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Rising rates weigh on stocks The major indexes ended mostly lower for the holiday-shortened trading week, with the large-cap benchmarks and technology-heavy Nasdaq Composite index hitting record intraday highs before falling back. An increase in longer-term interest rates weighed on fast-growing technology stocks by raising the discount rate on future earnings. Conversely, the increase favored bank shares by boosting lending margins and helped value shares—heavily weighted in financials—outperform growth stocks. Trading volumes continued to fall back from January’s record levels but were expected to pick up again on Friday, following one of the largest option expiration dates on record, according to T. Rowe Price traders. Markets were closed on Monday in observance of Presidents’ Day. Investors remained on the sidelines pending more tangible indications on the budgetary and sanitary situation. The focus turned to company statements as positive earnings surprises came in, a reflection of better-than-expected resilience. Elsewhere, Italian bond yields and spreads with Germany fell further on optimism that Mario Draghi would head up the government. Tech stocks gained on more warnings of a global semiconductor shortage. Volkswagen said supply constraints could hit its vehicle production. Fourth-quarter results at L’Oréal largely beat expectations as e-commerce sales surged 62% over a year. The business now accounts for 26% of overall sales. Trading began Tuesday on a strong note, which the firm’s traders attributed to a combination of hopes for further fiscal stimulus, continued easy monetary policy, a better-than-expected fourth-quarter earnings season, and progress in fighting the coronavirus. Further developments on those fronts were mixed as the week progressed. On Tuesday evening, President Joe Biden said in a town hall event that he expected all Americans to have access to a coronavirus vaccine by July, helping life fully return to normal by Christmas. Wall Street also seemed encouraged by a Bloomberg report that vaccine supply was anticipated to double by April, thanks in part to the approval of additional candidates. New studies suggested that current vaccines might not be as effective against new South African variants, however, and the Pentagon revealed that approximately one-third of troops were refusing shots when offered, reflecting continued widespread vaccine skepticism in the public at large. Inflation fears return Stocks pulled back on Thursday morning, following Walmart’s report of weaker-than-expected earnings. The company also predicted slower earnings growth in the coming year, due in part to its commitment to raise the average wage of its workers to USD 15 per hour. The news followed the Labor Department’s report on Wednesday that producer prices increased by 1.3% in January, the biggest increase since December 2009. Retail sales also jumped 5.3% in the month—well above consensus expectations for a 1.1% gain—which many attributed to USD 600 direct payments to lower- and middle-income Americans approved as part of the December stimulus package. Critics of the Biden administration’s new USD 1.9 trillion coronavirus relief plan pointed to the data as evidence that it could overheat the economy and result in a rebound in inflation. Advocates for further stimulus could also find support in the week’s data, however. Weekly jobless claims, reported Thursday, jumped to 861,000, the most since mid-January. Housing data also surprised on the downside, with housing starts falling back substantially from a nearly 14-year high. More importantly, perhaps, severe winter weather wrought havoc over much of the Midwest and South, particularly in Texas, where millions lost water and power. The damage helped magnify calls for the assistance to municipalities included in the Biden administration’s relief package. The shutdown of much of the region’s massive oil and gas infrastructure was also expected to have ripple effects across the national economy. Longer-term yields surge to highest level in almost a year Inflation worries and the retail sales data helped push the yield on the benchmark 10-year Treasury note to its highest level in nearly a year. The broad municipal bond market also posted negative returns through most of the week, as tax-exempt yields rose in sympathy with the sell-off in U.S. Treasuries. Minutes released Wednesday from the January Federal Reserve policy meeting may have helped limit the general rise in yields, with officials indicating that they would remain committed to their massive asset purchase program for “some time.” Our traders reported that investment-grade corporate bonds benefited from improving overnight demand from Asia and strengthening sentiment. Rising U.S. rates, manageable new issuance, and relatively light dealer inventories contributed to a strong technical backdrop. Conversely, high yield bonds and other riskier market segments experienced weakness as investors weighed stimulus and vaccine optimism against the prospects for higher inflation and the impact rising rates could have on the economy. Only a few new deals came to the market, and below investment-grade funds reported negative flows.



Shares in Europe ended the week modestly higher, supported by companies posting encouraging quarterly earnings. However, these gains were tempered by concerns that rising inflation and higher bond yields might prompt central banks to begin tightening 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 eurozone bond yields rose. The 10-year German bund yield reached about -0.32% on Friday—its highest level since June 2020—as growing reflation expectations in the U.S. weighed on core asset demand. Strong Purchasing Managers’ Index (PMI) numbers also put upward pressure on yields. Yields on peripheral eurozone bonds largely tracked core markets. Ten-year gilt yields reached 0.64% on Friday, up from 0.57% at the start of the week. UK and Switzerland set to ease lockdowns UK Prime Minister Boris Johnson said that England’s lockdown would be eased in “stages” based on a “cautious and prudent approach.” Johnson, who is due next week to outline plans for reopening the economy, might start by allowing children to return to school in early March, news reports said. The latest UK health data showed that the number of coronavirus cases in England, Wales, and Northern Ireland fell to their lowest levels since early October. Switzerland said it would start lifting some restrictions in March, reopening shops, museums and libraries, zoos, gardens, and sports facilities. The European Commission struck a deal with Pfizer and BioNTech for another 200 million doses of their coronavirus vaccine. However, Pfizer still has not delivered 10 million doses due in December, according to EU officials, cited by Reuters. Reports indicate that the pharmaceutical company had committed to making up the shortfall by the end of March. Pace of eurozone economic contraction slowed in February The latest PMI data indicated that business activity in the eurozone shrank for a fourth consecutive month in February, although the pace of contraction slowed as a stronger-than-expected pickup in manufacturing offset a continuing decline in services. Business expectations for the year ahead also rose to the highest level since April 2018 amid optimism that coronavirus vaccination programs would accelerate. Italian Parliament backs Draghi Prime Minister Mario Draghi’s new unity government in Italy received overwhelming support from both houses of Parliament. In Draghi’s maiden speech to the Senate, he pledged to accelerate the coronavirus vaccination program and outlined plans for investing EUR 210 billion in EU recovery funds and for structural reforms to the legal system and public administration.



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 milestones 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. Japan’s equity markets, which underperformed in 2020, have done well so far in 2021 as global vaccine distributions have led to optimism about a pickup in economic activity in the coming months. Japan, which has lagged other developed markets in starting vaccinations, began its vaccination rollout during the week. Chinese demand drives increase in exports The Nikkei’s climb above 30,000 occurred amid generally positive economic reports that included a better-than-expected gross domestic product report that showed the Japanese economy growing at a 12.7% annualized pace in the fourth quarter. However, for the calendar year, the economy contracted 4.8%, reflecting the sharp downturn in the first half of 2020. Japanese exporters also received good news. The manufacturing Purchasing Managers’ Index increased to 50.6 due to a pickup in export orders (readings above 50 indicate expansion), and an increase in new orders relative to inventories was also encouraging. The services PMI continued to fall because of restrictions that remain in place to slow the spread of the coronavirus. In addition, the Finance Ministry said that Japanese exports increased 6.4% year over year in January, which was driven by a 37% increase in shipments to China. Imports to Japan decreased about 10%. Inflation remains subdued. Despite signs of an economic rebound, core inflation was down 0.6% compared with the same period last year. The indicator has been flat or negative for 10 straight months, while the Bank of Japan has continued to reaffirm its commitment to achieving a 2% inflation level.



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 that 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. Lunar New Year complicates economic signals. Economic data over the Lunar New Year holiday were atypical due to efforts to discourage travel following a flareup of coronavirus infections in northern China. Travel plummeted 71% over the three weeks from January 28, reflecting the government’s campaign to dissuade people from using public transportation in what is normally China’s peak travel season. However, consumer spending was strong as people redirected their spending into other outlets: Retail and catering spending climbed 29% from the year-ago period when the virus was still spreading and from the corresponding period in 2019, according to China’s Commerce Ministry. Migrant workers—who typically endure long journeys to return to their hometown for Lunar New Year—fueled a steep rise in parcel deliveries and in telecom charges as travel restrictions kept most people in place for the holiday. Other consumer-driven categories that reported sharply higher sales were online takeaways and recreational spending. These gains, however, were offset by losses recorded by hotels, transportation, and tourism-related industries. Pent-up demand for consumption-driven activities is expected to surge in the coming months as China relaxes restrictions and travel patterns normalize. For example, a recent survey of visitors to Macau, the offshore gambling hub in southern China, showed that more than 90% of respondents planned to return within 12 months, while 49% planned to visit at least twice. The pandemic-driven delay in consumption last year is expected to significantly boost domestic consumer spending in 2021, according to analysts.



South African Stocks Gain Stocks in South Africa posted gains, overcoming ongoing political turbulence as former President Jacob Zuma defied a Constitutional Court order to appear and respond to corruption allegations. Current President Cyril Ramaphosa has pledged to fight corruption within the ruling African National Congress (ANC). Ramaphosa, who was formerly Zuma’s deputy within the ANC, faces opposition from factions within the party that some fear could destabilize the country’s government. South African stocks likely benefited from the early-week strength in commodities prices, helping to offset the political worries. Turkey’s central bank keeps rates steady. Turkish stocks climbed as the country’s central bank left its benchmark lending rate unchanged at 17%. Turkey’s central bank opted to keep rates steady despite rising inflation, which could have prompted an interest rate hike to contain price increases. The recent strength in the country’s currency, the lira, may have contributed to the central bank’s decision to hold off on a rate increase. Turkish bonds also gained after the central bank’s Thursday announcement.k

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