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
Inflation seemed to be a major driver of sentiment during last week. Warren Buffett commented over the previous weekend that the economy was running “red hot,” and Treasury Secretary and former Federal Reserve Chair Janet Yellen acknowledged on Tuesday that rates may have to rise somewhat to prevent the economy from overheating (Yellen later clarified that her remarks were not intended to be a prediction or a recommendation for the central bank to raise rates). Investors seemed to remain on the lookout for supply chain constraints and input cost inflation, and Wednesday brought word that copper and lumber prices hit new all-time highs.
The stock market rallied on Friday, appearing to be due in large part to important data suggesting the economy was not growing as fast as some expected. The Labour Department reported that nonfarm payrolls expanded by only 266,000 in April, a fraction of the nearly 1 million jobs widely expected. While restaurants and leisure companies added 331,000 jobs, manufacturing and retail payrolls fell slightly. The unemployment rate rose a bit, from 6.0% to 6.1%, and March job gains were also revised lower. Some observers pointed to a shortage of available workers in the slowdown in hiring and increased competition for employees may have been reflected in a surprise 0.7% jump in average hourly earnings over the month. In a contrasting view of labour market health, weekly jobless claims reached a pandemic-era low of 498,000.
Some of the rest of the week’s data surprised on the downside, if to a more modest extent. The Institute for Supply Management’s (ISM’s) gauge of April manufacturing activity came in at 60.1, the lowest since January and well below consensus estimates of around 65 (readings over 50 indicate expansion). March construction spending also rose less than expected. The ISM’s gauge of April services activity missed expectations too, but IHS Markit’s rival gauge surprised modestly on the upside.
The Netherlands and Belgium began easing coronavirus lockdowns, allowing outdoor hospitality to recommence. Most European countries have given at least a quarter of their populations a single dose of vaccine, The Guardian newspaper reported, citing figures from the European Centre for Disease Prevention and Control. In Germany, where the number of people vaccinated has increased significantly, Health Minister Jens Spahn said all adults would be offered the Oxford-AstraZeneca vaccine.
The European Commission also announced plans to reopen the EU’s borders again to holidaymakers from outside the bloc by June.
Economic data continued to point to a broad-based pickup in eurozone activity in March. The volume of eurozone retail sales climbed 2.7% sequentially, beating a consensus forecast, after rising 4.2% in February. Increases in retail sales volumes were particularly strong in the Netherlands, Denmark, Germany and Lithuania. German manufacturing orders in March rose 3.0% sequentially, beating a consensus estimate for 1.7% and accelerating from a 1.2% expansion in February. Exports f rom Germany continued to recover in March despite the co ntinuation of lockdown restrictions, rising 1.2% sequentially in adjusted terms.
The UK plans to offer a third jab to all those over 50 years of age in the fall, with the more aggressive aim of eradicating the threat of COVID-19 by Christmas, The Times newspaper reported.
The UK and Japan agreed to deepen their trade and security cooperation, following bilateral talks ahead of a G7 foreign ministers’ meeting. The two countries’ foreign ministers explored opportunities for increased collaboration in areas of joint interest and where expertise can be shared, such as economic security, advanced technologies, health and science.
Japan’s government extended a state of emergency in Tokyo and other pref ectures until 31 May to curb a surge in coronavirus cases and give the government time to accelerate its vaccination programme. Authorities had hoped that a “short and powerful” state of emergency would contain a fourth wave of infection, but cases remain at high levels, particularly in Tokyo and Osaka, leading to shortages of hospital beds. Health officials reported an all -time high level of severe coronavirus cases nationwide on Friday. The government also announced an easing in some measures – with a view to mitigating economic damage – such as allowing department stores, movie theatres and other large commercial facilities to reopen with shorter hours.
April preliminary same-store sales volumes announced by four major department stores were about three to four times higher than in the same month the previous year, when stores were forced to close due to the pandemic. However, compared with the pre-coronavirus April 2019 period, sales have decreased by around 20% to 30%.
The Caixin services Purchasing Managers’ Index (PMI) rose to 56.3 in April, the fastest growth pace this year for the private survey. Domestic tourism surged over the f ive-day Labour Day holiday and surpassed pre-pandemic levels, according to the government, though revenue over the period fell short of forecasts. However, box office and cinema admissions set new records, ref lecting strong pent-up demand among Chinese consumers for entertainment and other services. Among other economic readings, China reported that April exports surged a stronger-than-expected 32.3% in US dollar terms f rom a year earlier, when the pandemic disrupted the economy, while imports increased roughly 43%. Stripping out the base effect, the two-year growth rate rose to 16.8% in April, much stronger than pre-pandemic levels.
Last week, MSCI All Country World Index (ACWI) returned 1.3% (10.7% YTD).
In the US, the S&P 500 returned 1.3% (13.2% YTD). The major US indexes produced mixed returns across a wide range as a Friday rally erased some losses f rom early in the week. The narrowly focused Dow Jones Industrial Average fared best, while the technology-heavy Nasdaq Composite recorded its worst weekly loss in two months. Technology shares underperformed within the S&P 500, along with consumer discretionary, utilities and real estate stocks. Value stocks outperformed their growth counterparts for the third week in a row, small capitalisation stocks lagged, and the rotation continued out of momentum stocks – or those that have seen significant recent appreciation. Russell 1000 Growth returned -1.0% (6.7% YTD), Russell 1000 Value 2.8% (18.9% YTD) and Russell 2000 0.3% (15.3% YTD).
Earnings season continued to wind down over the week, with 442 of the S&P 500 companies expected to have reported first-quarter results by the end of the week, according to data from Refinitiv. Earnings over the quarter have generally surpassed analysts’ estimates by a wide margin, with analysts polled by FactSet currently expecting overall profits for the S&P 500 to have grown by over 49% relative to the year before. The season has been relatively “quiet” in the sense that earnings beats or misses do not appear to have had dramatic effects on stock prices, however.
In Europe, the Euro Stoxx 50 climbed 2.0% (15.1% YTD) on stronger-than-expected earnings results and growing confidence in an economic recovery. In local currency terms, Germany’s DAX rose 1.7% (12.3% YTD), Italy’s FTSE MIB added 2.0% (11.3% YTD) and France’s CAC 40 gained 2.4% (16.2% YTD). Switzerland’s SMI returned 1.5% (7.2% YTD). The euro was stronger against the US dollar, ending the week at 1.22 USD per EUR, up from 1.20.
In the UK, the FTSE 100 rallied 2.4% (11.9% YTD) and the domestically focused FTSE 250 returned 1.3% (11.9% YTD). The British pound strengthened against the US dollar, ending the week at 1.40 USD per GBP, up from 1.38.
In a holiday-shortened week (the market was closed for Golden Week for the first three trading days), Japanese equities at least momentarily shrugged off concerns about the virus and associated containment measures to register a gain. The Nikkei 225 rose 1.9% (7.7% YTD), the broader TOPIX finished 1.8% higher (8.1% YTD) and the TOPIX Small Index firmed 2.0% (7.8% YTD). Investor optimism was supported by the prospects of a global economic recovery following better-than-expected US data in recent weeks. The yen gained against the US dollar, closing at JPY 108.6 per USD, compared to 109.3 at the end of the previous week.
MSCI Emerging Markets Index returned 0.1% last week (4.9% YTD), dragged down by Chinese stock markets.
Chinese stocks fell in a holiday-shortened week. The large-cap CSI 300 Index dropped 2.5% for the week (-4.0% YTD), while the country’s benchmark Shanghai Composite Index shed 0.8% (-1.5% YTD). Mainland markets reopened Thursday after being closed Monday through Wednesday for the Labour Day holiday. Consumer stocks were among the best performers as preliminary holiday sales and travel data were positively received by investors, though a 40% surge in tourism in Macau was seen as disappointing. Select pharmaceutical names fell after the US announced it might waive COVID-19 vaccine-related intellectual property rights, a move that would increase competition for many vaccine makers.
The yield on China’s 10-year sovereign bond declined three basis points to 3.17%. China’s economy has peaked in momentum terms, according to some analysts, a view that has supported those who think that bond yields in China may also be near a peak. However, rising producer price inflation and commodity prices, as well as pressure from increasing yields in the US and globally, are other factors expected to influence Chinese bond yields in the near term.
Calm returned to credit markets a week after Beijing offered financial support to troubled state-owned China Huarong Asset Management. Given the government’s recent focus on deleveraging, many investors have braced themselves for an uptick in corporate defaults in the coming months. In foreign exchange trading, few analysts appeared concerned over China’s recent currency depreciation. On the other hand, many analysts expect continued capital inf lows into China and see a stronger currency as a greater risk. For the week, the renminbi strengthened slightly against the US dollar and closed at 6.45 per dollar.
In Turkey, the BIST-100 Index returned 3.1% (0.1% YTD). Early in the week, the government reported the consumer price index (CPI) for April rose 1.7% month over month, and that 12-month inflation through the end of April was 17.1% versus a 16.2% year-over-year increase through the end of March. T. Rowe Price sovereign analyst Peter Botoucharov says these f igures were in line with his expectations, and he currently believes the CPI will remain in the 16.5% to 17.5% range through late summer – assuming the lira remains relatively stable in the currency markets. While he expects some drop in the inf lation rate by the end of the year, he believes the Turkish central bank’s latest year-end estimate of 12.2% versus a previous projection of 9.4% is overly optimistic.
On Thursday, the central bank held its regularly scheduled policy meeting and, as expected, kept the one-week repo auction rate at 19%. In their post-meeting statement, policymakers reiterated their commitment to a tight monetary policy by keeping the repo rate above the headline CPI “to maintain a strong disinflationary effect…” Botoucharov believes the central bank will keep the repo rate at 19% until policymakers see the first signs of inflation turning lower, perhaps in June or July. At that time, he believes the central bank will initiate a new rate-cutting cycle.
Colombian assets were pressured by President Iván Duque Márquez’s decision – following several days of protests that ended up turning 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 f inance minister and deputy f inance minister. The bill would have increased the collection of value-added taxes (VAT) by including some goods and services while gradually increasing personal income tax rates, among other things.
Colombia’s new finance minister indicated he would work on a new, albeit much slimmer, tax reform proposal in partnership with members of Congress. Even if a revised tax reform bill becomes law, T. Rowe Price emerging markets sovereign analyst Aaron Gifford believes it would be unlikely to bring in a meaningful amount of net new revenue given promises to keep social expenditures intact. In the meantime, social and political risks are rising, with labour unions calling for additional strikes, protestors making new demands even through the tax reform proposal was tossed out, and a lef t -wing candidate showing an early lead in polls ahead of the May 2022 presidential election.
Last week, Bloomberg Barclays (BB) Global Aggregate Index (hedged to USD) returned 0.2% (-2.0% YTD), BB Global High Yield Index (hedged to USD) 0.4% (1.6% YTD) and BB Emerging Markets Hard Currency Index 0.6% (-1.6% YTD).
The disappointing US jobs data sparked a sharp but temporary decrease in Treasury yields on Friday morning, helping temporarily push the yield on the benchmark 10-year note to a two-month low before finishing lower for the week. Dovish remarks f rom several Federal Reserve officials also contributed to the decline. The 10-year Treasury yield ended the week at 1.58%, down five basis points from 1.63% (66 basis points higher YTD).
Core eurozone bond yields fell at the start of last week on underwhelming US manufacturing data. Yields steadied after a European Central Bank policymaker hinted that the central bank’s bond purchases could slow in June. German 10-year bund yield ended the week two basis point lower at -0.22%, down from -0.20% (36 basis points higher YTD).
The yields on peripheral eurozone government bonds largely rose. They initially tracked core markets lower, but Italian government bonds then sold off after reports emerged that the country would issue debt with a 30-year maturity. Uncertainty over the timing of Italy’s recovery package also pushed peripheral yields higher.
UK gilt yields fell, tracking early moves in core markets. However, the Bank of England then revised its forecast for 2021 UK economic growth to 7.25% from 5% and said it planned to slow bond purchases, causing a momentary rise in yields. The 10-year gilt yield ended the week at 0.77%, down seven basis points from 0.84% (58 basis points higher YTD).
US investment-grade corporate bond spreads moved wider alongside weakness in equities early in the week. However, spreads later tightened amid balanced flows and an uptick in overnight demand from Asia. Primary issuance was in line with weekly expectations, and the new deals were met with adequate demand.