Global Markets Weekly Update

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Stock benchmarks end mostly higher as bond yields jump on Fed comments

The major benchmarks ended mostly higher, with the large-cap S&P 500 Index reaching its highest level since February 10 on Friday. Information technology stocks outperformed, helped by gains in Apple following news of analyst expectations for strong sales of the iPhone 13. A continued rise in many commodity prices boosted the energy and materials sectors, while health care shares underperformed, dragged lower in part by a decline in drug giant Pfizer. T. Rowe Price traders observed that market activity was generally subdued but that there was a notable “buy on the close” trend through much of the week. Bloomberg reported Monday that the S&P 500 had gained one-third of one percent in the last hour of trading for five consecutive days—the longest streak in two decades.

Worries about an increasingly hawkish turn by the Federal Reserve seemed to weigh on equity sentiment early in the week, while prompting a sell-off in the bond market. On Monday, Fed Chair Jerome Powell repeated in a speech to the National Association for Business Economics that the central bank could deliver rate increases of larger than 25 basis points (0.25 percentage points) at future meetings if policymakers deem it necessary to control inflation. Earlier in the day, however, Atlanta Fed President Raphael Bostic said that “elevated levels of uncertainty” have tempered his confidence that an “extremely aggressive rate path” is appropriate for the Fed.

Developments in Russia's war against Ukraine also remained on investors' radar. Heavy fighting continued north of Kyiv, and Ukrainian officials rejected a Russian demand that their forces in Mariupol surrender. While concerns that Russia might deploy lower-yield nuclear weapons if its advance remained stalled hampered sentiment, our traders noted that stocks seemed to gain some footing Thursday afternoon after an advisor to Ukrainian President Volodymyr Zelenskyy voiced “cautious optimism” on ceasefire talks.

Economic signals prove resilient in face of Russian invasion

The week’s economic data had a mixed and arguably puzzling tone, with some data seeming to improve since the Russian invasion. Durable goods orders fell 2.2% in February, the first decline in five months and much more than the consensus expected fall of around 0.5%. Stocks also appeared to react negatively on Wednesday morning to news that February new home sales declined 2.0% despite a rise in inventories to their highest levels since 2008. February pending home sales, reported Friday, fell 4.1%, defying expectations for a roughly 1% gain.

Conversely, IHS Markit’s gauge of manufacturing activity rose much more than expected in March and hit its highest level since September 2020, while its services gauge indicated the most activity since July 2021. Meanwhile, weekly jobless claims fell much more than expected and hit levels last seen in September 1969.

The yield on the benchmark 10-year U.S. Treasury note jumped by roughly 35 basis points over the week, mirroring a sharp drop in Treasury prices. (Bond prices and yields move in opposite directions.) The broad tax-exempt municipal bond market sold off in line with Treasuries. Our municipal traders reported that new deals had to reprice to higher yields to clear the primary market.

Bank loans escape downdraft in fixed income markets

Our traders also observed volatility in the investment-grade corporate bond market amid the moves in the equities and Treasuries markets, hawkish comments from Fed Chair Powell, and technical conditions hampered by thin liquidity. However, the primary market showed strength, as new issues were generally oversubscribed. The high yield bond market also experienced weakness, but the segment was supported somewhat by the performance of energy issuers, which account for a relatively large proportion of the market. Our traders noted that new issuance volume was extremely light, but a few additional deals appeared ready to price if the market shows signs of stabilizing.  

The jump in bond yields had less impact on the bank loan market, where coupon payments move higher alongside interest rates. The technical backdrop for loans was broadly positive with healthy inflows to both mutual funds and exchange-traded funds amid investors’ expectations for multiple Fed rate hikes as the year progresses. 

Shares in Europe weakened amid the ongoing Russian invasion of Ukraine and the prospect of tighter monetary policy. In local currency terms, the pan-European STOXX Europe 600 Index ended 0.23% lower. The main market indexes were mixed. Germany’s Xetra DAX Index eased 0.74%, while France’s CAC 40 Index lost 1.01%. Italy’s FTSE MIB Index gained 1.39%, and the UK’s FTSE 100 Index added 1.06%.

Core eurozone bond yields rose, following U.S. Treasuries higher after hawkish comments from Fed Chair Jerome Powell raised expectations for more aggressive rate hikes. Stronger-than-expected eurozone purchasing managers’ surveys also pressured yields higher. Against this backdrop, the yield on the German 10-year bund reached its highest level since 2018. Peripheral eurozone bond yields broadly tracked core markets. UK gilt yields mostly ended higher, generally in tandem with U.S. Treasuries. However, news of lower gilt supply for the next fiscal year appeared to temper this increase in yields, to a degree.

West imposes more sanctions on Russia, U.S. to supply Europe with more natural gas

Western countries agreed at several summits to provide more military support for Ukraine, reinforce troops on European borders, and extend sanctions on Russian institutions, companies, and individuals. The economic measures included preventing the Russian central bank from selling its gold reserves to bolster the currency and pay for the invasion of Ukraine. European Union (EU) leaders focused on tightening existing sanctions and cracking down on evasion but stopped short of imposing additional curbs on Russian energy imports. The U.S. agreed to supply the EU with an additional 15 billion cubic meters of liquified natural gas this year, with the aim of reducing the bloc’s dependence on Russia.

Eurozone business activity slows on Russian invasion of Ukraine

Eurozone business activity appeared to slow in March, with the S&P Global composite purchasing managers’ index falling to 54.5 from 55.5 in February. (PMI readings greater than 50 signal expansion.) Firms’ costs and prices charged rose at record rates on soaring commodity prices and supply chain delays due to the Ukraine conflict. Business confidence sank amid growing concern about the economic outlook.

Sunak unveils cautious mini budget; UK inflation jumps

UK Chancellor of the Exchequer Rishi Sunak unveiled a mini budget that preserved most of a GBP 50 billion public finances windfall and erred on the side of caution—in light of the worsening economic outlook and the prospect of higher debt repayments. Sunak announced modest cuts in fuel duty and national insurance contributions and preannounced a reduction in the basic income tax rate in 2024, when a general election is likely to be held.

UK inflation hit a 30-year high in February, putting pressure on the Bank of England to continue raising interest rates. The consumer price index rose an annual rate of 6.2%—exceeding the median forecast of 6% among economists polled by FactSet—driven higher mainly by soaring household energy bills and petrol prices. Food prices also rose strongly.

Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 4.93% and the broader TOPIX Index up 3.78%. Sentiment was boosted by expectations of further economic stimulus and reassurances from the Bank of Japan (BoJ) that it will maintain very accommodative monetary policies. The yield on the 10-year Japanese government bond rose to an over six-year high of 0.24%, from the previous week’s 0.21%, amid a global bond sell-off as major central banks began raising interest rates. The yen weakened to an over six-year low of around JPY 121.58 against the U.S. dollar, from 119.23 the prior week, due primarily to the divergent monetary policy outlooks for Japan and the U.S.

Government set to announce additional measures to boost the economy

Amid growing pressure on Prime Minister Fumio Kishida to act to cushion the impact of rising fuel and commodity prices on households and firms, the government is set to announce an additional package of measures to boost the economy. Tokyo’s core consumer price index, a leading indicator of the national average, rose 0.8% in March from a year earlier. BoJ Governor Haruhiko Kuroda said that it is too early for the BoJ to change its dovish stance, with inflation remaining below its 2% target—although he conceded that consumer inflation may accelerate to around that level from April, driven mainly by rising energy costs.

Persistent yen weakness due to rising import costs and ultra-low interest rates prompted Finance Minister Shunichi Suzuki to emphasize the importance of currency stability. He also said that the government will scrutinize foreign exchange moves and their impact on the economy. Kuroda reiterated his view that a weak yen is generally positive for Japan’s economy, as domestic companies benefit from an increase in the value of overseas profits.

Private sector activity fell marginally in March

Flash purchasing managers’ index data showed that Japan’s private sector activity fell in March. Against the backdrop of easing coronavirus restrictions and downward trending COVID-19 cases, the decline was only marginal, however. While there was a moderate improvement in operating conditions in the manufacturing sector, severe supply chain disruptions continued to pose a headwind. Service providers indicated a softer deterioration in business activity, with new business inflows returning to growth at a fractional pace. Companies across the private sector signaled that price pressures were intensifying—primarily as a result of surging raw materials prices—and reported weaker optimism with regard to the outlook for the year ahead, amid concerns about the economic impact of the Russia-Ukraine conflict.

Chinese markets fell amid delisting fears for U.S.-listed Chinese companies arising from a simmering bilateral dispute over auditing standards. For the week, the large-cap CSI 300 Index fell 2.1% and the Shanghai Composite Index shed 1.2%, according to Reuters.

Concerns about the fate of dual-listed Chinese stocks continued to dampen sentiment. Chinese regulators instructed some of the country’s U.S.-listed companies to prepare audit documents for the 2021 financial year, Reuters reported, citing unnamed sources. The companies reportedly included China’s top search engine Baidu, e-commerce platforms Alibaba and JD.com, and social media company Weibo. News of the Chinese regulators’ instruction to dual-listed companies appeared to signal some willingness by Beijing to capitulate to Washington’s demands to resolve a longstanding standoff over auditing standards.

However, analysts noted that it remained unclear if the talks between regulators on both sides would materialize into anything concrete. The uncertainty was underscored Thursday, when the U.S. audit watchdog said that it was still meeting with its Chinese counterparts and called speculation about an agreement “premature.” In a statement, the Public Company Accounting Oversight Board added that it “remains unclear” whether China would permit U.S. regulators to review the audits of U.S.-listed Chinese companies.

For years, the U.S. has demanded access to the books of U.S.-listed companies, but Beijing has refused to give access to corporate audits citing national security reasons. Earlier in March, the U.S. Securities and Exchange Commission (SEC) named five Chinese companies that could face delisting under the Holding Foreign Companies Accountable Act, a law that compels the SEC to delist stocks of companies if U.S. regulators can’t review their audits for three straight years.

Reports of a worsening coronavirus outbreak across the mainland also depressed risk appetite. China counted more than 56,000 cases nationwide since March 1, of which more than half were recorded in the northeastern province of Jilin, according to health officials at a press briefing last Friday, the AP reported. The numbers don’t include cases in Hong Kong, which is suffering one of the deadliest outbreaks since the pandemic began in 2020. In the financial hub of Shanghai, the number of COVID-19 infections surged more than 60% to a record on Friday even as authorities broadened restrictions.

Russia

The Russian stock market partially reopened in a shortened and volatile trading session on Thursday, as the country’s invasion of Ukraine reached the one-month mark. Various news outlets indicate that Ukrainian resistance has stalled the Russian army’s advance, and some claim that Ukrainian forces are staging a counteroffensive in some locations. Nevertheless, Russian attacks over the last month have caused widespread damage, as well as the displacement of more than 3.5 million refugees, according to United Nations data.

On Thursday, the city of Brussels, Belgium, hosted emergency meetings for leaders of NATO, the Group of Seven (G7), and the European Council to discuss the conflict and consider new retaliatory measures directed at Russia. As reported by The New York Times, the U.S. announced new sanctions against hundreds of members of Russia’s legislature and dozens of Russian defense firms. The U.S. also indicated that it would accept up to 100,000 Ukrainian refugees.

On Friday and Saturday, U.S. President Joe Biden was scheduled to travel to Poland to meet with Polish President Andrzej Duda to discuss the refugee crisis caused by the Russian invasion of Ukraine. Poland, which shares its southeastern border with western Ukraine, has received more than 2.1 million refugees.

Turkey

Turkish stocks, as measured by the BIST-100 Index, returned about 1.5%.

Despite the continuing conflict between Russia and Ukraine—which is Turkey’s southern neighbor, across the Black Sea—the Turkish lira was fairly stable this week. T. Rowe Price sovereign analyst Peter Botoucharov believes that the Turkish government’s efforts to stabilize the lira in recent months have been somewhat effective. These efforts include the successful rollout of a foreign exchange (FX) linked Turkish lira deposit instrument, which was announced late last year.

According to Botoucharov, the deposit instrument guarantees to cover corporate and households’ lower returns if the lira deposit interest rate—which is currently about 17% annualized—remains below the rate of lira depreciation versus the U.S. dollar over the contracted deposit time. Due to its apparent effectiveness, as suggested by increased FX deposits and some stabilization in local FX demand, Botoucharov believes that this program is likely to be extended through the end of 2022 and could include new instruments. The government’s fiscal costs for this program are not negligible, but thus far, they have been limited and manageable.