- Global Markets Monthly Update
- June 2021
- Key Insights
- Developed equity markets generally recorded gains in June, although a fall in many currencies relative to the dollar resulted in mixed returns for U.S. investors.
- Steep increases in producer prices in China and rising consumer prices in the U.S. fostered inflation concerns.
- Federal Reserve officials stressed that the spike in inflation would likely prove temporary, however, and longer-term Treasury yields fell over the period.
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The major equity indexes recorded mixed returns in June. Growth stocks easily outperformed value shares, while large-caps outpaced small-caps by a smaller margin. Sector returns within the S&P 500 Index also varied significantly. Technology stocks returned about 7.0% on a total return (including dividends) basis, and energy shares were also strong, gaining 4.6%. Conversely, materials shares fell 5.3%, and financials declined roughly 3.0%. The S&P 500 reached record highs, but on typically subdued summer trading volumes.
Fixed income returns were generally positive as the yield on the benchmark 10-year U.S. Treasury note decreased to March lows, driven in part by overseas demand. (Bond prices and yields move in opposite directions.) The yield difference between 5- and 30-year Treasuries reached a lower level than where it started 2021, a trend that appeared to weigh on financial stocks because banks tend to profit from larger spreads between short- and long-term rates. Corporate bonds outperformed as investors embraced riskier issues, while mortgage-backed securities recorded a loss as fears grew that the Federal Reserve would trim its purchases sooner than expected.
Fears of Higher Rates Push Stocks Lower…
Interest rates and inflation fears seemed to dominate sentiment throughout the month. On June 10, Treasury yields jumped briefly after the Labor Department reported that core (less food and energy) consumer prices rose 0.7% in May, well above the consensus estimate of 0.4%. The annual headline inflation print reached a 13-year high of 5.0%, while the one-month reading totaled 0.6%, due in large part to a jump in used-car prices.
Stocks surrendered their gains for the month after Fed officials appeared to take note of the economic rebound and the eventual need to adjust policy. Policymakers acknowledged that progress on vaccinations has allowed the economic recovery from the coronavirus pandemic to gain strength, and Fed Chair Jerome Powell acknowledged that Fed officials have begun to discuss slowing the central bank’s monthly bond purchases, the first step toward eventually raising interest rates. Powell said that observers could characterize the meeting as “talking about talking about tapering.”
…But Fed Stresses That Inflation Pressures Should Prove Temporary
Powell’s congressionall testimony the next week, in which he restated policymakers’ belief that the recent spike in inflation will prove temporary, seemed to reassure investors and help stocks regain their momentum. Some signs emerged that supply chain pressures that 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. Longer-term inflation expectations also appeared to remain contained. The University of Michigan’s survey of consumer sentiment showed that Americans expected prices to rise 4.0% in the current year; the previous month’s reading was 4.6%.
While growth signals remained strong, signs emerged that the pace of the economic rebound also might have peaked. The Labor Department reported that employers added 559,000 jobs in May, somewhat below consensus forecasts for around 650,000, while the labor force participation rate ticked down. On the positive side, the unemployment rate fell more than expected, from 6.1% to 5.8%. 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), although it followed an 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.
Shares in Europe rose to a fresh record level in June, as economies continued to reopen and central bank officials reaffirmed their commitment to ultra-loose monetary policies. However, stocks gave back some of these gains on worries that stimulus might be withdrawn sooner than expected because of inflationary pressures and the spread of a super-infectious variant of the novel coronavirus. In local currency terms, the pan-European STOXX Europe 600 Index ended higher, as did major indexes in Germany, France, Italy, and the UK.
UK Delays Reopening; EU Lifts U.S. Ban
UK Prime Minister Boris Johnson delayed a full reopening of society in England to July 19 from June 21 due to surging infections mainly caused by the new strain of the coronavirus and said that the vaccination campaign would be accelerated. Scotland said it would delay a reopening until August. Infection rates fell in the European Union (EU), prompting France and Italy to end nighttime curfews and phase out mask requirements in most public places. Denmark also lifted mask rules. Sixteen EU states began using the EU Digital COVID Certificate, which will be available from July 1. The EU recommended that member states reopen travel to vaccinated U.S. citizens and urged the U.S. to ease a ban on European travelers.
ECB Sticks to Increased Bond-Buying; PMI Rises at Fastest Rate in 15 Years
The European Central Bank (ECB) left policy unchanged and said that it would maintain emergency bond-buying at a higher pace for the next quarter, even though its updated forecasts called for higher near-term rates of inflation and economic growth. At a European Parliament committee hearing, ECB President Christine Lagarde reiterated that it was important “not to withdraw support too early.” She also said that the outlook for the economy was “brightening” and that economic activity “should improve strongly” in the second half of the year. She asserted that rising inflation this year would start to decline in 2022 as temporary factors faded.
The ECB expects eurozone inflation to reach 1.9% in 2021, up from a previous estimate of 1.5%, before slowing to 1.4% in 2023. The economy is predicted to grow 4.6% this year and 4.7% next year—both up 60 basis points. The ECB said the risks to growth are now “balanced” rather than skewed to the downside.
A purchasing managers’ survey showed that a composite index of eurozone output rose to 59.1 in June, the fastest pace of growth in 15 years, as the economy continued to reopen and activity in the services sector expanded at a strong pace, according to IHS Markit. Official data showed inflation that slowed to 1.9% in June from 2.0% in May, right on the target for “below but close to 2.0%.”
BoE Holds Steady, Says Inflation Pickup Temporary
Bank of England (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 BoE said inflation could reach as high as 3% and economic growth would be strong, but the increases would be temporary.
UK inflation jumped again in May, accelerating above the BoE’s target to 2.1%, on higher prices for clothing, fuels, and meals in restaurants and bars.
Japanese stock market returns were broadly flat in June, with the Nikkei 225 Index down 0.24% and the broader TOPIX Index rising 1.1%. Concerns about a resurgence in domestic coronavirus cases dampened sentiment, despite the government easing some restrictions: The state of emergency in Tokyo and several other prefectures was lifted, although they remain under a quasi-emergency state. Toward the end of the month, amid a notable rebound in cases in the capital, authorities were set to decide on a possible extension of restrictions ahead of the start of the Olympics on July 23. In this uncertain environment, the yen weakened to its lowest level since March 2020, finishing the month at JPY 111.11 against the U.S. dollar. The yield on the 10-year Japanese government bond fell to 0.06%.
PMI Data Signal Quicker Deterioration in Business Activity
Activity at Japanese private sector businesses remained in contraction territory in June: The au Jibun Bank Flash Japan Composite Purchasing Managers’ Index (PMI) fell to 47.8 from 48.8 in the previous month. Survey respondents associated disruption to operating conditions with 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’s First-Quarter GDP Revised Upward; Exports Grow Strongly
Sentiment was lifted as the Cabinet Office reported that Japan’s first-quarter gross domestic product (GDP) shrank by less than initially estimated. The economy contracted by an annualized 3.9% from the final quarter of 2020, compared with a preliminary reading of -5.1%. The narrower contraction came from minor revisions in domestic demand, notably a bigger increase in private inventory, while the contribution from external demand was unchanged.
Separate data showed that Japan’s exports rose 49.6% year over year in May, the highest growth since 1980. The jump in exports largely reflected a rebound in shipments from last year’s plunge in the wake of the pandemic shock. The highest export growth was to the U.S., driven by cars and auto parts, while exports to China were also strong, led by chip production equipment and hybrid cars.
Bank of Japan Announces New Lending Measure to Aid Climate Change Efforts
The Bank of Japan (BoJ) left key policy rate targets and guidance unchanged at its June monetary policy meeting, as widely expected. It extended the duration of the special coronavirus financing support program by six months to the end of March 2022, giving Japan’s vaccination drive more time to work. In a surprise move, the BoJ also announced a measure to support climate change mitigation: A new initiative will provide funds for bank lending to climate-friendly businesses. The climate change facility will start operating within the year, and the central bank will provide details at July’s meeting.
Chinese stocks retreated in June, with the Shanghai Composite Index and large-cap CSI 300 Index each recording slight declines. Liquidity in the domestic A share market tightened as northbound Stock Connect inflows dried up and domestic investment funds experienced an increase in redemptions, according to domestic brokerage CITIC Securities. Reports of a COVID-19 outbreak in the southern province of Guangzhou leading to renewed pandemic restrictions also appeared to weigh on investor sentiment.
Short-term rates were broadly stable as the People’s Bank of China (PBOC) left monetary policy unchanged. Growth in total social financing, China’s broadest measure of new credit, slowed to 11.0% at the end of May from a year ago versus 11.7% in April. Analysts attributed the slowdown to a high level of credit extended in 2020 to cushion the economy from the pandemic.
The yield on China’s 10-year sovereign bond rose to 3.22% at mid-month before falling to 3.10% at month-end after a surprise liquidity injection by the PBOC. In credit markets, the spread on China’s U.S. dollar-denominated offshore bonds widened amid concerns about the financial woes at highly leveraged property developer Evergrande and state-backed distressed debt manager Huarong Asset Management Co. In foreign exchange markets, the renminbi shed about 1.6% against the U.S. dollar to close at 6.46 per dollar.
Economic Data Point to Flagging Consumption
Official monthly economic data for May were regarded as disappointing. Trends in industrial output and investment were little changed, with two-year average growth of 6.6% and 4.8%, respectively (analysts focus on two-year average growth rates to strip out base effects from last year’s coronavirus disruption). Retail sales, which notched two-year average growth of 4.5%, proved to be the main disappointment. The coronavirus outbreak in Guangdong, which accounts for one-tenth of national sales, was seen as a contributing factor.
Domestic consumption also appeared to be muted during China’s Dragon Boat Festival in mid-June. Total spending fell 25% from pre-pandemic levels, a similar shortfall to the May Day holiday. However, labor market signals were more positive, with urban unemployment nearing pre-pandemic levels.
In other economic readings, China’s producer price index in May rose 9.0% year over year compared with 6.8% in April due to higher commodity prices, raising worries that price increases in China would add to global inflationary pressures. However, the consumer price index (CPI) rose a below-expected 1.3% in May. Analysts see little risk of a rate hike in China since CPI inflation remains well below the central bank’s 3.0% target. Moreover, analysts believe that a rate hike would run counter to the government’s other policy goals, such as curbing currency gains and spurring domestic consumption.
Mexican Shares Fall as Central Bank Surprises With Rate Hike
Mexican stocks, as measured by MSCI, returned -1.83% in June and underperformed the MSCI Emerging Markets Index, which returned 0.21%.
Early in the month, Mexican assets were supported by the results from midterm elections held on June 6, in which all 500 seats in the Lower House of the legislature were up for grabs. According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, President Andrés Manuel López Obrador’s Morena coalition in the Lower House kept a simple majority, which means that he and his allies will continue to control the legislative agenda, including the budget. However, the coalition lost some seats in Congress, which should result in more checks and balances against questionable policies. More significantly, Morena’s loss of seats translates into a reduced ability to push through controversial constitutional reforms.
Toward the end of the month, however, Mexico’s central bank unexpectedly raised its key overnight interbank interest rate from 4.00% to 4.25%. It was the bank’s first interest rate increase since 2018 and the first rate change since a quarter-point rate cut on February 11. Policymakers were not unanimous—three voted for a rate increase, while two voted for no change.
The rate increase surprised many investors, as it happened just three weeks after the central bank released its quarterly inflation report, in which it highlighted upward risks to inflation. The report 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 believes that recent upside surprises in inflation, along with policymakers’ desire to build credibility and better anchor inflation expectations, caused the central bank to act.
As for the central bank’s next move, Gifford says that it is difficult to predict because policymakers offer no forward guidance beyond stating that their actions are data dependent. However, he believes rate hikes are likely to continue until inflation starts to recede and upward inflation surprises begin to reverse.
Colombian Stocks Outperform Despite Cloudy Political Outlook
Colombian stocks, as measured by MSCI, returned 5.63% in June and outperformed the MSCI Emerging Markets Index. Equities rebounded partially from deep losses earlier this year, though investors remained uncertain about the country’s fiscal outlook following an S&P Global Ratings downgrade of the sovereign credit rating into the below investment-grade universe in the latter part of May.
The political outlook also remained cloudy. After nearly seven weeks of protests, the National Strike Committee called for a temporary halt to demonstrations around mid-June. This followed the end of talks between the committee and the government after the former criticized President Iván Duque Márquez’s administration for not ceding to its demands. Rather than abandoning its efforts to force change, however, the committee launched a campaign to gain broader support by meeting with people in key economic sectors, union members, and students, among others, in an attempt to build a united front. Its goal is to stage a July 20 march to the capitol, with the message being “for life, peace, democracy, and against the neoliberal policies of Duque’s government.”
According to Gifford, the committee’s demands include strengthening the health sector, ramping up vaccinations, providing a universal basic income for 7.5 million families, promoting national production and food sovereignty, creating jobs and protecting wages and pensions, guaranteeing university enrollment, and ending privatizations. So far, it has achieved the scrapping of proposed tax and health reforms, as well as the resignation of several government officials, including the finance and deputy finance ministers. The Duque government intends to make a second attempt at tax reform—the first proposal back in April is what prompted the beginning of the protests—but not until Congress is back in session the same day as the national strike.
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Note: Returns are for the periods ended June 30, 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.
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