Global Markets Weekly Update: December 04 2020
U.S.
Stocks build on gains and close out solid November
Stocks reached further into record territory, with all of the major indexes touching new intraday highs by Friday. Energy shares bounced back after OPEC and other major oil producers reached an agreement to ease output cuts more gradually next year than previously planned, while utilities stocks lagged. On Monday, the Dow Jones Industrial Average closed out November with its best monthly performance since 1987, while the small-cap Russell 2000 Index registered its best monthly gain since its inception in 1978.
Investors anticipate imminent vaccine arrival
After starting the week on a down note, stocks regained momentum on Tuesday, seemingly helped by news that Pfizer and its European partner BioNTech had applied to European Union (EU) regulators for emergency use authorization of their prospective coronavirus vaccine. On Wednesday, the UK granted such approval, making it the first Western nation to authorize the widespread distribution of a vaccine (see below). Diminishing enthusiasm over the vaccine appeared to derail a rally on Thursday afternoon, however, after a Pfizer spokesperson acknowledged that production had been slowed by supply chain problems—although Pfizer and BioNTech later affirmed that they remained on track to deliver 50 million doses in 2020 and another 1.3 billion in 2021. Moderna also requested emergency use authorization for its vaccine candidate from both European and U.S. regulators during the week.
Rising hopes for a new round of fiscal stimulus also appeared to boost sentiment. On Tuesday, a bipartisan group of U.S. senators proposed a USD 908 billion relief package, although Senate Majority Leader Mitch McConnell announced that he was considering a smaller plan in the range of USD 500 billion. In congressional testimony, Federal Reserve Chair Jerome Powell emphasized the importance of emergency lending programs and advocated for more fiscal stimulus, while Treasury Secretary Steven Mnuchin urged legislators to tap USD 455 billion of CARES Act funds to provide targeted relief. Mnuchin had earlier asked for the return of the emergency lending funds from the Fed, drawing a rare rebuke from central bank policymakers.
Job gains slow
The week provided evidence that the economy was slowing, which paradoxically may have supported stock prices by bolstering stimulus hopes. Stocks rose Friday after October nonfarm payrolls missed consensus expectations by almost half, rising by only 245,000, the slowest pace of monthly jobs growth since the rebound from the shutdown began in May. The unemployment rate fell to a pandemic low of 6.7%, but this was partly due to a drop in the labor force participation rate—perhaps reflecting the need of parents to stay home as schools and day-care facilities closed in response to rising infection rates. The manufacturing sector remained in good shape, but the Institute for Supply Management’s gauge of growth in factory activity posted in November its first month-over-month decline since April. Even the standout housing sector showed signs of cooling, with pending home sales falling in October for the second consecutive month.
Bond yields increase, but investors embrace pandemic-hit issuers
Longer-term Treasury yields defied the mixed economic data and climbed through much of the week, largely fueled by optimism for a fiscal stimulus deal, according to T. Rowe Price traders. (Bond prices and yields move in opposite directions.) The increase in longer-term yields led the difference in yields on the 2- and 10-year Treasuries to its widest level since early 2018.
The broad municipal bond market advanced modestly through most of the week and outperformed the sell-off in Treasuries, with T. Rowe Price traders reporting solid demand for higher-yielding bonds. Munis’ recent outperformance has pushed the difference in yield between municipals and similar-maturity Treasuries back to pre-pandemic lows.
The firm’s traders noted that month-end buying in the investment-grade corporate bond market resulted in higher trading volumes and narrowing credit spreads—the additional yield offered over Treasuries, and an inverse measure of the sector’s relative appeal. Higher-risk and pandemic-impacted names outperformed in response to positive vaccine news. Likewise, segments of the high yield market that had been hit hard by the pandemic also showed some resilience. Although below investment-grade portfolios reported negative flows industrywide, a less active primary calendar than anticipated provided some technical support, and credit spreads tightened across the ratings spectrum.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
30,218.26 |
307.89 |
5.89% |
S&P 500 |
3,699.12 |
60.77 |
14.50% |
Nasdaq Composite |
12,464.23 |
258.38 |
38.91% |
S&P MidCap 400 |
2,242.50 |
36.78 |
8.70% |
Russell 2000 |
1,891.35 |
36.08 |
13.36% |
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
Shares in Europe paused after last month’s strong rally. In local currency terms, the pan-European STOXX Europe 600 Index ended the week with a modest 0.21% gain. Major European indexes were mixed: France’s CAC 40 ticked up 0.20%, Germany’s DAX Index fell 0.28%, and Italy’s FTSE MIB slipped 0.78%. The UK’s FTSE 100 Index, however, gained 2.87%, reaching nine-month highs on news that the UK had approved the coronavirus vaccine developed by Pfizer and BioNTech.
Core eurozone bond yields increased overall, lifted early in the week by expectations for further economic stimulus in the U.S. and encouraging developments related to coronavirus vaccines. Core bond yields pulled back somewhat on news that the eurozone purchasing managers’ index (PMI) had declined from the previous month, driven by weakness in the services segment of the economy. Consumer prices in the eurozone declined 0.3% year over year in November, the fourth consecutive month of negative inflation. The weak outlook for inflation, which contributed to expectations that the European Central Bank (ECB) could pursue additional stimulus, likewise pressured yields. Peripheral eurozone bond yields largely tracked the action in core markets. Yields on UK sovereign bonds rose after regulators approved a coronavirus vaccine for use; however, fears of a no-deal Brexit and dovish comments from the Bank of England’s Michael Saunders on Friday moderated the move in gilts.
Efforts to combat coronavirus continue, EU recovery fund may move forward
The UK said it would begin deploying a coronavirus vaccine beginning the following week after the regulatory authority granted emergency use approval for the treatment developed by Pfizer and BioNTech. Data indicated that the rate of infections in Europe continued to level off, with the UK showing a drop of 30%. While some countries will ease tough restrictions over the holidays later this month, Italy imposed stricter mobility rules and other measures to prevent a potential surge in infections. Germany extended its partial lockdown until mid-January.
The European Commission (EC) is ready to exclude Poland and Hungary from the EUR 750 billion pandemic recovery fund and proceed without the two countries if they continue to block Europe’s proposed seven-year budget, EU budget commissioner Johannes Hahn said in an interview with the Financial Times newspaper. The EC’s lawyers have identified possible ways of circumventing Poland’s and Hungary’s objections to the EU linking spending to new rule-of-law requirements, he said. The disagreement is likely to dominate the leaders’ summit that will start on December 10.
EU-UK post-Brexit talks drag on, France threatens veto
Hopes that the UK and the EU would strike a post-Brexit trade deal by the weekend faded as disagreements persisted on fishing rights, state aid, and other contentious issues. Negotiators will now try to finalize a deal before the EU leaders’ summit next week, according to press reports. On Thursday, French minister for Europe, Clément Beaune, warned in a radio interview that France would veto a deal that did not align with French interests.
Japan
Japanese stocks posted mixed results for the week. The Nikkei 225 Stock Average advanced 0.4% (107 points) and closed at 26,751.24. For the year-to-date period, the benchmark is ahead 13.1%. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, recorded modest weekly declines. The yen was little changed versus the U.S. dollar and traded near JPY 104 on Friday.
Amid the spike in infections, Suga likely to postpone snap election
According to The Nikkei, Prime Minister Yoshihide Suga is unlikely to dissolve the lower house of parliament and call for a snap election in January. In the face of falling approval ratings due to the administration’s handling of the pandemic—the latest opinion poll for Suga’s cabinet fell five points in November—the prime minister is expected to focus his efforts on containing the disease and revising the budget plans to revive the economy. New coronavirus cases in Japan increased to record levels in late November, and public opinion on the government’s response to the pandemic has faltered. Suga is expected to postpone the snap election until mid-2021, when there are fewer uncertainties and, hopefully, an effective, widely available vaccine for the virus.
Mixed data on production, employment, and capex
Japan’s industrial production increased 3.8% in October from September, which was well ahead of the consensus estimates and notched a fifth consecutive monthly improvement. The gains were powered by rising output in industrial machinery, automotive, and electronics, and core capital goods shipments were the highest since the onset of the global pandemic. Looking ahead, the METI monthly survey, which is used to identify the basic materials needed for manufacturing and mining production, points to a sixth consecutive monthly gain in November. Overall, fourth-quarter industrial production is expected to show further improvement.
The latest labor market and capital expenditure (capex) data were less encouraging. Unemployment edged higher in October to 3.1% due to significant job losses in the hospitality sector. However, employment improved in retailing, construction, and manufacturing, and the number of furloughed workers dipped to the lowest level since last November. Capex data from the Ministry of Finance showed a 10.6% year-over-year decline in the third quarter. With revenues and earnings sharply below year-ago levels and the uncertainty related to the pandemic, companies have remained unwilling to commit to significant business investments.
China
Chinese stocks posted their third straight weekly gain, aided by solid economic data. The large-cap CSI 300 Index rose 1.7%, and the benchmark Shanghai Composite Index gained 1.1%, according to Reuters. The yield on China’s 10-year sovereign bond edged lower 3 basis points to end at 3.33%. In currency markets, the renminbi appreciated by 0.5% against the U.S. dollar to CNY 6.5342.
U.S. announces new investment restrictions
Investors appeared to largely shrug off new restrictions on Chinese companies by the Trump administration, which designated four more state-owned enterprises as having links to China’s military and, therefore, off limits to U.S. investors. The latest additions to the list of Chinese military-linked entities included China National Offshore Oil Corporation, whose locally listed shares sank 14.0%. On Wednesday, the U.S. House of Representatives approved legislation that could force U.S.-listed Chinese companies to delist if an accounting regulator is not allowed to review their audited accounts. Meanwhile, the U.S. Securities and Exchange Commission is forging ahead with a less stringent plan that would require Chinese companies to use U.S.-overseen auditors.
Nevertheless, overseas investor interest in Chinese assets remained buoyant, as evidenced by an increase of foreign holdings of Chinese bonds in November, with buying concentrated in central government bonds. Foreign buying of Chinese bonds totaled USD 70.6 billion year-to-date, pushing the level of foreign ownership to 9.6%. However, global portfolio managers remain underweight mainland China bonds relative to two key fixed income benchmarks, the Bloomberg Barclays Global Aggregate Bond Index and the JP Morgan Emerging Market Government Bond Index.
Manufacturing gauge hits highest level in a decade
On the economic front, China reported that its official manufacturing PMI rose to 52.1 in November from October’s 51.4, its ninth straight month of staying in expansionary territory and further evidence of a sustained recovery. Meanwhile, the private Caixin/Markit manufacturing PMI rose to a stronger-than-expected 54.9 in November from 53.6 the prior month, the seventh straight month of expansion and the highest gauge since 2010, according to the South China Morning Post. The Caixin services PMI rose to 57.8, its strongest reading since June.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned about 0.2%. Shares fell sharply on Monday but rebounded over the rest of the week.
On Thursday, the Turkish Statistical Institute reported that consumer price inflation increased 2.3% in the month of November and that inflation over the 12 months ending in November was 14.03%. The inflation reading was not only greater than expected, but it also exceeds the central bank’s year-end 2020 inflation projection of 12.1%. As reported by the Daily Sabah newspaper, Treasury and Finance Minister Lütfi Elvan attributed the inflation increase to “food and oil prices and the effects of the exchange rate.” The lira has fallen more than 26% versus the U.S. dollar in the 12 months ended November 30.
While all three of the central bank’s main lending rates—the one-week repo auction rate (15.00%), the overnight lending rate (16.50%), and the late liquidity window facility rate (19.50%)—currently exceed the 12-month inflation rate, and while the lira has been strengthening in recent weeks, T. Rowe Price sovereign analyst Peter Botoucharov believes that the central bank could raise interest rates again until inflation shows signs of stabilizing. He expects inflation to peak around 14% to 14.5%, assuming a relatively stable Turkish lira.
Brazil
Brazilian stocks, as measured by the Bovespa Index, returned about 2.8%. On Thursday, Brazil reported that its third-quarter gross domestic product increased almost 8% quarter-over-quarter on a seasonally adjusted annualized basis. While this is encouraging economic news, T. Rowe Price sovereign analyst Richard Hall expects growth to weaken in response to two major factors, one of which is an increase in inflation.
Earlier in the week, Brazil’s electricity regulator decided to reintroduce the tariff flag system on electricity tariffs, which had been suspended earlier this year due to the pandemic. Due to low water reservoir levels and the need to source more expensive thermal power, this action adds a surcharge on electricity tariffs—to the highest possible level—which, in turn, will feed into inflation in the near term. According to Hall, this is a new price shock on top of an ongoing food price shock. He believes that it will erode real (inflation-adjusted) incomes and will probably raise concerns among central bank officials. It will also hurt economic growth at a time when the labor market is soft and unemployment is relatively high.
Hall also expects growth to weaken in response to the end of the government’s large-scale pandemic-related fiscal support. Based on recent comments, Hall believes that President Jair Bolsonaro is unlikely to support extending the government’s emergency financial support beyond the end of 2020. In addition, he seems likely to wait until after congressional leadership elections in February 2021 before looking to expand the Bolsa Familia welfare program. Any expansion of benefits would need to be offset by certain tax benefit reductions in order to keep spending under the country’s mandatory spending cap. According to a constitutional amendment that took effect several years ago, the growth rate of Brazil’s government spending is not supposed to exceed the country’s inflation rate over a 20-year stretch.
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