Market Review

Global Markets Monthly Update
May 2021
Key Insights
  • Global equity markets ended mostly higher in May as coronavirus infection rates eased in most developed economies, with the notable exception of Japan.
  • A spike in inflation weighed on consumer and investor sentiment in the U.S., although Federal Reserve officials offered assurances it would prove temporary.
  • A measure of economic confidence in the eurozone reached its highest level since early 2018 as governments eased lockdowns and travel restrictions.

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U.S.

The major indexes ended mixed in May, with investors appearing to balance reopening optimism against inflation worries. Value stocks outperformed their growth counterparts, building on their substantial lead for the year to date. Sector returns varied widely within the S&P 500 Index, with energy and materials shares gaining over 5% on a total return (including dividends) basis, while consumer discretionary shares fell nearly 4%.

The month brought the final round of first-quarter earnings reports. Overall profits for the S&P 500 rose by roughly 52% versus the year before, according to FactSet—the best showing since early 2010—but T. Rowe Price traders noted that both upside and downside surprises seemed to have less impact on stock prices than usual. Trading volumes also diminished considerably later in the month.

Longer-term Treasury yields decreased somewhat over the month, providing a moderate overall boost to the fixed income market. Treasury inflation protected securities generated strong returns as worries about inflation increased. Investors continued to favor corporate securities, particularly energy bonds, while agency mortgage-backed securities recorded modest losses. Investment-grade corporate bonds slightly outperformed the high yield bond market.

Job Openings Hit Record High

The month’s economic data confirmed that growth was accelerating, though not as quickly as many had expected. The Labor Department reported on May 7 that nonfarm payrolls expanded by only 266,000 in April, a fraction of the nearly 1 million jobs widely anticipated. A shortage of available workers rather than a slowdown in labor demand appeared to be at work, however. The Labor Department’s tally of job openings reached its highest level in records dating to 2000, and weekly jobless claims declined throughout the month to pandemic-era lows. Gauges of both service and manufacturing activity also indicated healthy expansion, helped in part by the accelerated coronavirus immunization program. By the end of the month, roughly 50% of the U.S. population had received at least an initial dose of a vaccine.

Indeed, some data suggested that the economy may be in danger of overheating. On May 12, the S&P 500 had its worst day since February 25—and the Dow Jones Industrial Average had its worst day since October 28—after the Labor Department reported that core (excluding food and energy) consumer prices jumped by 0.9% in April, the most in nearly four decades and roughly triple consensus estimates. The headline consumer price index (CPI) rose 4.2% over the 12 months ended in April, exceeding forecasts for a 3.6% increase. Later in the month, the Commerce Department reported that its core personal consumption expenditure (PCE) price index increased 3.1% in the year ended in April, slightly above expectations and the biggest increase in nearly three decades.

Fed Sees Inflation Pressures as “Transitory”

Although the PCE reading was well above the Federal Reserve’s 2% target for its preferred inflation gauge, Fed officials offered repeated assurances that inflationary pressures were likely to prove temporary and were due to “transitory supply chain bottlenecks.” Used car prices jumped 10% in April, for example, due in part to rental agencies’ efforts to rebuild fleets they had liquidated during the pandemic. Policymakers also noted that longer-term inflation expectations remained contained.

Nevertheless, price spikes—including a rise in gasoline prices following the hacking-related shutdown of a major Gulf Coast to East Coast pipeline—garnered considerable attention. Separate gauges of consumer confidence pulled back from recent highs, with many polled citing inflation concerns. Some evidence also emerged that consumers were postponing purchases in response to rising prices, particularly in the housing sector—pending home sales fell 4.4% in April, defying expectations for a small gain.

 

Europe

Shares in Europe gained for a fourth consecutive month as the accelerating rollout of vaccines for the novel coronavirus and central banks’ accommodative monetary policies contributed to investors’ optimism about the economic recovery. In local currency terms, the pan-European STOXX Europe 600 Index ended more than 2% higher. The major equity indexes in Germany, France, and the UK have advanced in each of the past four months, while Italy’s FTSE MIB Index rebounded from April’s losses.

Countries Ease Restrictions Enacted to Contain the Coronavirus’s Spread

Investor sentiment received a boost from major economies starting to ease restrictions as vaccination campaigns progressed and daily coronavirus infection rates began to fall. France lifted its travel ban, although it imposed a seven-day quarantine on travelers from the UK because of concerns about the spread of a highly infectious variant of the virus. Spain allowed its six-month-old “state of alert” to lapse, and Germany eased lockdown restrictions. Italy also loosened controls. Spain and Greece, whose economies rely heavily on tourism, plan to reopen this summer to boost their services sectors. In the UK, a spike in cases prompted ministers to caution that the final stage of reopening on June 21 could be delayed.

ECB Policymakers Back More Bond Purchases; BoE Plays Down Uptick in Inflation

Ahead of the June 10 policy meeting, European Central Bank (ECB) officials played down the risk of inflation pressure and said winding down the emergency bond-purchasing program before March 2022 was premature. ECB President Christine Lagarde, Executive Board members Isabel Schnabel and Fabio Panetta, and Chief Economist Philip Lane, among others, said they saw no sign of sustained inflationary pressure. In the UK, Bank of England (BoE) Governor Andrew Bailey opined that the uptick in inflation would not last but acknowledged that policymakers were watching this metric closely. However, outgoing Monetary Policy Committee member Gertjan Vlieghe said interest rates could rise as soon as the first half of 2022 if there is a stronger-than-expected improvement in the labor market. Purchasing managers’ surveys showed sharp increases in manufacturing and services costs in May.

Economic Data Boost Hopes for Economic Recovery

Business confidence and purchasing managers’ surveys bolstered optimism about an economic recovery as coronavirus curbs eased. The flash composite eurozone Purchasing Managers’ Index—an early estimate, usually based on about 85% of survey responses—rose at the fastest rate in more than three years in May, lifted by improvement in the service sector and continued strength in manufacturing activity. The European Commission’s sentiment gauge showed that economic confidence in the eurozone surged to 114.5—its highest level since early 2018. Business sentiment improved in Germany, France, and Italy. In the UK, business confidence climbed to its highest level since before the Brexit referendum in June 2016, according to the Lloyds Bank Business Barometer. In addition, UK retail sales volumes more than doubled in April from March, increasing 9.2%.

 

Japan

Japan’s major stock indexes produced varied results for the month, as the Nikkei 225 gained 0.16% and the broader TOPIX Index rose 1.30%. Ongoing concerns about the spread of the coronavirus, coupled with Japan’s relatively slow rollout of its vaccination program, weighed on sentiment. However, there were signs toward the end of the month that the country was on track to accelerate the pace of inoculations. The Japanese government extended the COVID-19 state of emergency covering Tokyo and eight other prefectures for three weeks until June 20 as Prime Minister Yoshihide Suga noted that the situation remained highly unpredictable. Against this backdrop, the yield on the 10-year Japanese government bond fell slightly to 0.08%, while the yen weakened modestly to JPY 109.59 against the U.S. dollar.

Mass Vaccination Program Amid COVID-19 Surge

Amid the worsening coronavirus crisis, Japan kicked off a mass vaccination program of people age 65 or older in Tokyo and Osaka, scheduled to stretch over the next three months. The debut of the two mass vaccination centers underscores the central government’s willingness to play a more active role, although municipalities remain responsible for a large portion of the nation’s vaccine rollout. The country significantly lags other developed nations in its vaccination drive, and its health care system is struggling to cope with the latest surge in cases.

The fourth wave of infections has led authorities to declare states of emergency covering much of the country, including Tokyo, raising some concerns about the Olympic Games, which are due to begin on July 23. Japan, struggling to convince its own public and the international community that it’s ready to host the event, was dealt a further blow by the U.S. State Department issuing a warning that Americans should avoid traveling to Japan.

Economy Shrinks More Than Expected

Japan’s economy shrunk by an annualized 5.1% in the first quarter, softer than expectations of a 4.6% contraction and following double-digit growth over the previous two quarters. The decline was mainly due to a drop in private consumption as coronavirus containment measures curbed spending on clothing and dining out. Public consumption was also weak. Import growth outpaced exports, with growth in the latter slowing markedly as global chip shortages put a drag on overseas shipments. Looking ahead, Bank of Japan Governor Haruhiko Kuroda said that, “the economy is likely to recover, with the impact [of COVID-19] waning gradually and supported by an increase in external demand, accommodative financial conditions, and the government’s economic measures.”

April Trade Data Show Strength

Japan’s exports for April grew the most since 2010, rising by a higher-than-expected 38.0% from a year earlier and lending support to a trade-led recovery. Sales of transport equipment soared, boosted by motor vehicles and cars, while exports of machinery surged, led by power-generating machines. Exports to Japan’s key markets, the U.S. and China, rose by 45.1% and 33.9%, respectively.

 

China

After a weak start, Chinese stocks rallied strongly in May. The large-cap CSI 300 Index rose 4.1% and the Shanghai Composite Index gained 4.9%, leading some technical analysts to say that the consolidation phase following a mid-February correction may have ended. Softer economic data in May appeared to ease investors’ concerns over potential policy tightening while a stronger currency encouraged foreign equity inflows, according to Reuters. On the pandemic front, China reported that it has vaccinated over 510 million citizens and may reach “herd immunity” by year-end. However, reports of 20 coronavirus cases in the southern province of Guangdong at month-end, including a more infectious COVID-19 strain found in India, raised concerns of further flare-ups.

Short-term interest rates remained low and stable in May amid a dovish liquidity stance from the central bank and reduced government bond issuance, according to analysts. In the bond market, yields continued to trend lower, with the yield on the 10-year sovereign bond falling to 3.09%. Default worries over Huarong Asset Management eased after Beijing stepped in to support the troubled state-owned company, and state-backed media reported that Huarong was “nowhere near” defaulting on its offshore bonds. In currency trading, the renminbi rallied to a three-year high against the U.S. dollar, which analysts attributed to U.S. dollar weakness and a wider external surplus.

April Economic Data Mixed

China’s economic data released in May revealed softer domestic demand counterbalanced by strong external demand. Residential construction and infrastructure investment both slowed. Retail sales growth weakened to 4.3% in April on the two-year average, which analysts use to minimize distortions due to the 2020 pandemic. However, two-year average exports growth soared 16.8% in April from March’s 10.1% pace. Strong external demand boosted industrial output, which also increased in April.

April bank lending and credit data were regarded as soft by analysts. The 11.7% annual growth in aggregate new credit was the slowest since March 2020. China’s producer price index surged 6.8% in April over a year ago, though the consumer price index rose 0.9% year on year amid lower food prices. However, analysts see core CPI inflation starting to rise as prices in China’s service sector normalize.

On the policy front, China’s government is mulling a residential property tax, a long-discussed reform that might help curb home prices, reported the South China Morning Post. Analysts expect a buoyant property sector in 2021, supported by low mortgage rates, reduced inventory, and strong land sales in 2020.

China said that it would relax the country’s current two-child policy and allow families to have a third child. The surprise announcement followed a decades-long policy limiting couples to one offspring until 2016, when Beijing allowed two children per family. It also comes as China is trying to stem a demographic crisis amid a graying population. The country’s 2020 census revealed more evidence of a shrinking working-age population and declining birthrate. Analysts believe that China will have to postpone the retirement age, relax urban residency rules, and take more drastic steps to increase its birthrate.

 

Other Key Markets

Scrapped Tax Reform Proposal Weighs on Colombian Stocks

Colombian stocks, as measured by MSCI, returned -1.18% versus 2.34% for the MSCI Emerging Markets Index.

Colombian assets were pressured early in the month because of President Iván Duque Márquez’s decision—which was prompted by protests that eventually turned violent—to scrap the tax reform proposal that his administration introduced to the legislature in April, as well as the resignation of the country’s finance minister and deputy finance minister. Among other measures, the bill would have increased the collection of value-added taxes (VAT) by covering more goods and services while gradually increasing personal income tax rates, including on the lower and middle classes. The impetus for tax reform, according to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, is the government’s challenging fiscal situation.

Later in the month, Colombian assets were hurt by news that credit rating agency S&P Global Ratings lowered the country’s sovereign credit rating one notch to BB+ with a stable outlook, just one month after reiterating its BBB- rating with a negative outlook. This downgrade into the below investment-grade universe reflects S&P’s belief that the withdrawal of the tax reform bill due to social pressures will lead to slower fiscal consolidation and greater deterioration in public finances. While Gifford was not surprised by the downgrade decision, he notes that it took place much sooner than he expected.

Despite the withdrawal of the tax reform proposal, protests in Colombia continued for most of the month. While the number of people out on the streets decreased, there was still some sporadic violence, and the government claimed that several weeks of strikes also cost the economy more than 1% of its gross domestic product. President Duque held a few meetings with the National Strike Committee but made limited progress on the strikers’ demands, which include social protections and benefits, an end to police brutality, and protecting the right to protest. Gifford says that the price tag of the demands is much more than the tax reform bill was intended to generate. Thus far, Gifford says that the government is offering little in the way of concessions beyond nominal gestures, such as providing free education for low-income groups and partially subsidizing salaries for young adults.

Stocks in Mexico Easily Outperform the Broad Emerging Markets Universe

Mexican stocks, as measured by MSCI, returned 8.15%, easily outperforming the MSCI Emerging Markets Index.

On May 13, Mexican central bank officials decided unanimously to keep the overnight interbank interest rate at 4.00%, where it has been since a quarter-point rate cut on February 11. In their post-meeting statement, Governing Board members concluded that the balance of risks for inflation is biased to the upside—a hawkish stance, according to Gifford—and cited a recent year-over-year inflation reading of 6.08% through April as being higher than anticipated. Gifford observed that Mexican inflation is at a 3.5-year high, largely because of non-core price components, especially energy. However, he does see some pressures in the cost of core goods, including processed foods, and some services as the economy reopens.

Toward the end of the month, the central bank published the minutes from its policy meeting, and Gifford noted a number of qualifying statements that seemed to soften policymakers’ hawkishness somewhat. For example, while central bank officials see green shoots for the economy—mostly because of external demand driven by the U.S.—they observed that the recovery is not uniform and referred to weak investment and services and dismal credit demand. Most policymakers expected higher inflation to be transitory due to temporary factors like supply shocks, bottlenecks, higher commodity prices, and the impact of a drought on agricultural prices. Though they expected inflation to decline over the next 12 months, Gifford believes policymakers are a bit worried about the potential for second-round effects and a decoupling of inflation expectations. They also noted the risk of tighter U.S. financial conditions.

Several central bank officials seemed to be focusing on having limited space to adjust monetary policy and the importance of anchoring inflation expectations. While they noted the need to build credibility with investors and convey caution to the financial markets, Gifford sees limited signs that the Governing Board is in a hurry to hike rates.

Major Index Returns

Total returns unless noted

Major Index Returns Chart

Past performance is not a reliable indicator of future performance.

Note: Returns are for the periods ended May 31, 2021. The returns include dividends and interest income based on data supplied by third‑party provider RIMES and compiled by T. Rowe Price, except for the Nasdaq Composite Index, whose return is principal only.
Sources: Standard & Poor’s, LSE Group, Bloomberg Barclays, MSCI, Credit Suisse, Dow Jones, and J.P. Morgan (see Additional Disclosures).

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