Global Markets Monthly Update
- China led global markets higher on positive economic data, but worries grew later in the month about a resurgence of the coronavirus in the U.S.
- Lockdowns eased in Europe and many other regions, while an acceleration in U.S. cases resulted in the renewed closure of bars and other facilities.
- Global bond yields remained near record lows as central banks introduced new stimulus measures.
Early gains helped stocks mark their third consecutive monthly advance in June. The technology‑heavy Nasdaq Composite Index performed best and reached record highs before falling back a bit at the end of the month. Likewise, tech shares outperformed within the S&P 500 Index, helped by strong gains in Apple and Microsoft shares, while Amazon.com’s advance boosted consumer discretionary stocks. Utilities recorded losses, and health care shares were also weak, dragged down by declines in Pfizer and several health insurance stocks. Growth stocks again outperformed value shares as the month ended with the Russell 1000 Growth Index up nearly 10% for the year to date, while the Russell 1000 Value Index was down over 16%.
Bonds recorded modest gains as longer‑term Treasury bond yields remained roughly unchanged after spiking early in the month. (Bond prices and yields move in opposite directions.) Riskier fixed income segments performed modestly better as the market continued to absorb heavy amounts of new corporate bond issuance. At mid‑month, the Federal Reserve announced that it would begin buying a broad portfolio of U.S. corporate bonds. The purchases will be made by the Fed’s Secondary Market Corporate Credit Facility, an emergency lending program that, to date, has purchased only exchange‑traded funds.
Surprise May Jobs Report Sends Stocks Higher
Equities started out the month on a strong note, helped by growing optimism that the economy might experience a sharp, “V‑shaped” recovery. Stocks surged on June 5 after the Labor Department reported that employers added back 2.5 million positions in May, defying consensus expectations for a decline of around 8 million jobs. Instead of rising to nearly 20% as forecast, the unemployment rate dropped to 13.3% from 14.7%. While the job gains paled in comparison with the 20.7 million jobs lost in April, they helped calm fears that the economy had entered a negative feedback loop in which jobs lost directly to the coronavirus and the shutdown—as in the case of retail and restaurant workers, for example—were cascading into other sectors.
Coronavirus Resurgence Weighs on Sentiment
Fears of a resurgence in the coronavirus pandemic soon derailed the market’s gains, however. On June 11, the S&P 500 suffered its biggest one‑day sell‑off since March 16, as investors appeared to react to recent reports of increasing numbers of cases—and, more tellingly, hospitalizations and higher positivity rates—in Arizona and Texas. The situation in both states worsened throughout the remainder of the month, and cases also increased sharply in the large states of California and Florida. While trends remained positive in the New York region and other areas that had been hit hard earlier in the pandemic, the national total of daily new confirmed infections reached record highs late in the month.
Whether the resurgence would lead to renewed wholesale lockdowns appeared unclear, but it already showed signs of having a modest economic impact. California’s Disneyland delayed its opening, and the larger Walt Disney World resort in Florida seemed likely to follow. Texas and Florida put new restrictions on bars, and governors in other states delayed reopening plans.
Markets fluctuated over much of the second half of the month as hopes for better treatments and a vaccine for the coronavirus may have helped offset fears over the rise in cases. At mid‑month, sentiment seemed to get a lift from a major study showing that a common steroid drug, dexamethasone, helped save lives in serious COVID‑19 cases, marking the first treatment to have a demonstrable impact on reducing the fatality rate. On June 23, Dr. Anthony Fauci, the nation’s top infectious diseases official, further calmed fears by telling a congressional committee that a vaccine was a matter of “when and not if” and that he was “cautiously optimistic” that one would arrive by the end of the year.
The MSCI Europe Index returned more than 4% in June, as optimism about a nascent economic recovery outweighed fears that a resurgence in coronavirus infections would sap a rebound. In local currency terms, equity indexes for major European countries gained between 4% and 7%.
Eurozone government bonds posted a positive overall return. Sovereign yields fell on continued central bank dovishness and concerns about rising coronavirus cases in the U.S. These factors, and hopes that the European Central Bank (ECB) has settled differences with the German Constitutional Court regarding the ECB’s bond purchases, also pushed peripheral eurozone bond yields lower.
ECB Expands Emergency Bond‑Buying Program
The ECB increased its pandemic emergency purchase program by EUR 600 billion to EUR 1.35 trillion, extended it until at least June 2021, and pledged to reinvest proceeds from maturing bonds until the end of 2022.
Some 742 European banks borrowed EUR 1.31 trillion at the ECB’s quarterly tender as part of its targeted longer‑term refinancing operations, the first since terms were eased in March. The three‑year tender was the ECB’s largest ever, amounting to a net injection of about EUR 550 billion. The loans are intended to ensure that banks keep providing credit to companies and households to support an economic recovery.
Germany’s ruling coalition agreed on a EUR 130 billion stimulus package, exceeding the top end of expectations by 30%. It includes a cut in the value‑added tax for the rest of the year, funds for 5G mobile networks and railways, and higher rebates for electric cars.
Data Indicate European Slump Is Bottoming
Economic data suggest that the coronavirus‑induced slump in the eurozone may be bottoming out, reviving hopes for a V‑shaped recovery as countries ease lockdown measures. The flash IHS Markit Eurozone Composite Purchasing Managers’ Index surged to 47.5 in June from 31.9 in May, the second‑biggest jump in the survey’s history. German and French business confidence recovered at record rates in June, although they were still well below pre‑pandemic levels, national surveys showed.
However, ECB Chief Economist Philip Lane warned in a speech that any substantial improvement in near‑term indicators would “not necessarily be a good guide to the speed and robustness of the recovery.” He added that it might take a sustained period of improving economic and public health conditions before confidence is fully restored.
BoE Increases Bond‑Buying Program
The Bank of England (BoE) enlarged its bond‑buying program by GBP 100 billion and left its key interest rate at a record low of 0.1%. It also said it would slow the rate of purchases and that it expected to meet the new target of GBP 745 billion by year‑end.
BoE Governor Andrew Bailey said in a newspaper article that the central bank should begin cutting back its bond‑buying program before raising interest rates on a sustained basis, a major shift in its asset purchase policy. He said that the high level of asset purchases “shouldn’t always be taken for granted.” T. Rowe Price International Economist Tomasz Wieladek noted that the BoE previously said that it would reduce its balance sheet once the bank rate hits 1.5%. In his view, the change in policy means that rates could stay at 0.10% for two to three years, if not longer, as the balance sheet becomes the main monetary policy tool.
UK Prime Minister Boris Johnson said the government would fast‑track GBP 5 billion of spending on infrastructure to boost the economy. More details are expected on July 8, when UK Chancellor of the Exchequer Rishi Sunak will unveil his next plans for the economy, reportedly including a temporary cut in the value‑added tax. The Financial Times reported that Sunak is also contemplating deferred tax rises and lower public spending as part of the UK budget in the fall.
Many developed European Union countries began easing border controls designed to contain the coronavirus, but continued restrictions and health concerns are still expected to curb tourism and business travel. In France, President Emmanuel Macron lifted most of the remaining lockdown restrictions and said he would focus on rebuilding the economy. UK Prime Minister Boris Johnson announced that pubs, restaurants, and hairdressers will be able to reopen on July 4, provided that they adhere to safety guidelines.
Japanese stocks followed positive momentum in April and May with additional gains in the first half of June; however, equities struggled later in the month. Macroeconomic concerns, highlighted by a resurgence of the coronavirus in parts of the U.S., and disappointing Japanese economic data weighed on investor sentiment, and monthly results were generally flat. Within the Japanese market, growth stocks outperformed value shares, and large‑caps generally held up better than small‑caps. The yen marginally weakened versus the U.S. dollar and traded at JPY 107.93 per dollar at month‑end. The yield of the 10‑year Japanese government bond moved slightly higher during the month, finishing June at 0.032%.
S&P Downgrades Credit Outlook Amid Rising Deficits
In its latest forecast, the Organization for Economic Cooperation and Development (OECD) reduced its growth outlook for Japan. The OECD believes Japan’s gross domestic product will contract 6.0% in 2020—in line with the predicted global slowdown—versus the March forecast for 0.2% growth. S&P Global Ratings also had sobering news for Japan as it downwardly revised its outlook for Japanese government debt from positive to stable. The ratings agency, which kept the country’s credit rating at A+, said the move was in response to the increasing deficits that Japan will face as a result of the stimulus spending that was enacted to counter the economic downturn caused by the pandemic.
Exports Plunge Amid Coronavirus Shutdowns
Economic data released in June largely covered the period before Japan’s state of emergency was loosened at the end of May and were expected to be weak. However, the drop in some key metrics was worse than expected. Japan’s Finance Ministry reported that the country’s exports declined 28.3% year over year in May as the coronavirus impacted global demand. Vehicle exports dropped by more than 60% during the period, and total Japanese exports to the U.S. also fell by about half. Consumer spending also continued to drop as retail sales fell 12.3% in May for the year‑over‑year period following a 13.9% annual decrease in April.
A more current indicator of sentiment released later in the month improved, but details were mixed. As expected, the au Jibun Bank Flash Japan Composite Purchasing Managers’ Index moved higher in June, reflecting the increase in economic activity following the lifting of the country’s state of emergency. However, all of the improvement was due to the services sector, which rose from 26.5 to 42.3, whereas the manufacturing sector remained roughly unchanged as output and new orders showed little improvement. According to Reuters, the manufacturing index has been below 50—indicating contraction—for 14 straight months and is at the lowest level since the global financial crisis in 2009.
Bank of Japan Continues to Target Low Yields
At its scheduled monthly meeting, the Bank of Japan (BoJ), as expected, kept its monetary policy largely unchanged. The central bank maintained its yield curve control targets, which aim to keep the 10‑year Japanese government bond yield around 0%. The BoJ also continued its purchases of exchange‑traded funds and Japanese real estate investment trusts at current levels. In a change, the central bank increased the amount of loans available in a lending program that is designed to support smaller businesses.
Equity markets in China rallied in June. The large‑cap CSI 300 Index gained 7.7%, led by the information technology and health care sectors. The MSCI China Index of mostly offshore‑listed Chinese companies rose 8.7%. China’s sovereign 10‑year bond yield increased 18 basis points to close at 2.90%. Domestic fixed income investors were disappointed by the central bank’s reluctance to cut rates or required reserves. China’s currency, the renminbi, weakened early in the month on worries that the U.S. trade deal might unravel, but it subsequently stabilized after President Donald Trump reaffirmed support for the accord. Reduced trade fears, attractive carry, net capital inflows, and signs of an economic recovery have lately supported the currency.
On the political front, June began with positive news after U.S. Trade Representative Robert Lighthizer confirmed that phase one of the U.S.‑China trade deal was on track, while China purchased large amounts of U.S. farm goods. Non‑tariff tensions soon resurfaced, however, as China forged ahead with a new national security law aimed at quashing dissent in Hong Kong. At month‑end, the U.S. said it would respond by revoking Hong Kong’s special trade privileges under the 1992 United States‑Hong Kong Policy Act, a largely symbolic gesture with little economic impact.
Economic Data in June Remained Positive
June indicators underscored a relatively weak recovery for Chinese consumers compared with the industrial sector. Domestic tourist receipts during the Dragon Boat Festival in late June plummeted 69% year on year, with a drop in per capita spending of 39%. Online sales recorded strong growth, but much of the strength in e‑commerce likely reflects sales lost at bricks‑and‑mortar stores due to the coronavirus.
Purchasing managers’ index reports were positive. Both the manufacturing and nonmanufacturing indexes improved. Heavy flooding across southwest China plus a partial lockdown in Beijing following new coronavirus cases had little impact on the economy. Industrial output continued to improve, and new export orders rebounded. However, Chinese businesses remained cautious about hiring and inventory rebuilding. Despite the rise in new export orders, weakening export demand due to the global recession remains a major risk.
PBOC Cautious in Opening the Credit Taps
The People’s Bank of China (PBOC) kept the loan prime rate (LPR)—the main reference rate for renminbi bank loans—steady for a second straight month. Investors awaited monetary easing measures promised earlier in the month by China’s State Council. However, interest rate relief for Chinese borrowers is expected to occur through less formal channels as opposed to cuts in the LPR. The State Council urged China’s banks to help small and medium‑sized companies and mortgage holders weather the downturn by sacrificing 70% of their 2020 profits. In addition, banks were asked to lower lending rates, defer loan repayments, and cut fees.
Other Key Markets
Turkey Increases Oversight of FX Transactions
Turkish stocks, as measured by MSCI, returned 7.36% in U.S. dollar terms and performed in line with the MSCI Emerging Markets Index. The central bank kept its one‑week policy rate unchanged at 8.25% versus market expectations for a rate cut. T. Rowe Price Sovereign Analyst Peter Botoucharov believes that this was a more responsible policy decision, given that inflation remains in double‑digit territory and that real (inflation‑adjusted) interest rates remain near or below 0% across all bond maturities.
A more concerning development, however, is that the Turkish government has been increasing oversight and moral suasion over foreign exchange (FX) transactions in an attempt to reduce Turkish lira volatility, keep FX flows under control, and enhance the country’s ability to become self‑financing. Botoucharov likens these efforts to a “soft form” of capital controls.
In June, Turkey’s financial market regulator, the Capital Markets Board, decided to suspend the licensing of asset managers whose foreign currency‑denominated securities make up at least 80% of total holdings. For asset managers with less than 80%, the Board will impose a 15% tax on their management of any such funds. Additionally, Turkey’s central bank requires companies with FX borrowings in excess of approximately USD 15 million to file a weekly report with the central bank, reporting their balances in line with another requirement by the Ministry of Finance, the Uniform Chart of Accounts.
These latest measures are on top of others that Turkey has taken in recent months, such as an increase in taxes on foreign currency exchange transactions, as well as new rules from Turkey’s Banking Regulation and Supervision Agency intended to encourage banks to issue more loans, buy government bonds, or provide foreign exchange swap lines to the central bank—and to penalize those banks that do not meet certain metrics.
Botoucharov believes that these government and central bank efforts could be somewhat effective in reducing lira and interest rate volatility and capital outflows, thus increasing the country’s self‑financing ability. However, he also believes that these measures will not fundamentally improve Turkey’s poor macroeconomic situation or reduce its large funding needs.
Pandemic Weighs on Brazil
Stocks in Brazil, as measured by MSCI, returned 7.40% in U.S. dollar terms in June, matching the performance of the MSCI Emerging Markets Index. Brazil’s central bank held a two‑day monetary policy meeting that concluded on June 17. As was widely expected, policymakers decided to reduce the benchmark interest rate, the Selic rate, by 75 basis points, from 3.00% to 2.25%. In their post‑meeting statement, central bank officials stated that “new information on the evolution of the pandemic, as well as a reduction in fiscal uncertainties, will be essential to define its next steps.” T. Rowe Price Sovereign Analyst Richard Hall interprets this as meaning that more rate cuts have not been ruled out, but that the central bank is on hold until the outlook for the economy—which depends greatly on how the pandemic plays out—is clearer.
Brazil has been hit hard by COVID‑19, arguably due, in part, to President Jair Bolsonaro’s disinterest in quarantine and social distancing measures, although local officials have taken some measures on their own to stem the spread of the virus. Nevertheless, with more than 1.6 million confirmed cases and about 65,000 deaths attributable to COVID‑19, according to Johns Hopkins University data, Brazil has been affected more than any other emerging country and is second only to the U.S. in the entire world.
Hall believes that anti‑Bolsonaro street protests are something to keep an eye on, particularly because large street protests were an important ingredient in building momentum for former President Dilma Rousseff’s impeachment. If the rallies are big enough, Hall believes it could lead to an increase in impeachment talk—though the speaker of the lower chamber of the legislature, Rodrigo Maia, has insisted that he would be the one to decide if and when to begin formal impeachment proceedings.
Major Index Returns
Total returns unless noted
As of 6/30/2020
Figures shown in U.S. dollars
|U.S. Equity Indexes|
|Dow Jones Industrial Average||1.82||‑8.43|
|Nasdaq Composite (Principal Return)||5.99||12.11|
|Global/International Equity Indexes|
|MSCI Emerging Markets||7.40||‑9.67|
|MSCI All-Country World||3.24||‑5.99|
|Bloomberg Barclays U.S. Aggregate||0.63||6.14|
|Bloomberg Barclays Global Aggregate ex-USD||1.01||0.61|
|Credit Suisse High Yield||0.92||‑5.27|
|JP Morgan Emerging Markets Bond Global||2.91||‑1.87|
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Note: Returns are for the periods ended June 30, 2020. The returns include dividends and interest income based on data supplied by third‑party provider RIMES and compiled by T. Rowe Price, except for the Nasdaq Composite Index, whose return is principal only.
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