retreated to roughly 1.50% by Friday morning, as rates generally retraced their early-week increases.
High yield bonds posted modest gains amid very light trade volumes. They noted that weakness in travel-related stocks due to rising coronavirus infection rates generally did not seem to impact the below-investment-grade bond market. No new deals were announced during the week.
|Index||Friday’s Close||Week’s Change||% Change YTD|
|S&P MidCap 400||2,842.00||46.17||23.21%|
European shares rose in holiday-thinned trade as omicron fears eased and investor optimism about the economic recovery strengthened. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.09% higher, rebounding more than 22.0% on the year. The main indexes also posted gains, with France, Italy, and the UK closing near their highest levels for the year. Germany’s Xetra DAX Index added 0.82% over the week, France’s CAC 40 increased 0.94%, Italy’s FTSE MIB advanced 1.22%, while the UK’s FTSE 100 Index was little changed.
Coronavirus infections surged to record levels over Christmas in France, the UK, Italy, and Spain, among other countries, boosted by the omicron variant. France, Italy, Portugal, Denmark, and Greece tightened measures to prevent the virus from spreading during New Year’s celebrations. In Portugal, where omicron is now the dominant strain, working from home will become mandatory in January, while France ordered people to work from home for three days a week. The UK decided to wait until early January to assess the impact on hospitals before making a move.
The Spanish and Italian parliaments approved 2022 budgets that include funds disbursed under the European Union’s recovery program. In Spain, spending plans total EUR 240 billion—the largest in the country’s history—made possible by an agreement to reform the labour market. Italy’s EUR 32 billion budget includes income and business tax cuts and the creation of a climate fund.
Chinese markets ended a tumultuous year for global markets with modest losses for the week in global markets. The large-cap CSI 300 Index declined 0.2%, and the Shanghai Composite Index shed 0.1%. Positive manufacturing data and comments from Chinese officials about the country’s beleaguered property sector boosted sentiment. For the year, the CSI 300 Index lost 5.2% in its worst annual showing in three years, according to Reuters, while the Shanghai Composite Index added 4.8%. In Hong Kong, the benchmark Hang Seng Index retreated 14%—its worst performance in a decade—and the Hang Seng China Enterprise Index lost 23% in 2021.
The yield on the 10-year Chinese government bond slid to 2.793% from the previous week’s 2.846% and fell sharply from 3.19% at the end of 2020. The yuan edged up to 6.3672 per U.S. dollar from last week’s 6.3709. The Chinese currency is on track to becoming the best performer in Asia for 2021 with a gain of over 2%, as most currencies in the region recorded losses.
In regulatory news, the country’s securities industry watchdog China Securities Regulatory Commission (CSRC) published draft rules that would require Chinese companies seeking initial public offerings (IPOs) and additional share sales overseas to register with the CSRC. Although the CSRC stopped short of banning IPOs by companies using the variable interest entities (VIE) structure, the draft rules signalled Beijing’s continued scrutiny of overseas listings under the name of data security.
In global economic news, China’s official manufacturing and nonmanufacturing Purchasing Managers’ Index (PMI) readings rose more than expected in December. The composite PMI output index was 52.2%, unchanged from November’s reading. Analysts said that restocking demand on the back of normalized raw materials prices and policy easing drove the improvement in manufacturing, while a recovery in services sector activity helped nonmanufacturing.
In a holiday-shortened week, Japan’s stock market returns were muted, with the Nikkei 225 Index up 0.03% and the broader TOPIX Index gaining 0.28% across global markets. Investor sentiment was dampened by the spread of the omicron variant through community transmission in the country; suspending the entry of foreign nationals alone has not appeared to contain the spread of the virus. However, the overall number of cases remained relatively small compared with the fifth wave, which prompted the government to implement states of emergency. Against this backdrop, the yield on the 10-year Japanese government bond rose to 0.07% from 0.06% at the end of the prior week, while the yen weakened to around JPY 115.1 against the U.S. dollar from the previous week’s 114.4.
Japan’s industrial production grew by a record, seasonally adjusted 7.2% month on month in November amid easing supply-side pressures, with the motor vehicle, plastic products, and iron, steel, and nonferrous metals industries the main contributors to the increase, according to Ministry of Economy, Trade and Industry data. The ministry upgraded its assessment and now expects production to increase through January 2022, having previously indicated that production is pausing. Separate data showed that Japan’s unemployment rate rose to 2.8% in November from the previous month’s 2.7%. The increase in the number of unemployed suggested that more people have embarked on a search for a better job amid the economic pickup.
Other Key Global Markets
- South Africa – South African shares, as measured by the FTSE/JSE All Share Index, rose about 3.0% in global markets. Late in the week, the government announced that it would ease some of its pandemic restrictions because of indications that “the country may have passed the peak of the fourth wave at a national level.” The government noted that the fourth wave “is mainly driven by the Omicron variant” that was discovered in southern Africa in November.
- Russia – Russian stocks, according to the Russian Trading System (RTS) Index, returned about 0.5% across global markets through the close of business on Thursday; Friday was a holiday. On Thursday, U.S. President Joe Biden and Russian President Vladimir Putin held a 50-minute conference call—as reported by The Wall Street Journal—in an attempt to diffuse tensions over Ukraine.
- Turkey – Turkish shares, as measured by the BIST-100 Index, returned about -1.8% for global markets. The lira continued to struggle versus the U.S. dollar, though the equity market stabilized somewhat following strong gains in the first half of the month and a sharp drop in the days prior to Christmas.