Global equities finished higher last week following a late rally on Friday, with the MSCI World Index closing up 0.7%, the S&P 500 Index up 1.6%, the European STOXX 600 Index up 0.8%, whilst the MSCI Asia Pacific Index was the clear underperformer, down 1.8%.1 There wasn’t one over-arching theme to markets last week, but there were a few market-moving events and comments.
The COVID-19 situation in Europe remains precariously balanced, which weighed on reopening hopes. The now-unstuck tanker in the Suez Canal also continues to attract attention, with media reports suggesting nearly 200 ships carrying US$10 billion of goods were stalled as a result of its prolonged blockage of the busy shipping lane.
On Friday of last week, there were reports in the United States of significant block trading liquidity tied to a hedge fund, on what appeared to be forced selling for margin calls. In terms of global fund flows, data showed cash was king last week.
A ‘Third Wave’ in Europe and Vaccine Disputes
COVID-19 cases continue to surge in continental Europe, in what has been described as a third wave. Italy, France, Estonia, Poland, the Czech Republic and Hungary all remain in a precarious place with regards to COVID-19 case counts as new variants spread fast. These virus mutations have been heavily associated with the rise in cases, with the UK variant now accounting for 76% of new infections in France and 75% in Germany. Last week, a new variant was identified in the French region of Britanny, which is reportedly not detected by standard PCR tests. The worsening situation in Europe does serve as a reminder to the United States of how the situation can change, with new variants spreading stateside, too.
Trends on serious illness continue to be the key focus regarding government decision-making. Despite the new variants, we have seen the rate of hospitalisations drop dramatically across Europe, but particularly in the United Kingdom and Portugal. Overall, death rates are continuing to fall, with vaccination programmes successfully targeting the most vulnerable to the virus.
However, behind the headline numbers, the picture is mixed. Death rates have begun to climb in countries such as Italy and the Czech Republic, whilst Hungary currently has the highest death rate per capita in the world, as countries are gradually impacted by the increased infection rates.
The rise in cases has result in new lockdown measures. France and Poland had already announced new lockdown measures to combat rising infections, whilst UK Prime Minister Boris Johnson warned the United Kingdom was at risk of a third wave.
Meanwhile, there was a rather embarrassing u-turn for German Chancellor Angela Merkel last week on lockdown plans for Easter. Last Tuesday, Merkel and regional leaders had agreed to put Germany into a hard lockdown over the Easter holiday. Merkel explained at the time that Germany was ‘now in a very, very serious situation’ and that ‘case numbers are rising more rapidly and intensive-care beds are filling up again’. However, just 24 hours later, she scrapped the plans for the Easter lockdown, apologised to parliament and asked for the public to forgive her. The practicalities of bringing much stricter measures at such short notice was cited as the reason for the u-turn. The uncertainty has not come at an ideal time politically, as her party has seen a recent reduction in support. As a result of the rising cases in Germany, some economists have cut growth forecasts there. Over the weekend, the German health authorities warned that the third wave could be the worst and could push the health care system to breaking point.
The overwhelming consensus view is that the vaccine remains key to the route out of lockdowns. We have noted over a number of weeks how the vaccination programme in the European Union (EU) trails well behind the United Kingdom and the United States. In the United Kingdom, 46% of people have received their first vaccine, whilst 39% of people in the United States have. This compares to just 14% overall in the EU. Supply constraints have been cited as the reason for the slow pace of vaccination in Europe, with tensions nearly coming to a head last week.
Earlier last week, it was reported that the EU was set to block exports of the AstraZeneca vaccine from EU-based manufacturing plants. The EU then announced last Wednesday that it will give itself stronger powers to do just that, which increased tensions further between the EU and the United Kingdom. The EU later noted they will be looking for ‘reciprocity’ and ‘proportionality’ with their exports.
In terms of markets, as tensions rose, the reopening trade sold off. But some argue that despite the renewed lockdowns, the cyclical rally has further to go, as Europe’s growth momentum should accelerate in coming months as vaccinations accelerate.
Suez Canal Blockage Causes Shipping Rates to Climb
A tanker blocking Egypt’s Suez Canal was in the headlines throughout last week. The latest reports suggest the tanker has been freed, but it has suffered damage to its hull which needs repairs. It is still unclear when the repairs will be completed and when the vessel will fully clear the way for the traffic behind it.
In terms of the economic impact, shipping firms were considering diverting their ships around Africa. This would incur additional expenses and add weeks to transit times for the shipping companies. The congestion has had negative impact on current operations and volumes, but provides significant tailwind for shipping rates, as shipping rates for oil product tankers nearly doubled last week.
Automobiles are also vulnerable to this situation. The industry was already facing semiconductor chip shortages, with numerous manufacturers reporting production cuts in recent weeks. The Suez Canal blockage has the potential to compound this issue further with regards to supply chain disruptions.
China Tensions for Retailers
Western fashion brands traded lower last week following a Chinese backlash to new sanctions. Subsequent to fresh sanctions from the West on China, clothing brands were being targeted on Chinese social media for their stance on cotton supply and workers’ rights in the Xinjiang region.
Week in Review
European equities traded higher last week following a late rally last Thursday and Friday on notably low volumes. The STOXX 600 Index closed the week up 0.9%. However, continued rise in COVID-19 cases around continental Europe and the ongoing EU quarrel regarding vaccine exports kept markets relatively subdued. Events in Egypt were also a focus for markets, as the blockage in the Suez Canal sent ripples through the global energy markets as questions arose over the impact on supply chains.
Market moves in Turkey also garnered attention, as President Recep Tayyip Erdogan replaced the country’s central bank chief following an interest-rate hike which the president was against. The Borsa Istanbul 100 Index was down as much as 18% at one point on Tuesday vs last Friday’s close, and closed the week down 9.6%.
There wasn’t too much divergence between the major indices in Europe as sector/stock weightings drove moves more than anything. The German DAX Index outperformed on the week, up 0.9%, whilst Spain’s IBEX Index lagged, down 0.2%. Momentum outperformed on the week. Technology stocks led the way, taking the lead from the United States after tech giant Intel announced a large investment programme and President Joe Biden touched on a desire to boost investment into science and technology. Chemicals stocks were also higher. At the other end, retail stocks declined, under pressure after Western fashion brands were targeted. Oil and gas stocks also declined as investors tried to assess the impact of events in Egypt.
The macro data out of Europe was supportive last week. The Flash Purchasing Managers Index (PMI) data was surprisingly strong, with the eurozone seeing its first expansion in business activity in six months. The Composite reading jumped to 52.5 (higher than expected). This was led by a pickup in manufacturing activity, showing solid growth with a reading of 62.4. There was also an uptick in hiring intentions and a pickup in prices. Also, eurozone consumer confidence improved, and the German IFO survey was strong, coming in at 100.4. UK PMIs were also better than expected. The Composite reading came in at 56.6, higher than expected. UK unemployment fell to 5%.
The S&P 500 Index gained 1.6% last week, reversing the previous week’s losses, but it was a mixed picture as the midcap-focused Russell 2000 Index underperformed (down2.9% on the week). Sector wise, there was a defensive skew with real estate investment trusts (REITs), staples, and utilities (up 2.8%) all higher. Energy also closed the week stronger. President Biden helped sentiment as he doubled down on the vaccination rollout in his first prime-time address as president. The United States has already hit the target of 100 million vaccinations, and Biden now plans to vaccinate 200 million within the first 100 days of his administration.
US Treasury yields showed signs of stabilisation, with the 10-year yield seeing a weekly decline for the first time in 8 weeks (-4.5 basis points (bps) to 1.678%).2 Treasury five-year and seven-year auctions were not as bad as feared, also easing concerns about rising rates. There was no change to the narrative from the Federal Reserve (Fed). In his testimony to congress, Chair Jerome Powell said that he does not see the economic rebound generating persistently high inflation. He added that high bond yields reflect an improved outlook, in line with what we heard the prior week.
US macro data was less impressive than we saw in Europe, with the Citi Economic Surprise index fading to its lowest level since June 2020. This was driven by worse-than-expected existing home sales and durable goods orders in February. The Markit Composite PMI also slipped, but did remain in expansion.
There were a number of media reports on Friday and over the weekend about a reported US$10 billion of so-called ‘forced’ block selling on Friday, with discounts on blocks ranging from 10%-14%. It now appears that this has been driven by the forced liquidation of more than US$20 billion of positions in the United States and China after hedge fund Archegos Capital Management failed to meet margin calls last week.
Investors are braced for further block selloffs, and we can expect the world of leveraged trading facilitated to come under some scrutiny.
Asian equities were mixed last week, with the MSCI Asia Pacific Index down 1.8%. Australian equities outperformed last week, up 1.7%, thanks to some commodity strength (iron ore in particular). Hong Kong equities lagged, down 2.3% as tensions between United States and China remained in focus. Tensions over human rights concerns and the sanctions backlash were a key talking point. In addition, we saw fresh tension over Taiwan after China’s air force flew 20 planes into Taiwan’s air defence zone last Friday, a day after Taiwan and the United States agreed to boost coast guard operations. Over the weekend, China and Iran signed a 25-year deal covering economic, political and trade relations.
In Japan, Nomura saw a record decline today, trading down 16% on the news of huge losses on a margin call related to Archegos.
In terms of macro data, Chinese February industrial profits grew 178.9% year-on-year. China industrial profits surged in January and February, largely reflecting base effects following early 2020 lockdown. In Japan, we had PMI’s broadly in-line with prior readings, with manufacturing at 52, services at 46.5 and the composite at 48.3.
The Week Ahead
Focus at the start of this week will no doubt centre on the unwind of the Archegos margin call and any fallout from that. Developments in the Suez Canal will also bear watching. Looking ahead at a holiday-shortened week, Chinese PMI’s on Wednesday and the March US employment report on Friday both stand out as key events.
Monday 29 March
- European Central Bank (ECB) Bond Purchases – the ECB’s weekly report on bond purchases will reveal the extent to which the Governing Council is front-loading acquisitions made through the Pandemic Emergency Purchase Programme. President Christine Lagarde indicated on 11 March that the change would first become visible in the data published on 22 March.
- England’s ‘stay-at-home’ rule ends, with outdoor sports and meetings of up to six people outside now allowed.
Tuesday 30 March
- Macro: France consumer confidence; Eurozone consumer confidence; Germany Consumer Prices Index (CPI).
Wednesday 31 March
- Macro: China (March) NBS manufacturing and non-manufacturing PMI; Japanese IP; UK gross domestic product (GDP); Italian, France and eurozone CPI.
- Official results in Israel’s election.
Thursday 1 April
- Macro: US manufacturing PMI.
Friday 2 April
- Macro: US non-farm payrolls unemployment rate for March.
- Good Friday market holidays.
Important Legal Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the team and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.
Companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. The companies and/or case studies shown herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
Links to External Sites
Franklin Templeton is not responsible for the content of external websites.
The inclusion of a link to an external website should not be understood to be an endorsement of that website or the site’s owners (or their products/services).
What Are the Risks?
All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.
Past performance is not an indicator or guarantee of future performance. There is no assurance that any estimate, forecast or projection will be realised.
Views You Can Use
We recently assembled a panel to discuss the European Union’s Sustainable Finance Disclosure Regulation, which represents part of a plan to reorient capital towards a more sustainable economy, to mainstream sustainability into risk management, and foster transparency. Read More.
Chief Market Strategist Stephen Dover believes addressing gender parity issues is not only the right thing to do, but it also creates greater outcomes and returns. Women as investment leaders, entrepreneurs, and venture capital decisionmakers are fundamental for a more sustainable world. By managing gender biases, wealth, and social networks, we can be an ally for gender parity. Read More.
The case for disaggregating international exposure by allocating to single countries remains strong, according to Dina Ting, Head of Global Index Portfolio Management, Franklin Templeton Exchange-Traded Funds. She outlines three investment lenses that shape her team’s views. Read More.
The resilience of emerging markets in the wake of COVID-19 shouldn’t come as a surprise, according to Franklin Templeton Emerging Markets Equity’s Andrew Ness. He says fundamentals still look attractive in select markets and reminds investors of what really matters—earnings. Read More.
1. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
2. One basis point is equal to 0.01%.