Market Review

Global Markets Weekly Update

June 25 2021

Review the performance of global stock and bond markets over the past week, along with relevant insights from T. Rowe Price economists and investment professionals.

U.S.

Stocks rebounded from the previous week’s declines, bringing the S&P 500 Index and the technology-heavy Nasdaq Composite index to new highs and helping both record their best weekly gains since early April. Stocks moved steadily higher through much of the week, if on generally lackluster summer volumes, according to T. Rowe Price traders. Energy shares fared best within the S&P 500 as oil prices reached their highest levels since October 2018 on falling global inventories. Utilities and real estate stocks lagged.

Peaking inflation pressures?

Moderating inflation fears may have factored in helping reverse the previous week’s drop. Some signs emerged that supply chain pressures that had caused a spike in commodity prices were easing. Lumber prices continued a sharp decline from record highs, and metal prices came under pressure as China released stockpiles to cool the market.

On Thursday, Bloomberg reported that prices in the wholesale used car auction market had peaked, suggesting that retail vehicle prices might soon follow. The sharp increase in used car and truck prices has contributed roughly one-third of the recent overall rise in consumer prices, according to Bloomberg. Federal Reserve Chair Jerome Powell’s testimony to Congress on Tuesday, in which he restated policymakers’ belief that the recent spike in inflation will prove temporary, also seemed to reassure investors.

Later in the week, economically sensitive securities got a boost from news of an agreement on a bipartisan infrastructure deal. On Thursday morning, President Joe Biden announced that a bipartisan group of 10 Senators had agreed on a plan for roughly USD 1 trillion in infrastructure spending over the next five years. The bill has yet to be drafted, however, and many expect it to face resistance from both ends of the political spectrum.

Expansion continues, but supply challenges persist

The week’s economic data may have also helped calm fears about economic overheating and inflation. Several figures released during the week indicated healthy expansion but came in below consensus estimates. Durable goods orders rose less than expected in May, with many analysts pointing to supply chain issues, while weekly jobless claims came in higher than expected, at 411,000. New home sales fell 5.9% in May, and previous months’ sales were revised lower, with many builders citing materials shortages and costs. 

IHS Markit’s gauge of June manufacturing activity beat expectations and climbed to a record 62.6 (with readings above 50 indicating expansion). Conversely, the firm’s services gauge came in much lower than anticipated (64.8)—if off another all-time high of 70.4 in May. Finally, personal spending was flat in May, defying expectations for a 0.4% gain. Supply shortages, particularly in autos, again appeared to be at work.

Inflation rises at fastest pace since 2008

Inflation fears seemed to resurface late in the week, however. The yield on the benchmark 10-year Treasury note jumped on Friday morning following a report that the Fed’s preferred inflation gauge—the core (less food and energy) personal consumption expenditures index—had risen 0.5% in May, bringing the year-on-year increase to its fastest pace (3.4%) since 2008.

Treasury prices fell as yields increased, but strong cash flows into municipal bond funds continued to support the tax-exempt market. T. Rowe Price traders reported that there appears to be less urgency among portfolio managers industrywide to invest new flows, however. In signs of diminishing fiscal strains, Fitch Ratings revised its outlook on State of Illinois bonds to positive from negative, and S&P moved its outlook for the nonprofit health care sector to stable from negative.

As new issuance in the investment-grade corporate bond market slowed throughout the week, trading volumes became more robust and bonds across all maturities saw healthy demand. The high yield market was fairly quiet but stronger as sentiment appeared to be mostly positive.

U.S. Stocks1
Index

Friday’s Close

Week’s Change

% Change YTD

DJIA

34,433.84

1143.76

12.51%

S&P 500

4,280.70

114.25

13.97%

Nasdaq Composite

14,360.39

330.01

11.42%

S&P MidCap 400

2,726.48

114.58

18.20%

Russell 2000

2,334.48

96.73

18.21%

This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.
Source of data: Reuters, obtained through Yahoo! Finance and Bloomberg. Closing data as of 4 p.m. ET. The Dow Jones Industrial Average, the Standard & Poor’s 500 Stock Index of blue chip stocks, the Standard & Poor’s MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments of the U.S. equity markets by market capitalization. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock exchange and the National Market System. Frank Russell Company (Russell) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.

Europe

European shares rose in volatile trading, buoyed by a reaffirmation of ultra-loose monetary policy and a bipartisan agreement on a huge U.S. infrastructure spending plan. The pan-European STOXX Europe 600 Index ended the week 1.23% higher. The main stock indexes also posted gains. Germany’s Xetra DAX Index rose 1.04%, France’s CAC 40 0.82%, and Italy’s FTSE MIB 1.16%. The UK’s FTSE 100 Index added 1.69%.

Core eurozone government bond yields ended the week marginally higher. German bund yields initially tracked rising Treasury yields and were then lifted further by strong purchasing managers’ index (PMI) data and business confidence readings. However, yields then fell in sympathy with the Bank of England’s (BoE) dovish outlook, before inching back up ahead of Friday’s U.S. inflation print. Peripheral eurozone bond yields also fluctuated, while UK gilt yields ended lower after the BoE reaffirmed its belief that near-term inflation strength would be transitory

UK COVID-19 cases jump; EU mulls tighter rules for UK visitors

The number of COVID-19 cases in the UK rose to more than 16,000, the highest since February, mostly due to infection by the highly transmissible delta variant of the coronavirus. The UK also expanded the lists of countries its vaccinated nationals can visit without having to quarantine when they return, amid pressure from the travel and aviation industries ahead of the midyear holiday season. However, the Times newspaper said the European Union is planning to scrap quarantine-free visits by UK nationals to prevent the import of the delta variant, although there was press speculation that Spain and Greece may break ranks.

ECB’s Lagarde: Important not to withdraw support too early

European Central Bank President Christine Lagarde told a European Parliament committee it was important “not to withdraw support too early.” She said the outlook for the eurozone economy was “brightening” and economic activity “should improve strongly” in the second half of the year. She also said rising inflation would start declining at the start of 2022 as temporary factors fade out.

A survey of purchasing managers showed that an index of eurozone output rose to 59.1 in June, the fastest pace of growth in 15 years, versus 57.1 in May, as the economy continued to reopen and the services sector posted further strong expansion, according to IHS Markit. Business confidence in the outlook, meanwhile, rose to the highest since future sentiment data were first available in 2012.

BoE holds steady, says inflation pickup temporary

BoE policymakers voted unanimously to keep the key interest rate at 0.1% and by eight to one to maintain the asset purchase program until the end of the year. The central bank said inflation could reach as high as 3% and economic growth would be strong, but the increases would be temporary.

Japan

Japanese stocks had a tumultuous start to the week, falling sharply on the first trading day before rebounding on the second. Sentiment soured after the U.S. Federal Reserve’s hawkish pivot increased worries about an earlier-than-expected tapering of its accommodative policies. Reassurances from the central bank that it will continue its supportive stance to ensure the sustained improvement of the economy helped stabilize markets. The Nikkei 225 Index returned 0.35% for the week. The TOPIX was up 0.83%.

The Japanese yen fell against the U.S. dollar to its lowest level since March 2020 during the week. Sentiment for the yen weakened amid disappointing domestic economic data, while the minutes of the April meeting of the Bank of Japan’s (BoJ’s) monetary policy committee highlighted agreement among policymakers that the massive stimulus measures deployed by advanced nations may help quicken the pace of recovery in the Japanese and global economies. This reinforced market expectations of continuity in the BoJ’s accommodative monetary policy. Against this backdrop, the yield on the Japanese 10-year government bond fell to 0.05%.

PMI data signals quicker deterioration in business activity

Activity at Japanese private sector businesses remained in contraction territory in June: The au Jibun Bank Flash Japan Composite PMI fell to 47.8 from the previous month’s 48.8. Survey respondents associated disruption of operating conditions to ongoing coronavirus restrictions, coupled with severe supply chain pressures. However, firms have continued to expand employment levels despite subdued demand conditions.

The manufacturing PMI slipped to 51.5, from 53.0 in May, signaling a weaker improvement in operating conditions among manufacturers, and the slowest pace of expansion in four months. The services PMI improved, rising to 47.2 from May’s 46.5, indicating a softer, yet still moderate fall in services output. The overall outlook was more optimistic, driven by non-manufacturers, stemming from hopes that the accelerated COVID-19 vaccine rollout would contribute to easing restrictions and trigger a broader recovery in demand.

Japan reaches its vaccine target

Japan reached its target of administering 1 million coronavirus vaccine doses per day in the first half of June, ahead of Prime Minister Yoshihide Suga’s goal of achieving this by the middle or the end of the month. The vaccination drive has received a boost from the rollout of state-run mass vaccination centers and on-site vaccinations at workplaces and university campuses. The government aims to finish vaccinating all eligible people in Japan who wish to be inoculated by November. With the start of the Tokyo Olympics less than a month away, the figures still lag other developed nations, however.

China

China’s large-cap CSI-300 Index added 2.7% and the Shanghai Composite Index rose 2.3%, ending a three-week losing streak. Financial stocks led the rally after the People’s Bank of China (PBoC) injected liquidity into the financial system for the first time since February. Renewable energy names did well after China's National Energy Administration announced that over 50% of rooftop spaces on government buildings would be reserved for solar panels, with lower targets for schools, hospitals, and other types of buildings. Domestic leisure and travel stocks also advanced amid reports that China may not open its international borders this year.

In other corporate news, e-commerce giant JD.com reported robust sales growth at its annual “618” shopping event. The promotion, which lasts from June 1 to June 18, is the summertime equivalent of the so-called Singles Day event hosted by competitor Alibaba each November.

Analysts see little chance that the PBoC will increase official interest rates in the near term. Most banks cut their long-term deposit rate ceilings by 30 to 50 basis points following a long-anticipated technical change in the rate-setting mechanism.

In bond markets, the government’s net bond supply was less than expected in June, helping to take some pressure off yields. The yield on China’s 10-year sovereign bond fell 10 basis points, closing the week at 3.10%. In currency markets, the renminbi began the week on a weak note but subsequently rallied to end flat against the U.S. dollar at RMB 6.453.

COVID-19 hits China’s ports

China reported that more than 20 million doses have been delivered on peak days, a remarkable achievement. The coronavirus continues to affect the economy, however. A COVID-19 outbreak starting in late May has heavily affected ports in the south, including Yantian, China’s largest container port. Container throughput at China’s eight major ports declined slightly in early June from a year earlier, reported The South China Morning Post. Shipping holdups and inventory shortages have forced many factories in the southern coastal province of Guangdong to reduce or suspend operations. 

In other economic news, China’s railway investment from January to May dropped 8% to RMB 203.6 billion from a year earlier, according to the country’s National Railway Administration. The decline was surprising given that Beijing has favored infrastructure investment to spur growth in the post-pandemic recovery.

Property sales fell in May from a year ago, when the property sector rebounded strongly from the pandemic, but surged 22% from 2019, according to China Realty Research. Despite a raft of central and local government measures to cool the property sector, demand is underpinned by strong fundamentals. Analysts do not expect a sharp slowdown in the second half, and some see scope for an upside surprise.

Other Key Markets

In surprise move, Mexico’s central bank hikes rates

Banxico, Mexico’s central bank, surprised market observers by raising its key lending rate by a quarter percentage point to 4.25%. The peso gained about 2% versus the U.S. dollar in reaction to the news before pulling back some, while local Mexican bonds sold off. Stocks moved lower immediately following the announcement but finished the day with a gain.

Policymakers were split, with three voting for the increase and two voting to hold rates steady. It was the bank’s first interest rate hike since 2018. Aaron Gifford, a T. Rowe Price emerging markets sovereign debt analyst, said he believed that recent upside surprises in consumer inflation reports along with Banxico’s desire to build credibility and better anchor inflation expectations caused the central bank to act. Mexico’s consumer price index had reached 6.02% for the most recent 12-month period, surpassing the central bank’s 3% target.

Markets were caught off guard, though, as the rate hike came just three weeks after Banxico released its quarterly inflation report where it had highlighted upward risks to inflation but also reiterated the transitory nature of inflation and focused on weak domestic economic conditions even as external demand from the U.S. had improved. Gifford said it is difficult to predict what the bank will do going forward as Banxico offers no forward guidance beyond saying it is dependent on data, but he believes it is likely that rate hikes will continue until inflation starts to recede and upward inflation surprises start to reverse.

Policymakers hold rates steady in Thailand, Philippines

Central banks in Thailand and the Philippines kept their key lending benchmarks at record lows, citing the continued threat that the pandemic poses to a full economic recovery.

In Thailand, central bank policymakers held rates at 0.50%, saying they expected the economic recovery to be slower and more uneven than previously anticipated as the country deals with a third wave of COVID-19 infections. Specifically, they noted that both tourism and domestic demand have been impacted.

The Philippines central bank, which held rates at 2.0%, also said that the economic recovery remains tentative due to risks from the pandemic. In their statement, bank officials said that food price pressures have abated and they expect inflation to ease in 2022 and 2023.

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