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Weekly Market Update 19/02/21

Shares in Europe ended the week modestly higher, supported by companies delivering reassuring quarterly earnings. Those gains were tempered, however, by worries that rising inflation and higher bond yields might prompt central banks to tighten monetary policy. In local currency terms, the STOXX Europe 600 Index advanced 0.21%. Equities in Germany and Italy fell, while France’s CAC 40 Index and the UK’s FTSE 100 Index gained ground.

Core euro-zone bond yields rose. The yield on 10-year German bonds hit -0.32% on Friday, the highest level since June 2020, as rising US inflation expectations weighed on core asset demand. Strong Purchasing Managers’ Index (PMI) numbers also put upward pressure on yields. Yields on peripheral euro-zone bonds largely tracked core markets. Ten-year gilt yields reached 0.64% on Friday, up from 0.57% at the start of the week.

The major US indexes ended the holiday-shortened trading week mostly lower, with the large-cap benchmarks and technology-heavy Nasdaq Composite index hitting record intraday highs before falling back. A boost in longer-term interest rates weighed on fast-growing technology stocks by raising the discount rate on future profits. Conversely, the increase favoured bank shares by boosting lending margins and helping value shares– heavily weighted in financial– outperform growth stocks.

Trading began Tuesday on a solid note, attributed to a mixture of hopes for further fiscal stimulus, continued soft monetary policy, a better-than-expected fourth-quarter earnings season, and progression in fighting the coronavirus. Wall Street also seemed stimulated by a Bloomberg report that vaccine supply is anticipated to double by April, partly thanks to the approval of additional candidates.

US stocks fell on Thursday morning after Walmart reported weaker-than-expected earnings. The company also forecast slower earnings growth in the coming year, in part due to its commitment to raise the average wage of its employees to $15 an hour. The news followed Wednesday’s Labor Department report that producer prices rose 1.3% in January, the largest increase since December 2009. Retail sales also rose by 5.3% in the month – well above consensus expectations of a 1.1% gain, which many attributed to 600 dollars in direct payments to lower- and middle-income Americans approved as part of the December stimulus package. Weekly jobless claims, reported Thursday, jumped to 861,000, the highest level since mid-January. Data on the housing market also surprised on the downside, with house prices falling sharply from a nearly 14-year high. Inflation worries and retail sales data helped push the yield on the 10-year U.S. Treasury note to its highest level in nearly a year.

Japan’s stock benchmarks produced mixed results for the week. The Nikkei 225 Stock Average advanced 1.7% (497.85 points) and closed at 30,017.92. This was the first time the widely watched benchmark had topped the 30,000 milestone in more than 30 years– although it remained well below the all-time high of 38,597 it reached in 1989. For the year-to-date period, the Nikkei index is ahead 9.38%. The broader equity market benchmarks, the large-cap TOPIX Index and the TOPIX Small Index, finished the week with modest losses. In other market news, the yen was slightly weaker and traded above JPY 105 versus the U.S. dollar on Friday. Meanwhile, the yield of the 10-year Japanese government bond finished the week at 0.11%, the highest level since November 2018.

Chinese shares ended on a mixed note on a holiday-shortened week. The large-cap CSI 300 Index slipped 0.5%, while the benchmark Shanghai Composite Index rose 1.1%. China’s financial markets reopened Thursday, February 18, after a weeklong Lunar New Year holiday. In fixed income markets, the yield on China’s 10-year government bond closed at 3.31%, five basis points above its pre-holiday level. The People’s Bank of China (PBOC) drained RMB 260 billion from the financial system, which dampened buying momentum. Now that China’s economy is on firm footing, analysts expect the PBOC will gradually dial back pandemic stimulus measures. In currency trading, the renminbi closed at 6.487 against the U.S. dollar, slightly weaker from its pre-holiday level.

Commodities traded lower for a second week with the US and China attempting to get a trade deal across the finish line. Gold found support at a key level while a week-long oil rally ran out of steam with OPEC+ under pressure to cut production further. West Texas Intermediate fell $1.28 to settle at $59.24 a barrel, falling less than 1% over the week. Brent for the April settlement slipped $1.02 to end the session at $62.91 a barrel, posting its largest daily drop since 15th January.

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