Global Markets Weekly Update: December 11 2020
U.S.
Small-caps continue to outperform
The major indexes hit new highs on Wednesday but pulled back to end the week mixed. The small-cap Russell 2000 Index outpaced the large-cap S&P 500 Index for the fifth consecutive week and recorded a modest gain. Within the S&P 500, the energy sector outperformed by a wide margin, as international (Brent) oil prices crossed USD 50 per barrel for the first time since the onset of the pandemic. Information technology and real estate shares underperformed. The week was also notable for the initial public offerings (IPOs) of Airbnb and DoorDash, two of the largest to date in 2020. Shares in both internet companies rose sharply once trading began. According to Renaissance Capital, 2020 is on track to be the highest volume and busiest IPO year since at least 2014.
Pfizer/BioNTech vaccine nears distribution
Positive vaccine news appeared to boost investor sentiment early in the week. On Tuesday, the U.S. Food and Drug Administration (FDA) released data confirming that the Pfizer/BioNTech vaccine was 95% effective while resulting in severe adverse reactions in only a limited and mostly younger set of trial participants. Investors also appeared encouraged by reports on progress in vaccines being developed by AstraZeneca and Johnson & Johnson, according to T. Rowe Price traders. On Thursday, as expected, an FDA panel recommended emergency use authorization for the Pfizer vaccine, spurring hopes that distribution could begin as early as the following week.
The brightening outlook for an eventual end to the pandemic came against a grim set of current milestones, however. A predicted post-Thanksgiving surge sent hospitalizations to new highs, while daily U.S. deaths from the virus crossed 3,000 for the first time. The nation’s largest state, California, announced new stay-at-home orders, and gauges of retail foot traffic, airline passenger traffic, and other high-frequency data indicated that consumers were growing more cautious—even in areas of the country that had resisted aggressive containment measures.
Bipartisan relief bill remains in doubt
Whether Congress would respond to the slowdown with further fiscal stimulus remained in doubt. On Wednesday, a bipartisan group of lawmakers released the broad outlines of a USD 908 billion package, which included both Republican demands for a liability shield for businesses against coronavirus claims and Democratic demands for assistance to state and local governments. Leaders on both sides expressed continuing reservations about the proposal, however, while other lawmakers demanded that any package also include a new set of direct payments to individuals.
The impact of the latest wave of infections was perhaps most evident in weekly jobless claims, which jumped from 716,000 to 853,000, the highest level in nearly three months. Continuing claims also rose from 5.53 million to 5.76 million, breaking a streak of declines stretching back to early September. The rest of the week’s economic data offered mixed signals. Perhaps reflecting vaccine optimism, the University of Michigan’s preliminary gauge of consumer sentiment in December surprised observers by reversing most of November’s decline and marking its second-highest level since the onset of the pandemic.
Yields fall on Brexit and stimulus worries
Treasury yields decreased through most of the week amid uncertainty over fiscal stimulus talks in the U.S. and Brexit trade negotiations. (Bond prices and yields move in opposite directions.) Solid industrywide inflows into municipal bond portfolios supported the sector’s performance, as did light dealer inventories and subdued levels of tax-exempt issuance.
Despite balanced flows and healthy trading volumes, investment-grade corporate bond credit spreads—the extra yield offered relative to Treasuries and an inverse measure of the sector’s relative appeal—widened amid macroeconomic concerns. The worsening coronavirus situation and lack of progress in fiscal stimulus talks stoked uncertainty, according to our traders. Meanwhile, the high yield market was largely focused on the new issue calendar, although the volume of deals was lighter than expected. High yield funds reported modest inflows, while credit spreads were mixed across the rating tiers, but little changed overall.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
30,046.37 |
-171.89 |
5.28% |
S&P 500 |
3,663.46 |
-35.66 |
13.39% |
Nasdaq Composite |
12,377.87 |
-86.36 |
37.95% |
S&P MidCap 400 |
2,243.06 |
0.56 |
8.73% |
Russell 2000 |
1,911.36 |
20.01 |
14.56% |
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
European shares fell on concerns about the rising numbers of coronavirus cases in key economies and uncertainty surrounding a post-Brexit trade deal and U.S. stimulus measures. In local currency terms, the pan-European STOXX Europe 600 Index ended the week about 1.00% lower, while Germany’s DAX Index fell 1.39%, France’s CAC 40 declined 1.81%, and Italy’s FTSE MIB tumbled 2.15%. The UK’s FTSE 100 Index was flat.
Core eurozone bond yields fell amid growing concerns about the possibility of a no-deal Brexit and another injection of stimulus by the European Central Bank (ECB), although optimism related to coronavirus vaccines and expectations of further U.S. fiscal stimulus moderated the overall fall. Peripheral eurozone bond yields broadly followed core markets. UK gilt yields also declined on receding hopes of a post-Brexit deal and Bank of England Governor Andrew Bailey hinting that the central bank could implement negative interest rates.
France extends lockdown; Germany set to follow
France will continue its lockdown beyond the December 15 review date because coronavirus infections remain well above the target level. The government also lengthened the nighttime Christmas curfew, which will begin at 8 p.m. instead of 9 p.m. and be backed by police enforcement and fines, but lifted travel restrictions. German state ministers and Chancellor Angela Merkel will meet on Sunday to discuss tightening existing lockdown restrictions, spurred by data showing that infections had jumped to a record level. Some German states have already tightened restrictions, with Bavaria only allowing people to leave home for essential reasons. Merkel recently urged states, which are responsible for disease control, to toughen measures. Britain began mass vaccinations of its population on Tuesday, starting with the elderly and medical and care workers.
Post-Brexit talks to continue until Sunday
Talks between British Prime Minister Boris Johnson and Ursula von der Leyen, the European Commission president, on Wednesday failed to break the deadlock over a UK-EU trade deal. The two leaders agreed to set a “final” deadline of Sunday for their negotiating teams to make a last attempt to reach agreement. A day later, Johnson said there was a “strong possibility” of no deal. An unidentified source cited by the Reuters news agency said that von der Leyen told EU leaders at a summit that “the probability of a no deal is higher than of a deal.”
EU approves historic budget; ECB expands and extends stimulus measures
The European Union passed the EUR 1.8 trillion budget, which includes a EUR 750 billion coronavirus recovery fund, for 2021 to 2027 after Hungary and Poland dropped their objections to tying payments to rule of law principles. The fund will start distributing money to needy member states in the second half of next year in the form of grants, raised via EU debt issuance, and loans.
The ECB injected more stimulus into the recessionary economy and forecast a slower recovery next year. Policymakers increased the Pandemic Emergency (asset) Purchase Programme by EUR 500 billion to EUR 1.85 trillion and extended it for another nine months to March 2022. They also agreed to provide banks with more ultra-cheap loans until June 2022, extending this program by a year.
Japan
Japanese stocks posted mixed results for the week. The Nikkei 225 Stock Average declined 0.4% (99 points) and closed at 26,652.52. For the year-to-date period, the benchmark is ahead 12.7%. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, recorded weekly gains. The yen was little changed versus the U.S. dollar and traded near JPY 104 on Friday.
Japan’s government unveils a third round of stimulus
Prime Minister Yoshihide Suga announced that the Japanese government was preparing a third stimulus package totaling JPY 73.6 trillion (USD 706 billion) to buttress the flagging economy, which has been pummeled by the impact of the coronavirus. According to The Nikkei, approximately JPY 52 trillion of the stimulus will be used to support structural economic changes, and the balance will go to curb the latest outbreak and support disaster management. About half of the funding for the plan will come from the central government—divided between a third supplementary budget in the current fiscal year and the 2021 fiscal budget—and from the private sector.
The economic stimulus plan, unveiled on Tuesday, includes initiatives focused on reducing carbon emissions and the implementation of digital innovation. The government also intends to increase its funding to various prefectures to increase the number of hospital beds and medical care capacity and provide additional monies for the Go To Travel program, which promotes domestic tourism. Suga said the additional stimulus would boost the economy by 3.6%, but many economists think that number is too optimistic and will more likely be in the 1% range for the fiscal year ending March 2022.
Monthly Tankan index rises to best level since February
The Reuters Tankan monthly manufacturers' sentiment index rose to -9 in December from -13 in November, and the services sector index advanced to -4 from -13. Although both remained in negative territory, the readings were the best since February. However, respondents expect conditions to remain negative for the rest of the fiscal year. Manufacturers remain concerned about worsening conditions in capital spending due to the coronavirus, which caused a falloff in demand. The service sector Tankan sentiment reading improved across all subsectors from the previous month, but consumers are wary of spending amid weakness in wage growth. The Bank of Japan’s quarterly Tankan survey will be released next week and is expected to report similarly positive results.
Coronavirus cases at an all-time high
The Japanese government confirmed about 3,000 new cases of the virus on Thursday, recording successive daily highs. In Tokyo, which also logged a new high in daily infections, a panel of experts noted strains on the health care system. The Tokyo government raised its virus alert level amid a “third wave” and requested restaurants and bars to close daily by 10 p.m. until December 17. Tokyo has reported a total of more than 45,000 cases, the largest number of infections among Japan’s 47 prefectures.
China
China equities fell on renewed tensions with the U.S. after a second major index provider removed some Chinese companies from its benchmarks following a Trump administration executive order. The large-cap CSI 300 Index sank 3.5%, its biggest weekly drop since September, and the Shanghai Composite Index shed 2.8%. Sentiment weakened after S&P Dow Jones Indices (S&P DJI) said it would remove 21 Chinese companies from its global stock and bond benchmarks after the U.S. Defense Department earlier this year designated the companies as having ties to China’s military. The move by S&P DJI followed a similar decision by FTSE Russell the previous week and comes as other index providers, including JP Morgan, MSCI, and Nasdaq, are deliberating whether to do the same.
Worries over U.S. sanctions weigh on sentiment
Concerns that U.S. sanctions will target more Chinese companies outweighed generally positive data for money, credit, and merchandise trade. China's November exports climbed an unexpectedly large 21.1% from a year earlier, marking the strongest growth since February 2018. The consumer price index inflation gauge declined 0.5% in November from a year ago as pork prices decreased, the first deflation reading in China since 2009. Foreign inflows into the country’s bond market rose strongly last month to USD 15 billion, almost double October’s inflow. China recorded a large increase in net holdings of short-term negotiable certificates of deposit, reflecting foreign investors’ positive views on the renminbi (RMB) currency. The RMB was broadly flat for the week, slipping 0.2% against the U.S. dollar. The yield on China’s 10-year sovereign bond rose 2 basis points to 3.32%.
In bond market news, semiconductor company Tsinghua Unigroup became the latest state-backed entity to default on its bonds. The once high-flying company, partly owned by China’s Tsinghua University, said it couldn’t repay the principal on a USD 450 million bond due Thursday, a move that would trigger cross-defaults on another USD 2 billion of debt. Tsinghua had received the strongest government backing of any chipmaker under Beijing’s plan to develop China's semiconductor industry. Its default is the latest sign of credit stress facing state-linked borrowers as the central government has shown more willingness to let weaker companies fail. Defaults in Asia’s offshore high yield market, which is dominated by Chinese issuers, have totaled roughly USD 9 billion so far this year, or a default rate of roughly 3%.
Other Key Markets
Chile
Stocks in Chile, as measured by the IPSA Index, returned about -2.7%.
Late the previous week, the legislature approved, and President Sebastian Pinera signed into law, the country’s second pension withdrawal bill this year. Like its predecessor, which was enacted in the latter part of the summer, the law enables pension participants to withdraw some of their pension balances on an emergency basis—up to 10% in this instance—due to the pandemic-driven economic downturn. While the reduction in pension savings and the long-term cost on Chilean fiscal accounts are the downside of premature pension withdrawals, T. Rowe Price emerging markets sovereign analyst Aaron Gifford notes that these emergency pension withdrawals represent an important inflow into consumers’ pockets, enabling them to pay down debt, purchase necessities, and increase their savings.
In response to the bill’s passage, the central bank announced the reintroduction of certain “tools” previously used back in August to absorb outflows from the pension fund system in an effort to reduce market volatility. This includes opening up repurchase lines with the Pension Fund Administrators, primarily for bank deposits and bank debt. There is no indication that the central bank will purchase government bonds, which Gifford believes is a reflection of the conservative nature of policymakers and the high threshold they’ve set for themselves for doing so—namely, in the event of extraordinary circumstances or concerns about the country’s financial stability.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about 1.2%. Early in the week, Brazil reported that inflation rose 0.89% in November on a month-over-month basis. This was higher than expected. Food prices led the increase, with food at home up almost 3% month-over-month, while manufactured goods prices remain the other main source of inflationary pressures. There are signs of more inflation in products affected by acute supply-chain issues, such as furniture and automobiles, but the supply-chain issues should be resolved over time.
Late Wednesday, the central bank’s policy-setting committee concluded a regularly scheduled meeting and, as expected, decided to leave its key policy rate, the Selic rate, at 2.00%, where it has been since early August. According to the post-meeting statement, policymakers have noted “a reversal of the downward trend in inflation expectations” and telegraphed that, at some point, they will no longer provide forward guidance for how long they anticipate keeping the Selic rate very low. Central bank officials attempted to reassure investors that an interest rate increase would not be an automatic next step “because the economic situation continues to prescribe an extraordinarily high stimulus in the face of uncertainties.” While policymakers did acknowledge “the stronger inflationary pressure in the short term,” they believe that the current price shocks are “temporary” but intend to monitor them closely.
The mutual funds referred to in this website are offered and sold only to persons residing in the United States and are offered by prospectus only. The prospectuses include investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing.
T. ROWE PRICE, INVEST WITH CONFIDENCE and the bighorn sheep design are trademarks or registered trademarks of T. Rowe Price Group, Inc. in the United States, European Union, and other countries. All other trademarks are the property of T. Rowe Price or their respective owners.
Copyright 2006-2020, T. Rowe Price. All rights reserved.
T. Rowe Price Investment Services, Inc., Distributor.