Our Multi-Asset Solutions team produce a weekly market recap which aims to summarise the previous week’s major events and developments that may impact markets. They try to include points that may aid you in your decision making or conversations with clients. This is supplemented by a market data sheet, offering a summary of financial market performance. Last week’s summary is below.
Economic and political backdrop
Equity markets pulled back last week because of lingering fears among investors of higher inflation and that bond yields could cause an exodus from equities back into fixed income instruments. Consumer inflation data released earlier in the month surprised on the downside, but producer prices, reported at mid-month, rose 1.3% in January, much more than consensus expectations and the largest increase in data going back to 2009. Inflation has also been pronounced in the housing sector, and Tuesday brought news that home prices had increased 10.1% in December from a year before. Relatedly, lumber futures have reached record highs, while copper prices are at their highest levels in a decade.
The week’s strong economic signals also seemed to feed inflation worries. Weekly jobless claims hit their lowest level (730,000) in three months, recording their biggest decline since August. Personal incomes, reported Friday, jumped 10.1% in January, thanks largely to payments from the coronavirus relief package passed in December. It was the largest gain since April, following the passage of the first pandemic relief package. The manufacturing sector remained in solid shape, with core (excluding defence and aircraft) capital goods orders rising 0.5%.
Fears that stronger growth and rising inflation would lead the Federal Reserve to begin removing monetary stimulus sooner than expected abated on Wednesday, when Fed Chair Jerome Powell confirmed policymakers’ dovish stance in testimony before Congress. Stocks surged briefly after Powell’s comments emphasising that inflation remains “soft” and does not show signs of likely experiencing “very large” or “persistent” increases later this year. Powell said it may take more than three years to reach the central bank’s inflation goals.
Meanwhile, Democrats in Congress continued to move toward passage of another round of coronavirus relief before some current benefits expire on 14 March. The House of Representatives passed the bill with 219 votes against 212; a stark contrast to the strong bipartisan support of the previous pandemic relief bills enacted last year. Reports surfaced that President Joe Biden might be willing to cut the size of his proposed USD 1.9 trillion package, however, perhaps by lowering the income cap for individuals to receive direct payments of USD 1,400. The president has stated he was open to suggestions to “make the package better and make it cheaper.”
The Senate Parliamentarian also ruled Thursday that the bill could not include an increase in the federal minimum wage to USD 15 per hour if passed through the reconciliation process, which would require a simple majority in the chamber and thus be achieved on a party line vote. Costco added its name to the list of companies raising wages on their own, however, announcing on Thursday that it was raising its hourly pay rate to at least USD 16.
Denmark said it would ease restrictions in the retail sector and allow some schools to reopen on 1 March.
Only 6.4% of the EU’s population has received a vaccine, European Commission (EC) President Ursula von der Leyen said after an EU video summit. European Council President Charles Michel said, “I think we have to face the truth that there is indeed a difficult situation,” and warned that “the next few weeks will continue to be difficult as far as vaccinations are concerned.”
Fourth-quarter GDP data were revised up unexpectedly to a growth rate of 0.3% from an initial estimate of 0.1% on strong exports and solid construction activity. The full-year figure was increased to -4.9% from -5.0%. The eurozone Economic Sentiment Indicator rose to 93.4 in February from 91.5 the month before, the highest since March last year, the EC said. Separate surveys showed consumer confidence improving in Germany and Italy, but sentiment remained little changed in France.
UK Prime Minister Boris Johnson unveiled a plan for gradually and irreversibly lifting lockdown restrictions in England from 8 March and ending on 21 June. Almost all sections of the economy and many social activities are likely to be reopened by 17 May. British finance minister Rishi Sunak is expected to extend the jobs support programme until at least May in his budget next week, and there may be state support for industries hit hardest by the lockdowns, such as aviation.
For the first time since mid-2019, Reuters monthly Tankan Index recorded a positive reading among manufacturers. The poll, which closely tracks the Bank of Japan’s quarterly Tankan Index, showed that Japan’s manufacturers in aggregate were more positive than negative on business prospects, thanks to improving overseas demand. The sentiment index rose to 3 from -1 in January, reflecting strengthening conditions in chemicals and manufactured foods. The survey also showed that sentiment was expected to continue rising over the next three months, in part due to improving business conditions and a more vibrant global economic environment. Although sentiment remained weak in the nonmanufacturing/services segments in February, the index rose to -7 in February from -11 in the prior month. Business conditions in the nonmanufacturing sectors are forecast to improve over the next three months, powered by better prospects for the information/communications sectors.
According to Finance Minister Taro Aso, Japan’s GDP growth in the first quarter of 2021 (the final quarter of Japan’s fiscal year) is expected to slow from the torrid pace in the three-month period ended 31 December 2020, when GDP expanded at a 12.7% annualised clip. Despite the economic slowing, the finance minister believes the government is not currently considering adopting any fresh stimulus measures and the government will likely maintain its current pace of bond issuance and fiscal stimulus. Bank of Japan Governor Haruhiko Kuroda intends to conduct a policy review in March to ensure the central bank can continue to provide ultra-loose monetary policy for an extended period.
The falling coronavirus infection rate and lessened strains on hospital capacity in several of Japan’s regions have prompted government officials to okay the removal of the state of emergency status for six prefectures on Sunday, a week earlier than the initially scheduled 7 March deadline. Prime Minister Yoshihide Suga, in concurrence with a panel of experts on infectious diseases, will maintain the state of emergency in Tokyo and three nearby prefectures for another week. Suga noted the decline in new coronavirus cases was encouraging but warned against complacency. The government intends to start administering vaccinations for the elderly on 12 April, after vaccinating healthcare workers.
In a week devoid of economic readings, China investors are focusing on the National People’s Congress (NPC) that starts 5 March. In addition to reviewing the past year’s performance, the annual parliament meeting will offer a road map for future economic plans, including goals for 2021 and Beijing’s latest five-year development plan. China has unveiled its annual GDP and other official targets at past NPC meetings, although last year it did not, due to the pandemic.
Last week, MSCI All Country World Index (ACWI) returned -3.3% (2.3% in February, 1.9% YTD).
In the US, the S&P 500 returned -2.4% (2.8% in February, 1.7% YTD). The major benchmarks pulled back sharply in response to a steep rise in longer-term Treasury interest rates. The S&P 500 recorded its biggest weekly decline in a month, while the Nasdaq Composite suffered its worst drop since October. Consumer discretionary shares were particularly weak, dragged lower in part by a steep decline in automaker Tesla, while a drop in Apple shares weighed on the information technology sector. Energy stocks outperformed as oil prices rose – the price of a barrel of Brent ended the week at USD 66.1, up from 62.9 – and a rotation into cyclical shares continued as vaccine progress fuelled optimism about the reopening of the global economy. The shift led value stocks to handily outperform their growth counterparts, leaving them well ahead for the year-to-date period, while small caps lagged large caps. Russell 1000 Growth returned -4.4% (0.0% in February, -0.8% YTD), Russell 1000 Value -1.0% (6.0% in February, 5.1% YTD) and Russell 2000 -2.9% (6.2% in February, 11.6% YTD).
In Europe, the Euro Stoxx 50 returned -2.1% (4.6% in February, 2.6% YTD). Shares in Europe fell along with global markets. Trading was volatile during the week as concerns grew that central banks might have to act sooner than expected to quell inflationary pressures that could accompany an economic recovery. Major Continental stock indexes declined. Germany’s DAX fell 1.5% (0.5% YTD), France’s CAC 40 lost 1.2% (2.9% YTD) and Italy’s FTSE MIB gave up 1.2% (3.1% YTD). Switzerland’s SMI returned -1.7% (-1.7% YTD). The euro was stable against the US dollar, ending the week at 1.21 USD per EUR.
In the UK, the FTSE 100 retreated 1.9% (1.6% in February, 0.8% YTD), coming under pressure from a stronger British pound. The currency rose to its highest level in almost three years, reaching USD 1.42 on Wednesday before pulling back from this peak, ending the week at 1.39 USD per GBP, as the rapid rollout of vaccines fuelled recovery hopes and investors priced in an interest rate hike over the next two to three years. The domestically focused FTSE 250 returned -0.6 (2.2% YTD).
Japan’s stock markets tumbled on Friday, the last trading day of the month, ending sharply lower for the holiday-shortened trading week. Japan’s stock markets were closed on Tuesday, 23 February, in observance of the Emperor’s Birthday. For the week, the Nikkei 225 declined 3.5% (4.8% in February, 5.6% YTD), the broader large-cap TOPIX fell 3.3% (3.3% YTD) and the TOPIX Small Index lost 2.2% (0.8% YTD). The yen weakened versus the US dollar, ending at 106.6 JPY per USD compared to 105.5 on the previous Friday.
MSCI Emerging Markets Index logged a punishing weekly loss of 6.3% (0.8% in February, 3.8% YTD).
Chinese shares fell in tandem with the global sell-off. The Shanghai Composite Index shed 5.1% (1.0% YTD) while the large-cap CSI 300 Index fell 7.6% (2.4% YTD) in its worst weekly performance since 12 October 2018, according to Reuters. Profit-taking was evident in highflying companies related to semiconductors, electric vehicles and automaking, as well as in names that recently had an initial public offering. However, shares of airlines and Macau gaming companies did well, as investors rotated into so-called COVID-off names that are expected to see a demand revival as travel and quarantine restrictions are relaxed.
In credit markets, the yield on China’s sovereign 10-year bond was broadly flat. The official loan prime rate – a reference rate for new renminbi loans – was unchanged for the 10th straight month. February marked the second month of net liquidity withdrawal by China’s central bank, something not seen since March 2019, possibly signalling an inflection point for monetary policy. However, a news outlet affiliated with the People’s Bank of China (PBoC) stated that investors should focus more on official interest rates rather than on money market liquidity operations in order to gauge monetary policy. For some analysts, a more accurate description of PBoC policy might be “neutral with a bias toward tightening.” Historically, tighter liquidity conditions have posed a significant headwind for Chinese A-shares, a market that is dominated by retail investors and includes many rate-sensitive state-owned companies.
In foreign exchange trading, the renminbi was firm versus the US dollar, rising 0.4% to close at 6.46 against the greenback. China is considering a change in how its citizens can invest in overseas assets. Currently, Chinese citizens can purchase foreign currencies up to USD 50,000 annually for overseas travel, study or work but are not permitted to buy overseas financial assets or property. The rule change would allow them to buy overseas securities and insurance policies within the USD 50,000 foreign exchange limit, according to a State Administration of Foreign Exchange official. Some analysts view the proposal as an attempt to slow the renminbi’s appreciation after it gained about 6.5% against the US dollar in 2020.
In Turkey, the BIST-100 Index returned -5.7% (0.1% YTD). Shares were pressured in part by rising US Treasury yields, a stronger US dollar versus the lira, and weakness among various world markets.
During the week, Turkey’s central bank adjusted its requirements with regard to Turkish lira reserves and foreign exchange (FX) reserves. By raising reserve requirements for the lira and decreasing them for foreign currencies, the central bank’s objective, according to T. Rowe Price sovereign analyst Peter Botoucharov, is to tighten lira liquidity and improve US dollar liquidity in the Turkish financial system. While Botoucharov believes this is the right policy action, he also believes the central bank has signalled that it has resumed managing the country’s liquidity conditions and is willing to pursue less orthodox policy measures.
If the central bank’s intent is to fortify the lira, Botoucharov believes policymakers need to do more than adjust reserve requirements. Demand for foreign currencies (non-Turkish currencies) remains strong – reflecting a lack of confidence in the lira – while the dollarization trend has temporarily stabilised, not reversed. Also, the current account deficit, which is about 5% of GDP, and the central bank’s plans to replenish reserves are other sources of FX demand, and, unfortunately, policymakers continue to prefer supporting growth with spending rather than making more difficult fiscal adjustments. In addition, any central bank efforts to replenish its FX reserves will boost demand for non-Turkish currencies. At the very least, Botoucharov believes the central bank is likely to continue raising rates in an attempt to keep the Turkish lira relatively stable and achieve some disinflation, rebuild its reserves and increase confidence among investors.
In Mexico, the IPC Index returned about -0.5% (1.4% YTD). On Thursday, the Mexican central bank released the minutes from its 11 February monetary policy meeting, at which policymakers unanimously agreed to reduce the overnight interbank interest rate from 4.25% to 4.00%. T. Rowe Price emerging markets sovereign analyst Aaron Gifford believes the minutes reveal that policymakers were not as dovish on monetary policy as many initially believed. While most of the discussion contained mitigating statements for the list of risks that central bank officials have highlighted in the past, the input from each of the five board members varied quite a bit with regard to the monetary policy decision:
• One dovish opinion is that monetary policy is still too tight and that there is plenty of space to keep easing.
• Another dovish stance is that the upward inflation readings are temporary and that policymakers should be willing to look beyond them.
• A neutral opinion is that policymakers should focus on Mexico’s financial conditions and the peso exchange rate.
• One of the hawkish opinions among policymakers is that there is a limit to monetary policy and that it is important for policymakers’ actions to generate confidence.
• Another hawkish perspective is that there is still plenty of uncertainty, that core inflation has not declined, and that policymakers may need to pause their rate cuts.
Given the more difficult external backdrop in the weeks since the meeting stemming from rising US Treasury yields and a stronger US dollar, Gifford will be paying close attention to how board sentiment shifts. He still thinks, however, that central bank officials are biased for at least one more rate cut.
Last week, Bloomberg Barclays (BB) Global Aggregate Index (hedged to USD) returned -0.5% (-1.6% in February, -2.1% YTD), BB Global High Yield Index (hedged to USD) -0.7% (0.1% in February, 0.1% YTD) and BB Emerging Markets Hard Currency Index -1.0% (-1.4% in February, -2.3% YTD).
Inflation worries, stronger-than-expected economic data, technical factors and weak auction results combined to push the 10-year US Treasury yield to around 1.61% on Thursday afternoon, its highest level in over a year, before easing on Friday. The yield ended the week up seven basis points at 1.41%, up from 1.34%.
Core and peripheral eurozone government bond yields rose; tracking moves in US Treasury yields. German 10-year bund yield ended the week five basis points higher at -0.26%, up from -0.31%. Dovish rhetoric from Fed Chair Powell triggered a sharp bond sell-off across most developed markets as it failed to allay fears of inflation rising. Christine Lagarde, president of the European Central Bank, and other policymakers warned markets that they were monitoring borrowing costs, but the consequent decline in yields was short-lived. UK gilt yields also rose in line with other developed markets, with the 10-year gilt yield ending the week at 0.82%, up 12 basis points from 0.70%.
Investment-grade corporate bond spreads widened in anticipation of rising rates, but movements were hemmed in by more balanced flows and healthy trading volumes in the secondary market. Primary issuance was in line with expectations, and the new deals were well subscribed. Rising rate and inflation concerns also weighed on the high yield market, with weakness concentrated in longer-duration, higher-quality and lower coupon bonds. The primary calendar was fairly active, and high yield funds reported outflows.