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
Vaccine news appeared to drive sentiment last week. Futures wavered on Tuesday morning, after US regulators announced they were suggesting a “pause” in Johnson & Johnson’s coronavirus vaccinations following rare reports of blood clots. On Thursday, however, investors seemed encouraged by Pfizer’s announcement that it could deliver 10% more of its vaccine by the end of May than earlier promised. Moderna said its similar mRNA vaccine was more than 90% effective at protecting against COVID-19 and more than 95% effective against severe disease up to six months after the second dose.
The week’s economic signals seemed supportive. March retail sales, reported Thursday, grew by 9.8%, the most since May. Gains were broad-based, reflecting the continued reopening of restaurants and other retail operations, as well as a recovery from a 2.7% pullback in February due to exceptionally severe weather. Investors also welcomed some more exceptional manufacturing data, with a gauge of mid-Atlantic factory activity hitting its highest level in nearly five decades. Weekly jobless claims came in at 576,000, well below expectations and a new pandemic-era low. The University of Michigan’s preliminary gauge of consumer sentiment also reached its best level (86.5) since the pandemic began but came in a bit below consensus expectations.
The week brought important inflation data. Headline consumer prices rose 0.6% in March, while core (less food and energy) prices rising 0.3%, both moderately above consensus expectations. Import prices rose 1.2% in the month, also above forecasts. News also continued to emerge about price pressures in parts of the economy affected by supply disruptions. The Wall Street Journal, for example, reported a dramatic increase in rental car prices as firms struggle to rebuild fleets because of slowed auto production, resulting in turn from the global chip shortage. Inflation concerns may have been tempered by Federal Reserve Chair Jerome Powell’s interview on “60 Minutes” the previous weekend, in which he reiterated that policymakers would like to see inflation “on track to move moderately above 2% for some time.”
German Chancellor Angela Merkel urged Parliament to approve new laws that would allow federal authorities to impose strict coronavirus restrictions, such as curfews, on areas with high infection rates. Data showed infections were rising in Germany, which Merkel said was firmly in the grip of a third wave of the pandemic. Ireland, where the vaccination programmes have progressed slower than in the UK, plans to start lifting measures in May. France, Germany and Italy began to accelerate their vaccination campaigns, the Financial Times reported.
Italy has raised its target for this year’s budget deficit to 11.8% of GDP from an 8.8% forecast made in January, a government source told Reuters. The new target includes the impact of a EUR 40 billion stimulus package signed off by the cabinet, the source said.
England, which has vaccinated almost two-thirds of its population, started reopening shops, personal care services and outdoor dining this week. Northern Ireland said it would allow outdoor dining from the end of April, accelerating its exit from lockdown.
The UK economy grew 0.4% in February, helped by an uptick in factory output and retail and wholesale sales, official data showed. The 2.9% contraction that the economy suffered in January was revised to a 2.2% slowdown.
The week began cautiously with investors seemingly content to hold their fire ahead of some significant economic updates from China and the US later in the week. A lack of fresh triggers following the record market highs set last week also contributed to the sluggish start.
However, Tuesday saw Japanese stocks rally as investors were initially encouraged by Fed Chair Jerome Powell’s comments that a rate hike in 2021 was unlikely. The news boosted earnings optimism and hopes for a faster global economic recovery. Sentiment was also given a major lift midweek, as the IMF revised its expectations for regional growth in Asia. The revised outlook sees the Asian economy expanding 7.6% in 2021, up from the previous view in October last year of 6.9%. The IMF also expects a further 5.4% growth in 2022.
The confident mood was soon undermined, however, by the continued surge in coronavirus infections. A spike in daily cases, notably in Tokyo and Osaka, made likely the prospect of renewed restrictions imposed on activity. Meanwhile, a jump in oil prices did little to improve sentiment in the world’s second-largest net importer.
The week ended more positively, however. Bank of Japan Governor Haruhiko Kuroda provided a cautiously optimistic view of the economy, saying it would continue to improve as robust global demand lifts business sentiment. Key economic data from China and the US seemed to support his view.
The economy surged 18.3% year over year in the first quarter, albeit versus a very low base in 2020, when stringent shutdowns were imposed to contain the initial COVID-19 outbreak. Earlier in the week, China’s Customs reported that exports rose 30.6% in March in US dollar terms. Exports were a key growth driver for China in 2020. Despite the strong headline number, exports slowed in March on a two-year average comparison with 2019. Among the other March data prints, retail sales beat consensus estimates (33.9% versus 28%), while industrial production missed (14.1% versus 18%).
Economists pointed to slower-than-expected sequential GDP growth in the first quarter (0.6% versus 3.1%) due to the virus containment measures at the start of this year and an upward revision to the fourth-quarter data.
Last week, MSCI All Country World Index (ACWI) returned 1.5% (9.7% YTD).
In the US, the S&P 500 returned 1.4% (11.9% YTD). Most of the major benchmarks recorded their fourth consecutive week of gains, moving to record highs. The technology-heavy Nasdaq Composite and the small-cap Russell 2000 slightly lagged the large- and mid-cap benchmarks, staying below their recent highs. Healthcare shares were particularly strong within the S&P 500, helped by gains in insurance stocks, while rising gold and copper prices boosted mining shares. Energy shares were roughly flat after retreating late in the week. The price of a barrel of Brent ended the week at USD 66.8, up from 63.0.
Growth stocks outperformed value shares. Russell 1000 Growth returned 1.8% (8.6% YTD), Russell 1000 Value 1.2% (15.1% YTD) and Russell 2000 0.9% (14.9% YTD).
The week kicked off the unofficial start of earnings season with 22 of the S&P 500 companies scheduled to report first-quarter results, according to Refinitiv. Overall sentiment seemed to get a boost from Wednesday’s release of earnings results from banking giants JPMorgan Chase, Goldman Sachs and Wells Fargo. Analysts polled by both Refinitiv and FactSet currently expect overall earnings for the S&P 500 to have grown by roughly 25% in the quarter on a year-over-year basis, the most since the sharp cut in corporate tax rates that took effect in 2018.
In Europe, the Euro Stoxx 50 rose 1.4% (14.1% YTD), posting a seventh consecutive week of gains on hopes of a strong recovery in the global economy and corporate earnings, despite a resurgence in infections. In local currency terms, Germany’s DAX advanced 1.5% (12.7% YTD), France’s CAC 40 gained 1.9% (13.6% YTD) and Italy’s FTSE MIB added 1.3% (11.7% YTD). Switzerland’s SMI returned 0.4% (7.1% YTD). The euro was stronger against the US dollar, ending the week at 1.20 USD per EUR, up from 1.19.
In the UK, the FTSE 100 returned 1.6% (9.9% YTD) and the domestically focused FTSE 250 returned 1.3% (10.5% YTD). The British pound firmed against the US dollar, ending the week at 1.38 USD per GBP, up from 1.37.
Japanese stock markets were mixed during the week. The Nikkei 225 returned -0.3% (8.8% YTD). The broader TOPIX returned 0.1% (9.5% YTD) and the TOPIX Small Index 0.7% (9.7% YTD). The yen strengthened against the US dollar, closing at JPY 108.8 per USD, compared to 109.7 at the end of the previous week.
MSCI Emerging Markets Index returned 0.8% last week (4.8% YTD).
The Shanghai Composite broad market index of A-shares fell 0.7% over the week (-1.3% YTD). The CSI 300 large-cap index, with its higher weight in technology stocks, retreated 1.4% (-4.7% YTD). Asian and Chinese markets were broadly higher Friday following key Chinese economic data. Mainland investors appeared unsure whether strong GDP data would bring forward liquidity tightening or if disappointing March industrial production data would give the authorities cause to pause. Consumer stocks rallied after a working paper from the government proposed fully lifting restrictions on family size. In foreign exchange markets, the renminbi had a good week, gaining 0.5% against the US dollar.
In Turkey, the BIST-100 Index returned 1.2% (-2.4% YTD). On Thursday, the Turkish central bank decided to leave its one-week repo auction rate unchanged at 19%. The decision was in line with the commitment to policy continuity expressed recently by Governor Sahap Kavcioglu, but the new governor is considered an AKP Party loyalist who seems to share President Recep Tayyip Erdogan’s unorthodox view that high interest rates cause high inflation.
In light of the government’s prerogatives for economic growth and job creation, T. Rowe Price sovereign analyst Peter Botoucharov believes that, under the new governor, the central bank is likely to pursue a faster pace of monetary easing in the future than it would have under former Governor Naci Ağbal. Botoucharov believes Turkey could begin cutting rates as soon as this summer and that policymakers will maintain a looser policy stance. This would likely translate into a higher year-end inflation rate.
In Russia, the Russian Trading System (RTS) Index returned 5.6% (8.1% YTD). In recent weeks, there have been media reports of intensified fighting in the Donbass region of eastern Ukraine between pro-Russian separatists and Ukrainian forces – a conflict that has simmered for seven years – as well as a Russian military build-up along its border with Ukraine. On Tuesday, US President Joe Biden and Russian President Vladimir Putin spoke by telephone and, according to a White House statement, Biden “called on Russia to de-escalate tensions…reaffirmed his goal of building a stable and predictable relationship with Russia…and proposed a summit meeting in a third country in the coming months…”
On Thursday, however, Biden signed an executive order expanding the existing set of US sanctions against Russia – some of which were imposed in the aftermath of Russia’s seizure of Ukraine’s Crimean Peninsula in early 2014. The new sanctions are extensive: They include the expulsion of some diplomatic personnel, as well as sanctions on individuals and entities allegedly involved in meddling in the 2020 US presidential election and conducting other malicious cyber activity. The most serious restriction from an investment perspective is that US financial institutions may not participate in the primary market for ruble- and non-ruble-denominated bonds issued by the Central Bank of Russia, the National Wealth Fund or the Ministry of Finance after 14 June. The restrictions on Russian domestic debt are similar to the ones that the US introduced in August 2019 on Russian Eurobonds; these will likely result in a split between “old/pre-sanction” and “new/post-sanction” bonds.
For the time being, Botoucharov says it is unclear how the new sanctions will affect US-Russia relations, but he will be closely watching several key events in the coming weeks. These include Putin’s annual address to the Russian parliament on 21 April and a Global Leaders Summit on Climate on 22-23 April, which will be hosted by Biden, who extended invitations to Putin and to Chinese President Xi Jinping.
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) 0.5% (1.1% YTD) and BB Emerging Markets Hard Currency Index 0.7% (-2.2% YTD).
Despite stronger-than-expected economic data, US Treasury yields fell over the week. The 10-year yield ended the week at 1.58%, down eight basis points from 1.66%. Stronger demand from Japanese investors and other technical factors were the catalysts for the rally. In addition, upbeat economic data likely caused investors to reduce their expectations for more fiscal stimulus and, relatedly, Treasury issuance.
Core eurozone bond yields crept higher as investors sold existing bonds to make space for long-dated issues from several eurozone countries. News reports indicating Europe would receive additional vaccine supplies in the second quarter also lifted yields. However, yields dipped slightly after the US imposed new sanctions on Russia. German 10-year bund yield ended the week at -0.26%, four basis points up from -0.30%. Yields in peripheral European economies widely tracked the core markets this week.
UK gilt yields broadly followed US Treasury yields lower. The 10-year gilt yield ended the week at 0.76%, down one basis point from 0.77%.
In Japan, the benchmark 10-year government bond yields declined, finishing the week at 0.085%.
In China, rumours spread that state-owned asset manager Huarong Asset Management might fail to meet its upcoming bond payments. The price of Huarong’s bonds fell sharply but began to recover on Thursday after Huarong said it would repay an SGD (Singapore dollar) 600 million bond in April. Contagion to other bonds (and equities) due to Huarong has been relatively mild, seemingly due to expectations that Beijing will step in with financial support for the prominent state-owned enterprise.
Nevertheless, the week’s sell-off in Chinese offshore US dollar-denominated bonds was the biggest since March 2020. Sentiment in both the domestic (RMB) and offshore (USD) bond markets was hurt by new regulations on Tuesday that local government financing vehicles should choose bankruptcy if they were unable to repay their debt. The timing of this announcement shook investors, coinciding as it did with Huarong’s troubles.
The yield on the 10-year Chinese central government bond fell five basis points to 3.18% despite robust economic data. Analysts pointed to a “flight to safety” factor given the volatility in credit markets from Huarong. Assurances on liquidity from the People’s Bank of China, China’s central bank, also helped to ease concerns over a potential increase in funding costs.
Trading volumes were relatively lighter and flows in the US investment-grade corporate bond market were balanced to start the week. Spread movements were fairly limited apart from banking sector spreads, which widened amid post-earnings issuance. The primary market picked up speed as the week progressed, and the new deals were generally met with adequate demand.
The strong economic recovery data, generally positive earnings outlook and optimism around US government spending plans supported the performance of high yield bonds. However, robust issuance weighed on some market segments as investors raised cash to participate in new deals.