U.S.
Up-and-down week amid light volume Stocks finished little changed in an up-and-down week amid some of the lightest daily trading volumes of 2021. Small-caps performed slightly better than large-caps, and the technology-heavy Nasdaq Composite Index modestly lagged the broad market. No particular theme—such as companies that would most benefit from economic reopening or stocks popular with individual investors—dominated the week’s activity, although semiconductor stocks were notably weak. Headlines on possible capital gains tax hike briefly rattle stocks Stocks took a decided turn lower in trading on Thursday on news headlines that President Joe Biden plans to propose nearly doubling the long-term capital gains tax rate for taxpayers who earn more than USD 1 million a year. The tax hike would be used to fund some of the measures in Biden’s American Families Plan, which could be formally proposed next week and may involve free community college tuition, child-care subsidies, and other health- or education-related spending. Stocks recovered some of their intraday losses as investors seemed to realize that negotiations in Congress would likely make any final tax increase lower than what Biden initially proposes. Quarterly earnings season was in full swing, and the week’s earnings reports provided more evidence that the economy is gradually transitioning to a post-pandemic environment. Netflix reported that its number of new subscribers declined steeply in the first quarter and said that it expects to add even fewer subscribers in the second quarter as consumers spend less time at home. Major airlines, including United, American, and Southwest, posted another quarter of weak earnings but said that they are seeing a meaningful pickup in travel demand as more people are vaccinated and become comfortable traveling. Weekly jobless claims reach lowest level in pandemic Initial unemployment claims fell to the lowest level since the onset of the pandemic in March 2020, according to weekly data from the Department of Labor. The report showed that the labor market is continuing to improve, although weekly jobless claims remain well above pre-pandemic averages. The National Association of Realtors reported that existing home sales fell 3.7% in March from February amid a limited supply of houses on the market. The limited supply and strong demand pushed the median sales price to a record high in March. Treasury yields decrease slightly U.S. Treasury yields modestly decreased as the Biden capital gains tax increase news supported demand for less risky assets, according to T. Rowe Price traders. The broad municipal debt market gained but lagged Treasuries. Continued cash flows into municipal bond funds industrywide helped demand keep pace with an increase in new municipal issuance. Our investment-grade corporate bond traders said that U.S. banks continued to issue new debt early in the week and that the deals were generally well received. However, the new supply created some weakness in the secondary market. Lower levels of issuance later in the week helped the secondary market recover. High yield bonds lagged to some degree amid declining risk sentiment and some disappointing earnings reports from sub-investment-grade issuers.
Europe
Shares in Europe slipped on concerns that a rising coronavirus caseload could slow the pace of the economic recovery. These fears overshadowed strong corporate earnings. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.78% lower. Major country benchmarks also fell: Italy’s FTSE MIB declined 1.45%, Germany’s Xetra DAX Index slid 1.17%, and France’s CAC-40 Index pulled back by 0.46%. The UK’s FTSE 100 Index dropped 1.15%. Core eurozone bond yields ended the week roughly flat. Optimism about the vaccine rollout drove yields higher early in the week. This move reversed, however, after the European Central Bank (ECB) President Christine Lagarde said it was too early to withdraw stimulus. UK gilt yields fell, tracking U.S. Treasury yields, amid volatility in equity markets and the Biden administration’s proposal to raise taxes on higher-income earners. Broader authority for German government to combat coronavirus Parliament passed a controversial law that would allow the German government to impose strict lockdown restrictions, such as overnight curfews and school closures, wherever coronavirus infection rates rise to dangerous levels. Eurozone PMI stronger than expected; German deficit expected to balloon The IHS Markit flash composite Purchasing Managers’ Index (PMI) for the eurozone rose to a nine-month high of 53.7 in April, up from 53.2 in March. (PMI readings greater than 50 imply an expansion in economic activity.) This uptick defied analysts’ expectations for a slightly weaker result. Business activity in the manufacturing sector rose to a record high, and the services portion of the economy unexpectedly returned to growth, despite the introduction of new restrictions aiming to curb the coronavirus’ spread. Germany’s Finance Ministry forecast that the public sector deficit would expand to about 9% of gross domestic product in 2021—compared with 4.2% last year—as the country increases spending to counter the economic damage caused by the coronavirus pandemic. ECB to keep borrowing costs low As expected, the ECB kept its main policy measures unchanged and restated its determination to keep borrowing costs low, saying it would maintain its recently increased pace of bond purchases until the eurozone’s economy is firmly on the path to recovery. “The governing council expects purchases under the PEPP [Pandemic Emergency Purchase Program] over the current quarter to continue to be conducted at a significantly higher pace than during the first months of the year,” Lagarde said.
Japan
Coronavirus worries weigh on markets Despite a brief rally on Thursday, it was a disappointing week for Japanese equity markets—weighed down by weakness across all sectors as the government enhanced its response to tackle surging coronavirus cases. The Nikkei 225 Index shed more than 650 points over the week, briefly falling below the 29,000 mark before finishing the week 2.2% lower at 29,020.63. Meanwhile, the broader TOPIX Index also closed down. The yen weakened against the U.S. dollar, trading just below JPY 108 on Friday, while the yield of the benchmark 10-year Japanese government bond reflected the more cautious landscape, finishing the week lower at 0.069%. Worries about possible coronavirus-related lockdowns in major cities amid the continuing surge in coronavirus cases weighed on sentiment throughout the week. Japan reported nationwide daily infections of more than 5,000 for the first time in three months, causing Prime Minister Yoshihide Suga to declare another state of emergency in a few prefectures. Manufacturing expands, but inflation remains sluggish Despite preliminary data showing the manufacturing sector expanding at a faster-than-expected pace—a flash estimate from Jibun Bank showed a manufacturing PMI score of 53.3, up from 52.7 in March—the week ended on a negative trend. Government data highlighting a 0.2% decline in consumer prices, year on year, did little to lift spirits.
China
In China, the large-cap CSI 300 Index advanced 3.4% for the week, while the country’s benchmark Shanghai Composite Index added 1.4%. Chinese stocks rose steadily since Monday, when mainland equity markets received inflows totaling USD 2.5 billion from Hong Kong via Stock Connect, marking the third-largest single-day inflow from Hong Kong investors. In the bond market, the yield on China’s sovereign 10-year bond increased one basis point to 3.18%. The People’s Bank of China left the loan prime rate (LPR), a reference rate for new bank loans, on hold for the 12th straight month. In currency trading, the renminbi strengthened slightly against the U.S. dollar to close at 6.491. New rules from China’s financial regulators appear to have lifted investor sentiment. After the market close the previous Friday, April 16, the China Securities Regulatory Commission (CSRC) announced a number of new market reforms, including a pledge to curb the “unregulated” expansion of fintech firms. It also amended qualification requirements for companies applying to list on Shanghai's Star Board—a technology-focused, Nasdaq-styled stock market—including a ban on property and financial firms. T. Rowe Price traders in Hong Kong said that while the new rules may seem unfavorable for the country’s property developers and internet companies, investors had mostly expected the CSRC measures, which they noted could help reduce regulatory uncertainty. New bond market regulations announced In other financial markets reform news, the Shanghai and Shenzhen Stock Exchanges on Thursday issued new guidelines aiming to tighten the onshore bond approval process. Credit assessment, corporate governance, financial disclosure, capital structure, and the pledging of assets are among the areas covered by the guidelines. The guidelines also singled out for criticism China’s property and local government financing vehicles (LGFVs) bond issuers for having strong operating subsidiaries but financially weak holding companies. LGFVs with assets below RMB 10 billion, or a credit rating of AA or less, were discouraged from issuing bonds, except for refinancing. Analysts generally welcomed the new rules, which they said reflected China’s continued efforts to increase discipline in the onshore bond market after a wave of missed debt repayments by state-linked companies in recent months. No major economic data were released this week. First-quarter profits at China’s central state-owned enterprises (SOEs) totaled RMB 415.3 billion, a roughly 31% increase over the same period in 2019 before the coronavirus pandemic disrupted the economy, reported Caixin, a financial news outlet. The surprisingly strong performance over the two-year period was noteworthy given the widely held view that China’s SOEs are inefficient entities that drag on the country’s overall economic growth.
Other Key Markets
Russia Russian stocks, as measured by the Russian Trading System (RTS) Index, returned about 1.0%. Tensions between Russia and its neighbor Ukraine remained elevated in the early part of the week, pressuring Russian assets, amid media reports of a continuing Russian military buildup along its border with Ukraine—ostensibly to conduct training exercises. Geopolitical tensions also increased as the Russian government made good on its threat to “reciprocate” as a response to new U.S. sanctions. Late last week, Russia decided to sanction eight U.S. officials and to ask 10 U.S. diplomats to leave the country. According to T. Rowe Price sovereign analyst Peter Botoucharov, this response was in line with his and with general expectations. On Wednesday, Russian President Vladimir Putin delivered his annual address to the Federal Assembly. Many were hoping that Putin would give some clues about his intentions regarding Ukraine. According to Botoucharov, the address to parliament was toned down and mainly focused on domestic matters, such as infrastructure spending and policies to support families. However, Putin did make a few statements warning outside parties not to cross red lines and interfere with internal politics or “threaten the core interests” of Russia; he said that Russia’s response to “provocations” would be “asymmetrical, swift, and tough.” On Thursday, Russia announced the end of the military exercises near Donbas and indicated that the army would start to return to its bases from the south on April 23. This would represent a de-escalation of tensions along the Line of Contact, and it lifted investor sentiment in both Russia and Ukraine. Friday’s equity market action in Russia was less ebullient, though the ruble strengthened as the central bank raised short-term interest rates by 50 basis points (half a percentage point) to 5.00%, which was more than expected, and signaled that there may be additional rate increases due to inflation risks. Mexico Mexican stocks, as measured by the IPC Index, returned around 0.8%. During the week, the Mexican government reported that inflation in the first half of April increased 6.1% year over year. This was higher than expected and well above the central bank’s 2% to 4% inflation target range. According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, most of the increase was due to non-core components, though core inflation remains above the central bank’s target range. Gifford notes that most of this is due to base effects, so the financial markets and central bank officials are likely to look through it. Still, it provides some discomfort at a time when other emerging market central banks have begun to hike rates due to similar price pressures. In legislative matters, the Mexican Senate has approved a controversial bill that gives the government further control over the fuel market, favoring Petróleos Mexicanos (PEMEX) at the expense of private players. The bill, which was approved in general terms and will go to President Andrés Manuel López Obrador for his signature once some articles are finalized, aims to expand the regime’s control over gasoline and diesel distribution as well as imports and marketing. It also lets the government suspend permits for national, energy, or economic security reasons, and it even allows PEMEX to take over energy facilities in these circumstances. This bill comes on the heels of legislation intended to end the so-called “asymmetric regulation” of the energy sector—the promotion of private competition in the sale of fuels, rather than PEMEX. That bill, which has already been passed by the lower house of the legislature, is expected to be approved by the Senate.