Stocks around the world rallied on Friday, as China announced that it would ease some of its travel restrictions amid a decline in Covid-19 cases. The move boosted optimism that the global economic recovery would regain momentum and ease supply-chain bottlenecks. Bond yields also rose, while the dollar and gold fell.
China’s Policy Shift: A Boost for Growth and Trade
China, the world’s second-largest economy and a major trading partner for many countries, said on Friday that it would allow domestic travelers who are fully vaccinated to visit Beijing without quarantine, and that it would resume issuing visas for overseas visitors who have received Chinese-made vaccines. The policy shift came after China reported zero locally transmitted Covid-19 cases for the first time in two months, signaling that it had contained the latest outbreak of the Delta variant.
The news was welcomed by investors, who had been worried about China’s zero-tolerance approach to Covid-19, which had led to strict lockdowns, travel bans, and mass testing in several regions. These measures had hampered China’s economic activity and consumer spending, as well as disrupted its supply chains and exports. Some analysts had lowered their growth forecasts for China, citing the impact of the pandemic and other factors such as regulatory crackdowns, power shortages, and debt woes.
The easing of travel curbs could help China’s economy rebound in the fourth quarter, as it would boost domestic tourism, consumption, and confidence. It could also benefit other countries that rely on China’s demand for their goods and services, such as commodities exporters, manufacturers, and tourism operators. Moreover, it could ease some of the supply-chain pressures that have been plaguing the global economy, such as shortages of raw materials, components, and shipping containers.
Global Markets: A Broad-Based Rally
Global markets reacted positively to China’s policy shift, as they saw it as a sign of improving growth prospects and trade conditions. The MSCI All Country World Index, which tracks stocks across 50 countries, rose 1.2% on Friday, reaching a record high. The index gained 3.7% for the week, its best weekly performance since February.
The rally was broad-based, with all major regions and sectors posting gains. Asian markets led the way, with the Shanghai Composite Index jumping 2.4%, its biggest daily increase since July. The Hang Seng Index in Hong Kong rose 1.9%, while the Nikkei 225 Index in Japan gained 1.8%. European markets also advanced, with the Stoxx Europe 600 Index rising 0.9%, closing at an all-time high. The index was up 3.2% for the week, its best weekly performance since April.
US markets followed suit, with the S&P 500 Index rising 0.8%, reaching a new record close. The index was up 2.8% for the week, its best weekly performance since July. The Dow Jones Industrial Average gained 0.7%, while the Nasdaq Composite Index added 0.8%. All 11 sectors of the S&P 500 were in positive territory, with energy, materials, and industrials leading the way.
Bond Yields: A Rise in Inflation Expectations
Bond yields also rose on Friday, as investors adjusted their inflation expectations in light of China’s policy shift and other factors. The yield on the 10-year US Treasury note climbed to 1.61%, its highest level since June. The yield was up 15 basis points for the week, its biggest weekly increase since March.
The rise in bond yields reflected a rise in inflation expectations, as investors anticipated that China’s easing of travel restrictions would boost demand for commodities and other goods and services, putting upward pressure on prices. Moreover, investors also factored in other sources of inflationary pressure, such as higher energy costs, supply-chain disruptions, labor shortages, and fiscal stimulus.
The rise in bond yields also reflected a decline in demand for safe-haven assets, as investors shifted their funds to riskier assets such as stocks amid improving growth prospects and trade conditions.
Dollar and Gold: A Fall in Safe-Haven Appeal
The dollar and gold also fell on Friday, as they lost some of their safe-haven appeal amid the global market rally. The dollar index, which measures the greenback against a basket of six major currencies, dropped to 93.81, its lowest level since September 17. The index was down 0.9% for the week, its worst weekly performance since May.
The fall in the dollar was driven by a combination of factors, such as China’s policy shift, which boosted demand for other currencies linked to trade and commodities; the rise in bond yields, which reduced the relative attractiveness of holding dollar-denominated assets; and the expectations that the Federal Reserve would maintain its accommodative monetary policy stance despite rising inflation pressures.
Gold also declined on Friday, as it faced headwinds from the rise in bond yields and the fall in the dollar. Gold is a non-yielding asset that tends to move inversely to bond yields and the dollar. The precious metal fell to $1,743.80 per ounce, its lowest level since August 12. The metal was down 1.7% for the week, its worst weekly performance since June.
Conclusion: A Positive Outlook, but with Some Risks
The global market rally on Friday was a reflection of the positive outlook for the global economic recovery and trade, as China eased some of its travel restrictions amid a decline in Covid-19 cases. The rally was broad-based, with all major regions and sectors posting gains. Bond yields also rose, as investors adjusted their inflation expectations. The dollar and gold also fell, as they lost some of their safe-haven appeal.
However, the market rally also came with some risks and uncertainties, such as the possibility of new Covid-19 variants and outbreaks that could derail the recovery and trade; the potential of further regulatory crackdowns and geopolitical tensions involving China; the uncertainty over the Fed’s policy direction and market reaction; and the volatility and divergence of the bond, currency, and commodity markets.
