We have picked some of the more interesting global markets figures from last week to present here – we believe these might be indicating a new trend for global equities and should definitely not be ignored by investors.
Untied States
Equities
Last week was defined by stock declines, in line with significant volatility and volume swings. Major indexes took a hit too, especially smaller caps. Last week S&P lost 3.30% from the week before, with DOW and NASDAQ losing 3.28% and 3.5%, respectively, against the previous week. S&P and DOW are both registering loses YTD, with NASDAQ barely hanging on at 1.42% gain YTD. The Russell 2000 index, on the other hand, seems to be doing much better this year, with 4.84% gain YTD.
Last week was more about the GME and AMC share price skyrocketing in line with retail investor interest and short squeeze effects (due to institutional short-sellers’ retreat) than anything else, although it was actually a busy earnings report week in the US. Some analysts and media outlets believe that major players had to sell various long positions in the wider market to cover their failing short positions in GME and AMC, which in turn led to a bad week for indexes. Of course, it is possible that investors are limiting risk exposure, amidst worries that equities are way overvalued, combined with the fact that earnings reports are not offering any major financial news, which the market hasn’t already priced in. The aforementioned cohort of retail investors also targeted some other assets last week, including Nokia shares, Silver ETF (SLV), as well as some digital (crypto) assets.
The Federal Reserve reinforced the economic uncertainty narrative and left interest rates and asset purchase volumes unchanged.
Bonds
10-YR benchmark yield remains stable at around 1.07% – 1.09%, with a slight decrease over the week in line with risk aversion and general equities retreat. Municipal bonds attract high demand, putting pressure on their yield curves and leading to a substantial gain in terms of bond prices. Both investment-grade and high-yield corporate bonds continued to attract investors, although worries about vaccination, recovery, stimulus, and inflation curtail demand.
Europe
Stocks were down due to vaccination program issues amidst high new case numbers and death rates. STOXX 600 was down 3.10%, with DAX, CAC, and FTSE UK dropping by 3.2%, 2.9%, and 4.3% respectively. In line with recent production delays at Pfizer and AZ, the EU is planning on allowing member states to block vaccine exports to countries outside the block, thus prioritising domestic vaccination efforts. The block is expected to have a stronger Q2 in terms of vaccination efforts. Meanwhile, EU members, including France, Germany, Netherlands, UK, and Portugal, are either extending lockdowns, planning new restrictions, or curbing travel from countries with the new COVID-19 strains. Despite raging pandemic, economic setbacks, and political turmoil, Q4 GDP numbers are relatively stable for the block’s leading economies, with some countries registering slight YoY growth and others performing better than expected.
Elsewhere
Japan
The Nikkei 225 was also down for the week – almost 3.5%, with YTD performance standing at just below 1% gain. TOPIX was also down for the week, erasing most of its YTD gains. The USD appreciated against the yen, trading at around 104.77. The country is in a state of emergency amidst a recent surge in COVID-19 cases, which the Government plans on extending till March 2021, rather slow vaccination rollout. Many economic analysts are now predicting a W-shaped recovery for Japan, meaning that a second correction in GDP growth and market performance is likely. It would seem local companies are anticipating a second dip, which is reflected in their plans to reduce CAPEX by nearly 3% across the board. However, the IMF has a more optimistic view and still predicts that Japan’s economy will grow by over 3% in 2021.
China
The Shanghai Composite Index lost 3.4% last week and CSI 300 dropped by 3.9%. The move was seen as a negative response to central bankers tightening monetary policy and actually reducing balance sheet (by about $45B last week) and thus removing a significant amount of liquidity from the markets to reflect improving GDP growth, higher industrial output, export boom, and regulators’ fears of potential asset bubbles (signs of which can be seen in the local housing markets). The Hang Seng Index, on the other hand, did well in line with investor demand from mainland China – Hong Kong is actually often preferred for initial or secondary listings of Chinese companies, with most IPOs in Hong Kong now being Chinese companies. The Treasury benchmark remains fairly stable at around 3.2% yield, although there are signs of some fixed-income outflow in line with expectations of tighter monetary policy in the short and potentially higher interest on future government borrowing.
While most economies are struggling, China seems to be doing well in terms of recovery – so well that policymakers are already worried about too much liquidity and asset bubbles against the backdrop of acceptable GDP growth, with strong export and industrial figures. Therefore, while the Fed and ECB are being more dovish than ever, their Chinese counterparties are turning more hawkish by the day, which could mean rising interest rates and more attractive bond yields (government and corporate) in the short-term (at least until the West starts contracting), but also potentially less attractive valuations on the stock market, especially when it comes to growth stocks and their promising earnings forecasts, which get more heavily discounted, come base-rate-hike time. On the other hand, US markets could be headed for correction (probably not a massive or sudden one), which is only fair looking at how stock valuations have grown since Q2 2020, against the backdrop of a rather slow and unstable economic recovery.
