Global Markets Weekly Update: August 23, 2019
U.S.
Stocks give up gains on new escalation in trade dispute
Stocks suffered their fourth consecutive weekly loss as a late-week escalation in the U.S.-China trade dispute undermined optimism over retail sales and Federal Reserve policy. Trading volumes were exceptionally thin through most of the week, reflecting the final weeks of the summer vacation season. Earnings and revenue beats from Target, Lowe’s, and Home Depot helped consumer discretionary shares outperform the broader market, and low long-term bond yields supported the utilities and real estate sectors.
Stocks got off to a strong start for the week. T. Rowe Price traders pinned the move on hopes that the U.S. and China could still find some middle ground in their trade dispute. On Monday, the Trump administration announced that it was extending the reprieve for 90 days on a general ban on U.S. firms doing business with Chinese telecommunications giant Huawei. The U.S. has restricted the sale of U.S. semiconductors and other products to the world’s largest telecom equipment maker, while many U.S. rural cellphone carriers rely on Huawei equipment.
Investors continue to look for monetary stimulus
Hopes for additional stimulus from the world’s central banks and fiscal authorities also supported sentiment. Expectations have grown that the European Central Bank (ECB) will soon resume quantitative easing, and reports surfaced that the German government would turn to deficit spending to revive its economy (see below). On Wednesday, stocks rose after the Fed released the minutes from its July 30–31 policy meeting, which indicated that policymakers wanted to remain flexible in responding to economic data.
The Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming, convened Friday. Fed Chair Jerome Powell again pledged to “act as appropriate” to head off a recession, but also stated that the “economy is close to both goals” of low unemployment and stable inflation. As many had predicted, President Donald Trump quickly responded with a critical tweet, going as far as to question “who is our bigger enemy, Jay Powel [sic] or Chairman Xi?”
China announces tariffs; Trump orders U.S. companies to look elsewhere
Part of the President’s ire may have been due to the announcement of new Chinese tariffs on U.S. goods, which were announced early Friday. China said that it would impose new tariffs on $75 billion in U.S. imports, including a 25% levy on U.S. autos—a move that would have international implications given that BMW and Mercedes-Benz assemble cars in the U.S. for export to China.
Late Friday morning, President Trump fired back, tweeting that “Our great American companies are hereby ordered to immediately start looking for an alternative to China.” Over the next hour, the S&P 500 Index fell nearly 2% in apparent response, although it was unclear how such an edict could be enforced, if at all. T. Rowe Price Policy Analyst Katie Deal currently believes the U.S.-China trade battle and tariff escalation will likely extend well into 2020.
Meanwhile, new evidence emerged during the week that the trade dispute was exerting a drag on the U.S. manufacturing sector. On Wednesday, IHS Markit reported that its gauge of current U.S. manufacturing activity, which had been slipping for nearly a year, had declined into contraction territory for the first time since 2009. The firm’s gauge of service sector activity remained slightly in expansion territory but fell more than expected. Weekly jobless claims reversed the previous week’s rise, and continuing claims touched a two-month low.
Yield curve inverts again
The yield on the benchmark 10-year Treasury note jumped at the start of trading Monday but later decreased sharply to end the week modestly lower. (Bond prices and yields move in opposite directions.) On Thursday, the yield curve again inverted, with two-year Treasury yields moving above 10-year yields—a closely watched (but not foolproof) indicator of a coming recession. The inversion appeared to follow comments from Philadelphia Fed President Patrick Harker, who told CNBC that he thought the Fed’s quarter-point rate cut in July would prove sufficient. Nevertheless, futures markets ended the week pricing in a roughly 88% chance of at least two cuts by the end of the year, according to CME Group data.
U.S. investment-grade corporate bonds performed well for most of the week, although trading volumes were light, as is typical of late August. T. Rowe Price traders noted solid demand for high yield bonds, while supply appeared poised to remain muted going into September.
Municipal market headlines were dominated by an $8 billion issuance of Texas tax and revenue anticipation notes, an annual deal that typically sets the tone for the short-term muni market. The deal was three times oversubscribed, according to The Bond Buyer. T. Rowe Price municipal bond traders noted that secondary activity was concentrated in high yield issues.
U.S. Stocks1
Index |
Friday's Close |
Week's Change |
% Change YTD |
---|---|---|---|
DJIA |
25,628.90 |
-257.11 |
9.87% |
S&P 500 |
2,847.11 |
-41.57 |
13.57% |
Nasdaq Composite |
7,751.77 |
-144.22 |
16.83% |
S&P MidCap 400 |
1,836.84 |
-36.38 |
10.45% |
Russell 2000 |
1,459.67 |
-33.98 |
8.24% |
This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.
Source of data: Reuters, obtained through Yahoo! Finance and Bloomberg. Closing data as of 4 p.m. ET. The Dow Jones Industrial Average, the Standard & Poor’s 500 Stock Index of blue chip stocks, the Standard & Poor’s MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments of the U.S. equity markets by market capitalization. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock exchange and the National Market System. Frank Russell Company (Russell) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.
Europe
Stocks buoyed by hopes of ECB stimulus
Most major European markets rose throughout the week but remained under pressure after the fresh round of U.S. and China tariffs threats. The pan-European STOXX Europe 600 Index, the exporter-heavy German DAX, and Italy’s FTSE MIB Index all rose, while the UK’s FTSE 100 Index dropped. In its minutes released Thursday, the European Central Bank signaled that a stimulus package to address the region’s slowdown may be in the works.
Italian bonds rally as government falls
Italian debt rallied after Italian Prime Minister Giuseppe Conte resigned, accusing far-right interior minister and coalition partner Matteo Salvini of putting his own political ambitions ahead of Italy’s needs in calling for snap elections. The yield on the 10-year bond fell to a three-year low just above 1.3%, after climbing as high as 1.8% when Salvini said he planned to dissolve the country’s governing coalition.
Morozov expects new Italian Five Star coalition could calm markets
Conte’s resignation puts an end to the unlikely alliance forged between the anti-establishment Five Star Movement and the anti-European Union, anti-immigration League after national elections 15 months ago. According to T. Rowe Price Sovereign Analyst Ivan Morozov, Italy will now either have new elections or the Five Star Movement will form a coalition with its long-time opponent, the center-left Democratic Party. Such an alliance would likely be more market-friendly than the previous government, although it would still have to deal with significant fiscal challenges.
President Sergio Mattarella has given the two parties until Tuesday to come up with an agreement. While both parties have signaled a willingness to form a government, they have also hardened their positions. An agreement would likely spark a further rally among Italian assets, according to Morozov. Should talks collapse, new elections would likely take place at the end of October, and current polls suggest that the League could win an outright majority in Parliament.
Bundesbank warns of recession in Germany
Signs that Germany is entering recession piled up during the week. The IHS Purchasing Managers’ Index showed orders at factories and services companies dropping at the fastest pace in six years, and companies expect output to fall in the next 12 months. Meanwhile, the Bundesbank said the country could fall into recession. The economy contracted 0.1% for the three months ended June 30. The bank also said the downturn in industry is at the center of its worries about the economy. In June, numbers showed industrial output was 5.2% lower than a year ago, the largest annual decline in almost a decade. Bloomberg reported early in the week that German officials were preparing stimulus measures designed to spur car buying and investments in energy efficiency.
Pound gains versus U.S. dollar after optimistic talks
The British pound gained some ground against the U.S. dollar but remained under pressure after hitting two-year lows earlier in the month. UK Prime Minister Boris Johnson held meetings with French President Emmanuel Macron and German Chancellor Angela Merkel, which increased hopes that a Brexit deal could still be within reach. Macron said, however, that there is little chance that the European Union will substantially renegotiate the withdrawal agreement, notably the largest point of contention—the so-called Irish Backstop, designed to preserve an open border between Northern Ireland and the Republic of Ireland.
Purchases of UK companies mount amid pound’s decline
The pound’s weakness has recently prompted a number of purchases of UK companies, and the week brought news that Hasbro had agreed to buy “Peppa Pig” maker Entertainment One, while Hong Kong property company CKA was buying Greene King, the UK’s biggest-listed pub and brewery group. According to Dealogic, $66 billion worth of deals have been announced this year, with about $16 billion of those struck since Boris Johnson became prime minister in July.
Japan
Japanese stocks advanced for the week. The Nikkei 225 Stock Average gained 1.4%, leaving the widely watched benchmark up 3.5% for the year to date. The broader measures of the Japanese stock market, the large-cap TOPIX Index and the TOPIX Small Index, also rose for the week, but to a lesser extent. At the close on Friday, the yen stood a bit above ¥106 per U.S. dollar, little changed for the week.
Mixed signals on the Japan’s economic health
Second-quarter gross domestic product (GDP) was revised upward from the first estimate, increasing 1.8% at an annualized pace in the June quarter. Despite recording three consecutive quarters of expansion, slowing global demand is taking a toll on Japan’s economy. The trade deficit expanded to ¥127 billion (seasonally adjusted) at the end of July from ¥34 billion in June, and manufacturing activity contracted for a fourth straight month. Exports declined for an eighth consecutive month as rising shipments of aircraft-related equipment to the U.S. and ships to Europe were offset by weaker exports of chipmaking equipment and auto parts to Asia. Shipments to China, Japan’s largest trading partner, fell 9.3%, according to the Ministry of Finance. While most economists remain optimistic for decent economic growth in the September quarter, they are concerned about the impact of the October sales tax increase on fourth-quarter growth.
No bonus increases for about three-quarters of Japanese workers this summer
According to a recent Reuters poll, recession fears and the U.S.-China trade war have curbed corporate managers’ willingness to grant annual bonus increases at approximately three-fourths of Japan’s mid- and large-cap companies. Rather than granting pay increases, which are hard to claw back, most Japanese companies prefer granting variable bonuses. Yusuke Shimoda, a senior economist at the Japan Research Institute, believes that bonus payments are currently at high levels thanks to good gains over the past few years, but the trade war and global economic uncertainties make it difficult for companies to justify raising bonuses further.
The poll also included a question on raising the minimum wage to ¥1,000/hour, which Prime Minister Shinzo Abe has requested, from ¥874/hour (14.2%). Nearly two-thirds of the respondents were in favor of the increase. The most common reasons included helping with labor shortages, spurring domestic demand, and increasing labor productivity. Additionally, the increase would help low-wage earners cope with the October tax increase.
China
Chinese stocks advance as favorable earnings, interest rate reform lift sentiment
Chinese stocks advanced as positive corporate earnings reports and monetary policy changes buoyed investor sentiment and offset U.S. trade-related concerns (markets were closed as the trade dispute escalated at the end of the U.S. trading week). For the week, the benchmark Shanghai Composite Index added 2.6%, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, rose 3.0%. Friday ended the biggest weekly gain for both indices since June, according to Reuters.
Interest rate reform from China’s central bank lifted investor sentiment. The People’s Bank of China (PBOC) announced several market-based changes to the formation of the loan prime rate (LPR), which the central bank said would henceforth be a key reference rate for new loans. Following the changes, the LPR was listed at a lower rate later in the week—effectively amounting to an easing in monetary policy and raising hopes of fresh stimulus measures. While the PBOC’s changes to the LPR are modest in the short term, its longer-term goal is more significant since it moves China to a more market-driven interest rate system and improves the transmission of wider monetary conditions to lending rates, notes T. Rowe Price Sovereign Analyst Chris Kushlis.
Other Key Markets
Argentina stocks continue stumble after election surprise; peso stabilizes
Argentina’s stock market continued to lose ground during the week, adding to the dramatic losses that the country’s equity market suffered after surprising results in the presidential primary on August 11. The country’s Merval Index was down about 7% for the week and has lost more than a third of its value in local currency terms since challenger Alberto Fernández outpolled market-friendly incumbent Mauricio Macri in the early voting round. According to Reuters, Fernández said there is “no possibility” of a default if he wins the presidency in October, but he said his government would seek to negotiate new terms with creditors.
Argentina’s peso stabilized against the U.S. dollar during the week, though, as new Finance Minister Hernan Lacunza said the country would use “all available tools” to defend its currency. Both the finance ministry and Argentina’s central bank used their dollar reserves to support the peso.
Turkish lira, other EM currencies under pressure
Emerging markets (EM) currencies were pressured during the week by concerns about slowing global growth. Turkey’s currency, the lira, was a notable decliner, falling to its lowest level versus the dollar in a month. The lira had been steadily recovering from a significant drop early in the year, but the announcement of looser monetary policies by the country’s central bank reversed the trend. Policymakers lowered reserve requirements and encouraged banks to lend more.
Amid growth concerns, Indonesia’s central bank cuts rates
In a surprise move, the Indonesian central bank cut its key policy rate from 5.75% to 5.50%, its second cut in the past two months. Bank Indonesia officials cited low inflation and slowing global economic growth as the reasons for the move.
Other central banks in emerging markets also signaled concerns about an economic slowdown. Egypt’s central bank cut its benchmark rate, while minutes from the Reserve Bank of India’s meeting earlier in the month showed policymakers were focused on growth and believed the economy could need “a larger push.” Meanwhile, central banks in Thailand and Malaysia both cut their 2019 growth forecasts.
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