Weekly Market Update 12/03/2021
Shares in Europe rose over the week as the U.S. prepared to inject a massive amount of fiscal stimulus into the economy and the European Central Bank (ECB) promised to buy more bonds to counter rising borrowing costs. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 3.52% higher. Germany’s Xetra DAX Index climbed 4.18%, France’s CAC 40 advanced 4.56%, and Italy’s FTSE MIB gained 5.00%. The UK’s FTSE 100 Index added 1.97%.
Core eurozone government bond yields fell. The ECB announced it would accelerate bond purchases in the second quarter to suppress the recent rise in yields, pushing bond prices up. Fourth-quarter gross domestic product (GDP) for the region was also revised down slightly, further suppressing yields. Peripheral eurozone government bond yields largely tracked core markets. UK gilt yields also declined broadly. However, optimism coming from the UK’s vaccine rollout and the final approval of U.S. fiscal stimulus helped to moderate this decline later in the week. Better-than-expected January GDP data for the UK also supported gilt yields relative to other developed markets.
The ECB’s latest estimations call for EU GDP growth at 4% in 2021, an increase from the 3.9% expansion that the central bank forecast in December. The ECB also revised its inflation outlook to 1.5% from 1% for 2021 and adjusted its 2022 estimate to 1.2% from 1.1%. ECB President Christine Lagarde credited these adjustments primarily to “temporary factors and higher energy price inflation.”
UK economic output shrank 2.9% sequentially in January due to a sharp slowdown in the services sector, official data presented. Economists in a Reuters survey had forecast a 4.9% contraction, likely reflecting the new lockdown measures instituted at the start of the year. Exports of UK goods to the EU, excluding gold and other precious metals, fell 40.7% from the preceding month. UK imports from the EU tumbled 28.8%.
US Stocks moved broadly higher for the week, raising most of the major benchmarks to new records. Investors seemed to remain focused on fluctuating longer-term bond yields and the discount they place on future earnings, resulting in substantial swings in the technology-oriented Nasdaq Composite Index. Shares in heavily weighted automaker Tesla rebounded after the previous week’s sell-off, lifting the consumer discretionary sector. The small-cap Russell 2000 Index outperformed and extended its recent market leadership, ending the week up roughly 19% on a price (excluding dividends) basis for the year to date.
The week started out on a down note as the yield on the benchmark 10-year U.S. Treasury note stayed near one-year highs. Bond yields retreated over the following days, which seemed to provide a lift to sentiment. Tesla and other high-growth stocks that had sold off in previous weeks were particularly strong as interest rate fears abated. On Wednesday, the Labor Department reported that core (excluding food and energy) consumer prices had increased only 0.1% in February, slightly below expectations. Core producer prices, reported Friday, rose 0.2%, in line with expectations and well below January’s 1.2% jump.
The Nasdaq gave back some of its gains after Treasury yields bounced back Friday to end higher for the week. (Bond prices and yields move in opposite directions.) The broad municipal bond market posted strong gains through most of the week as cash flowed back into the market and new issuance remained relatively modest
Japan’s stock markets advanced over the week, with the Nikkei 225 Stock Average gaining 2.96% and the broader TOPIX Index up 2.89%. Japanese value stocks continued their strong outperformance relative to their growth peers, amid increased global interest in companies whose fortunes are closely tied to the economic cycle: The TOPIX Value Index has surged so far this year. The yen weakened to near a nine-month low, closing above JPY 109 versus the U.S. dollar. The yield of the 10-year Japanese government bond finished the week at 0.11%.
Chinese stocks posted a weekly loss as the Shanghai Composite Index fell 1.4% and the large-cap CSI 300 Index shed 2.2%. Despite recent weeks’ underperformance, investor appetite for Chinese stocks appeared undiminished. Net inflows into Chinese stocks have turned neutral for the first time since November, according to data from global custodian bank State Street, reflecting improving demand from China’s major trading partners and the country’s ongoing recovery. The recent weakness in Chinese stocks comes as Beijing appears to be focusing more on longer-term economic restructuring and financial deleveraging amid a strong post-pandemic recovery. In the bond market, the yield on China’s sovereign 10-year bond declined nine basis points to 3.27% for the week.
Commodities face another buffeting this week with the US Federal Reserve meeting, statement and forecasts very likely to send prices in all directions. Ahead of the meeting, last week saw oil prices fall, gold weaken, silver rise, copper remain solid and iron ore lose up to 5% by Friday’s close.
Global benchmark Brent futures fell 0.6% on Friday and West Texas Intermediate also dipped 0.7% for its first weekly decline in three weeks.Both Brent and WTI down slightly for the week after rising more than 10% over the past two. WTI settled at $US65.58 per barrel and Brent settled at $US69.20.
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