Global Markets Weekly Update: August 30, 2019
U.S.
Stocks rebound on trade hopes
Stocks enjoyed their best week in nearly three months, as investors appeared to grow more confident in the prospects for a U.S.-China trade deal. Trading volumes were low early in the week but picked up somewhat as institutional investors sought to rebalance portfolios before the end of the month. Within the S&P 500 Index, industrials outperformed, helped by a rise in UPS shares. Health care, consumer staples, real estate, and utilities shares lagged. Johnson & Johnson (J&J) shares surged on Tuesday after a judge ruled that the company bore some responsibility for Oklahoma’s opioid epidemic but awarded smaller damages to the state than many expected. J&J shares surrendered most of their gains over the following few days, however.
Trump offers conciliatory comments on trade
Futures markets were sharply lower before markets opened Monday, as traders reacted to President Donald Trump’s announcement the previous Friday evening of additional tariffs on Chinese imports (see below). According to the Peterson Institute for International Economics, the latest hikes will lift the average tariff rate on Chinese goods to 24.3% by December 15, nearly doubling since June. The tariffs will also now cover 96.8% of all Chinese imports.
Investors reacted with relief on Monday, therefore, when President Trump stated that prospects for a trade deal were the best they had been in some time, asserting that the Chinese “want to make a deal very badly.” Markets pulled back as hopes for a deal faded again Tuesday, however. The editor of a state-owned Chinese newspaper tweeted that he had no knowledge of recent talks and that China “didn't change its position” and “won't cave to U.S. pressure.”
On Thursday, trade prospects took another turn for the better, helping stocks regain momentum. A spokesman for China’s Ministry of Commerce told reporters that China had no plans to respond to the White House’s latest tariff escalation, although he also remarked that “China has ample means for retaliation.” Meanwhile, China’s Foreign Ministry stated that the two sides remained in “effective communication.” Many T. Rowe Price managers and analysts believe that China may be unwilling to agree to a substantial deal before the November 2020 U.S. presidential election, preferring to wait and see if a Democratic challenger is elected. They also note that negotiations have created a trust deficit and that Chinese officials may be concerned that President Trump, if reelected, could seek new concessions in 2021.
Consumers spent freely in July, but sentiment appears to be eroding
The week’s economic data were mixed. Durable goods orders (excluding the volatile transportation sector) declined unexpectedly, but regional manufacturing gauges continued a recent pattern of surprising on the upside. Personal income growth in July was lower than expected, but personal spending rose 0.6%, its best pace in three months. Friday brought a warning that consumers might be tightening their belts, however—the University of Michigan’s consumer sentiment index for August fell by the most in almost seven years and hit its lowest level since late 2016. The Michigan survey’s chief economist noted that the “data indicate that the erosion of consumer confidence due to tariff policies is now well underway.”
Yield curve inversion takes a new turn
Reflecting the mixed economic signals, the yield on the benchmark 10-year Treasury note ended the week roughly unchanged. (Bond prices and yields move in opposite directions.) The 10-year yield again spent part of the week below the two-year yield, however, marking a yield curve inversion that has reliably preceded an impending recession—if also delivering occasional false positives. More notably, perhaps, the 30-year yield continued falling to record lows and slipped below the yield on the three-month note. Long-term U.S. yields remain well above those of most other developed markets, however. On Wednesday, Treasury Secretary Steven Mnuchin told Bloomberg that the government was seriously considering offering ultralong bonds—Treasuries with maturities of 50 or even 100 years.
The broad municipal bond market saw healthy new issuance, led by several airport deals, but the new supply was easily absorbed in the primary market. Massachusetts’ unique sale of taxable general obligation advanced refunding bonds drew especially strong interest. Municipal bond funds have seen positive net inflows for 33 consecutive weeks, according to T. Rowe Price traders.
Conversely, trading in corporate bonds was muted. As expected, issuance in the investment-grade market was extremely light, with only one issuer coming to the market with a new deal. In credit-specific news, Philip Morris and Altria confirmed negotiations for a potential all-stock merger. The high yield market was also relatively quiet, although T. Rowe Price traders noted increased demand for lower-quality bonds in segments such as energy and industrials.
U.S. Stocks1
Index |
Friday's Close |
Week's Change |
% Change YTD |
DJIA |
26,403.28 |
774.38 |
13.19% |
S&P 500 |
2,926.46 |
79.35 |
16.74% |
Nasdaq Composite |
7,962.88 |
211.11 |
20.01% |
S&P MidCap 400 |
1,881.20 |
44.36 |
13.12% |
Russell 2000 |
1,494.84 |
35.17 |
10.85% |
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 get boost from improved U.S.-China talks, new Italian coalition
Most major European markets rose throughout the week, buoyed by improvements in U.S.-China trade talks and the agreement of Italian political parties to form a new government. The pan-European STOXX Europe 600 Index rose more than 2%, while the exporter-heavy German DAX advanced 2.5%, and Italy’s FTSE MIB Index gained almost 4%.
British pound pressured as UK’s Johnson suspends Parliament
The British pound came under pressure against the U.S. dollar, but the FTSE 100 Index rose after Prime Minister Boris Johnson suspended Parliament from mid-September until October 14 to push through Brexit. The move, which was approved by Queen Elizabeth II, reduces the time opponents of Brexit will have to prevent a disorderly Brexit but also increases the chance that Johnson could face a vote of no-confidence in his government, triggering a possible election.
Lawmakers who oppose leaving the European Union (EU) without a deal rushed to seek ways to block a no-deal Brexit. Scottish parliamentarians submitted a legal challenge, and groups in Northern Ireland argued that a no-deal Brexit would breach the Good Friday agreement—the 1998 peace deal reached between the British and Irish governments. Meanwhile, opposition leader Jeremy Corbyn wrote to Queen Elizabeth in opposition to the suspension and backed calls for street protests. T. Rowe Price Fixed Income Portfolio Manager Quentin Fitzsimmons believes the move gives Johnson much greater leverage and credibility in the EU renegotiation of a Brexit deal.
Italian stocks rally after 5-Star Movement and Democratic Party agree to coalition
Italy’s FTSE MIB rose almost 4% after the country’s center-left Democratic Party and the populist 5-Star Movement overcame bitter differences and agreed to make a formal attempt to form a new coalition government. In doing so, they sidelined right-wing Deputy Prime Minister Matteo Salvini, who had called for early elections and sought to consolidate his power. President Sergio Mattarella gave Prime Minster Giuseppe Conte a fresh mandate to form a government.
T. Rowe Price Sovereign Analyst Ivan Morozov expects the coalition to proceed, but it may not last as the two parties may have less in common than the euroskeptic and populist 5-Star and League, which share a dislike of globalization and elites—both of which are associated with the Democratic Party. In addition, the new government will immediately face tough challenges, including keeping the budget deficit below 3% of gross domestic product in 2020, economic stagnation, and a permanently rising debt stock—all of which could expose wide cracks between the two parties. These issues could prove either unsolvable or unpopular and thus erode support for the both parties and increase the right wing’s popularity.
German data show economy headed for recession
German data provided more evidence that trade disputes are pushing the German economy toward recession. Germany’s Ifo Institute’s business climate index fell to its lowest level since August 2012. Ifo Economist Klaus Wohlrabe told Reuters that he expects stagnation, at best, for the third quarter. While the auto industry has improved, the engineering, chemicals, and electric sectors have deteriorated. The group’s business sentiment survey showed business morale deteriorated more than expected in August to hit its lowest level in nearly seven years. Separately, Germany’s Federal Statistics Office reported that the German economy contracted 0.1% on a seasonally adjusted basis in the three months to June 2019. Exports fell faster than imports, and investment in construction declined markedly.
Greece lifts capital controls
Greece’s government said it will fully lift capital controls on September 1, bringing an end to four years of restrictions on transfers abroad by companies and individuals. Greece imposed the controls in mid-2015, following a bank run triggered by fears that the country was headed for a disorderly exit from the euro. The center-right government of Kyriakos Mitsotakis, who took over last month, made lifting the capital controls a priority as his government tries to boost growth.
Japan
Stocks advanced for the week, with the Nikkei 225 Stock Average, large-cap TOPIX Index, and TOPIX Small Index all posting gains. At the close on Friday, the yen stood at ¥106.48 per U.S. dollar, little changed for the week and near the midpoint of its trading range in August.
Small window for a U.S. trade deal
According to The Nikkei, Japanese negotiators will soon meet in Washington in a last-minute attempt to compromise on beef and automobile exports to come to a new trade agreement with the U.S. For a deal to take effect this year, Tokyo would need to sign an agreement with Washington by September to be approved by the Diet. Missing this window would mean waiting until the regular session next year meaning, in turn, that an agreement cannot take effect until shortly before the November 2020 vote in the U.S. President Trump is eager for a swift deal with tangible benefits to American farmers ahead of the election.
South Korea has protested the loss of its “white-list” status as a favored Japanese trading partner, which was revoked Wednesday. The move prompted South Korea to drop Japan from its intelligence-sharing agreement. South Korea’s business sentiment index fell to 69 in August (readings below 100 indicate fewer optimists than pessimists) from 71 in July—the lowest reading in six months.
Unemployment falls to 27-year low, inflation remains below BoJ target in July
Statistics Japan reports that the unemployment rate in Japan fell to 2.2% (seasonally adjusted) in July from 2.3% a month ago—a 27-year low. The jobs-to-applicant ratio dipped to 1.59 in July from 1.61 in the prior month. Shortages of workers have long frustrated Japan’s central bank. Employment in non-manufacturing areas remains tight. Japanese core consumer inflation stayed at 0.7%—a two-year low—in July, well below the Bank of Japan’s (BoJ) 2.0% target.
China
Chinese stocks decline for week and month
Investors in Chinese stocks appeared less encouraged by the latest trade developments and braced for the next wave of U.S. tariffs. For the week, the benchmark Shanghai Composite Index declined 0.4% and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, shed 0.6%. Both indices fell in August, with the Shanghai composite falling 1.6% and the CSI 300 giving up 0.9%, according to Reuters.
On Wednesday, the U.S. trade representative affirmed President Trump’s plans to impose an additional 5% tariff on $300 billion worth of Chinese imports starting on September 1 and on December 15, Reuters reported. The latest increase means that the U.S. will start levying a 15% tariff in September on a range of consumer goods imported from China, including footwear, flat-panel TVs, and smartwatches, followed by a 15% tariff in December on the remainder of the targeted list, including cellphones, laptops, toys, and clothes.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST 100 Index, returned about -0.4% through the close of business on Thursday. The equity market was closed for a holiday on Friday. The market held up relatively well for the week despite a “flash crash” of the lira early on Monday following recent salvos in the U.S.-China trade dispute. The lira stabilized after dropping to a two-month low following reports of an increase in the country’s economic confidence index and reports that the country’s trade deficit in July shrank by nearly 50% versus one year earlier.
Argentina
Argentine stocks, as measured by the MERVAL Index, fell about 7%. The equity market, the peso, and bond prices continued to weaken as the country’s new Treasury and Finance Minister, Hernan Lacunza, announced that the government would “re-profile,” or restructure, approximately $100 billion of its debts by extending the maturities of its bonds. In response, S&P Global briefly downgraded Argentina’s credit rating to SD, or “selective default.”
The International Monetary Fund (IMF), which has been providing financial assistance to Argentina over the last year, issued a statement indicating that it is “analyzing” and “assessing” the impact of the proposed debt restructuring. Despite the IMF’s apparent moral support, T. Rowe Price Analyst Richard Hall is skeptical that the IMF will agree to the terms of Argentina’s proposal, which could jeopardize the IMF’s next scheduled review of the country’s fiscal situation and disbursement of bailout funds. Hall also believes that President Mauricio Macri’s administration may be playing for time so that Macri’s successor—Alberto Fernandez, who soundly defeated Macri a few weeks ago in a primary election and could ultimately win the presidential election in October—will be the one who must negotiate with the IMF.
India
Indian stocks, as measured by the S&P BSE SENSEX Index, returned about 1.7%. The market was supported by the finance ministry’s recent announcement of government measures that are intended to stimulate the economy. The measures include providing additional liquidity for the stressed housing finance sector, accelerating an expected capital infusion to state-run banks, and scrapping an additional levy that foreign investors would have had to pay on their investment gains.
Also, the central bank announced that it would transfer close to $25 billion to the Indian government, which is likely to use the capital to bolster its fiscal position. This action raises concerns among some investors that the Reserve Bank of India is losing its independence and is increasingly being controlled by the government.
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