Global Markets Weekly Update: December 18 2020
U.S.
Stocks reach new highs on relief hopes
The major indexes reached record highs as expectations grew for the passage of another federal coronavirus relief package. Information technology stocks outperformed within the S&P 500 Index, helped by gains in Apple and Microsoft. Energy stocks lagged despite oil prices touching nine-month highs on strong demand from India and China. Trading volumes were muted through much of the week in advance of the rebalancing of the S&P 500, which electric carmaker Tesla was set to join the following Monday. T. Rowe Price traders noted that USD 110 billion in shares were expected to change hands on Friday, as mutual funds and exchange traded funds (ETFs) that attempt to mirror the returns of the S&P 500 adjusted their portfolios. Several large ETFs that target other benchmarks also rebalanced.
Outlines of compromise stimulus package come into view
After weeks of stalled negotiations, signs of progress emerged in congressional attempts to craft a new stimulus bill. A bipartisan group of lawmakers convened Monday to discuss a new USD 908 billion package. The group was unable to come to an agreement, but reports later surfaced that the two sides had agreed to temporarily put aside two of the thorniest issues: Democratic demands for further aid to states and localities and Republican demands for a litigation shield for businesses and other institutions. On Tuesday, stocks seemed to get a lift after Senate Majority Leader Mitch McConnell vowed that Congress would remain in session until a deal was reached.
By the end of the week, the outlines of a roughly USD 900 billion package appeared to emerge, including roughly USD 600 direct payments to individuals and supplementary federal unemployment assistance of USD 300 per week. Stocks pulled back on Friday, however, on reports that Republicans were demanding a provision barring the incoming Treasury secretary from providing the Federal Reserve with more emergency lending funds in 2021.
The rollout of the Pfizer-BioNTech coronavirus vaccine on Monday also seemed to bolster sentiment. On Thursday, a U.S. Food and Drug Administration (FDA) advisory panel gave its approval to Moderna’s similar mRNA vaccine, which would nearly double the expected number of total doses available by the end of the year. Current coronavirus trends remained daunting, however, with the U.S. setting records for daily deaths. The heavily populated southern part of California emerged as the new epicenter of the crisis, despite strict lockdown measures.
Weekly jobless claims hit three-month high
The toll the virus is taking on economic activity also became clearer during the week. On Wednesday, the Commerce Department reported that retail sales contracted 1.1% in November, roughly triple the expected decline and the worst showing since April. Weekly jobless claims, reported Thursday, reached 885,000, well above expectations and the highest level since early September. Continuing claims fell back to a new pandemic low, however. A pickup in auto and parts manufacturing helped industrial production grow 0.4% in November, a bit more than expected, but October’s strong gain was revised lower from 1.1% to 0.9%. Housing data generally remained solid.
Long-term Treasury yields increased modestly through most of the week, as fiscal relief hopes and optimism about vaccine distribution outweighed the generally disappointing economic data. (Bond prices and yields move in opposite directions.) At its December 15–16 meeting, the Federal Open Market Committee (FOMC) held its policy rate steady, as expected, and elected to maintain the current composition of its bond purchases, disappointing some investors who had hoped for an increase in the Fed’s buying of long-term bonds. In an adjustment from its prior statement, the FOMC said that it will continue buying Treasuries and agency mortgage-backed securities at its current pace “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” The statement caused yields to briefly increase, but the move was quickly reversed as Fed Chair Jerome Powell’s comments to the press and the FOMC’s updated Summary of Economic Projections were perceived as dovish, according to our traders.
Investment-grade corporate bonds benefit from subdued issuance
Low levels of primary issuance, along with a year-end buying trend, drove investment-grade corporate bond credit spreads—the extra yield offered over Treasuries, and an inverse measure of the sector’s relative appeal—tighter throughout the week. Trading volumes were lower than average, and expectations for issuance remain subdued through year-end. Solid equity gains supported the performance of high yield bonds, and credit spreads tightened across all quality tiers. Investors were mostly focused on the primary calendar as the below investment-grade market saw a high volume of new deals. Technical conditions were mixed, however, as high yield funds industrywide reported modest outflows.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
30,179.05 |
132.68 |
5.75% |
S&P 500 |
3,709.41 |
45.95 |
14.81% |
Nasdaq Composite |
12,755.64 |
377.77 |
42.16% |
S&P MidCap 400 |
2,287.26 |
44.20 |
10.87% |
Russell 2000 |
1,969.99 |
58.63 |
18.07% |
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 rose on optimism surrounding coronavirus vaccinations, better-than-expected readings from purchasing managers’ indexes in key eurozone economies, and signs of progress in U.S. congressional negotiations for another round of fiscal stimulus. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.48% higher, while Germany’s DAX Index rose 3.94%, France’s CAC 40 ticked up 0.37%, and Italy’s FTSE MIB added 1.26%. In London, the FTSE 100 Index ended the week down modestly, as the UK pound strengthened on earlier optimism over a trade accord with the European Union (EU). UK stocks tend to fall when the pound rises because many companies in the index are multinationals that generate significant overseas revenues.
These encouraging developments likewise appeared to reduce investor demand for assets perceived as havens, sending core eurozone bond yields higher and offsetting concerns about tougher coronavirus restrictions and Germany’s plan for hefty debt issuance next year. Peripheral eurozone bond yields ended the week flat. UK sovereign yields generally increased on growing optimism that the UK and EU could reach a trade agreement. However, dovish messaging from the Bank of England (BoE) amid an uncertain economic outlook, as well as growing worries over tighter coronavirus restrictions, somewhat curbed the rise in gilt yields.
Macron catches COVID-19; lockdowns tightened
French President Emmanuel Macron self-isolated after displaying symptoms of COVID-19, the disease caused by the novel coronavirus. Macron had attended a series of high-level events in the past week, including a summit of EU leaders. After his announcement, the prime ministers of Spain and Portugal, who met with him at a dinner, quarantined themselves as a precaution.
Germany tightened lockdown restrictions to tame a strong resurgence in coronavirus infections and offered more support to affected businesses. Meanwhile, the UK imposed its toughest tier-3 regime on London and southern England. Dutch Prime Minister Mark Rutte announced a second, strict lockdown that included the closure of schools and shops for at least five weeks. Prime Minister Giuseppe Conte said severe restrictions might be imposed over Christmas to prevent a third wave of infections in Italy, where there is no nationwide lockdown. European Commission President Ursula von der Leyen said the EU would begin vaccinating against COVID-19 on December 27, although some member states have announced different start dates.
UK downbeat on trade talks; EU parliament sets Sunday deadline
Negotiations on a post-Brexit trade deal are in a “serious situation,” UK Prime Minister Boris Johnson said after a call with von der Leyen late Thursday. He said again that a no-deal scenario was “very likely” unless the EU’s position changed “substantially.” Von der Leyen said in a statement that both sides welcomed “substantial progress on many issues” but added that it would be “very challenging” to bridge the “big differences, in particular on fisheries.” The EU Parliament set a Sunday deadline for the talks, allowing time to ratify legislation before December 31, when the transition period ends. The UK Parliament is on standby for an emergency sitting before Christmas to consider the approval of a deal.
Bans on bank dividends lifted; BoE, SNB, Norges Bank hold rates steady
The European Central Bank lifted a ban on European banks paying dividends but capped payouts and share repurchases at a combined 15% of an institution’s 2019 and 2020 profits or 0.2% of a lender’s key capital ratio, whichever is lower. The BoE lifted a ban on payouts late last week, urging banks to limit their dividends to 25% of their cumulative profits in 2019 and 2020 or 0.2% of the value of their riskiest assets, whichever is highest.
The BoE held interest rates at 0.1% and kept the target for its asset purchase program unchanged, as expected. Policymakers reiterated that they did not intend to tighten monetary policy until there is evidence that “significant progress” is being made in achieving the 2% inflation target. The Swiss National Bank (SNB) kept its key policy rate unchanged at 0.75%. Norges, Norway’s central bank, left its main rate at 0% but signaled that an expected improvement in the economy next year could support a rate increase in mid-2022.
Japan
Japanese stocks posted gains for the week. The Nikkei 225 Stock Average advanced 0.4% (111 points) and closed at 26,763.39. 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, also recorded weekly gains. The yen strengthened versus the U.S. dollar and traded near JPY 103 on Friday.
Japan’s government revises its economic growth forecasts
The Japanese government lowered its gross domestic product (GDP) growth forecast for the 2020 fiscal year (ending March 2021) to a 5% contraction from its July forecast for a 4.5% contraction. The changes reflect the winter resurgence of coronavirus infections and the reimplementation of restrictions on travel and other business closures. Conversely, the government concurrently upwardly revised its fiscal 2021 GDP growth forecast to around 4%, from its earlier 3.4% growth forecast, due to the benefits from its stimulus efforts. According to a Reuters poll of economists, six out of 40 respondents expect Japan's economic growth to return to pre-pandemic levels in fiscal 2021, 15 expect this to happen in fiscal 2022, and 19 said this would take place in fiscal 2023 or later.
Record fiscal 2021 budget
The Japanese government is planning a record JPY 107 trillion budget for fiscal year 2021. The proposed budget addresses coronavirus response initiatives, social welfare, and additional military spending. The spending plan is in addition to three extra budgets to combat the economic drag on the economy from the global coronavirus pandemic. The third extra budget and the fiscal 2021 budgets will be presented to the Cabinet together as a 15-month budget. Debt-servicing costs are forecast to total approximately JPY 24 trillion in fiscal 2021, an all-time high. The Bank of Japan made no changes to its monetary policy stance at the December meeting, stating that its liquidity-boosting measures would continue through September 2021 or longer as conditions warranted.
Medical capacity becoming strained in Tokyo
Tokyo reported more than 800 new coronavirus infections on Thursday, and a nationwide daily total climbed to 3,200, a record high. The increase in new cases caused Tokyo’s government to raise its medical alert level to 4, its highest, for the first time since the inception of the four-stage scale in July. Coronavirus patients in the region’s hospitals have increased to approximately 2,000 and are occupying more than 60% of Tokyo’s 3,000-bed capacity. Severe cases, requiring ICU care, have already filled one-third of its 200 ICU beds, and hospitals are struggling to find qualified staff.
In response to the nationwide increase in new cases, Prime Minister Yoshihide Suga suspended the government’s domestic tourism program subsidies through the New Year holidays. The Japanese government has contracted with Pfizer for 120 million vaccine doses, enough for approximately 60 million people, half of its population.
China
Chinese stocks posted a weekly gain despite recording mild losses on Friday, when the U.S. announced that it was blacklisting China’s top chipmaker and more than 60 other companies for national security reasons. For the week, the large-cap CSI 300 Index rose 2.3%, while the country’s benchmark Shanghai Stock Exchange Composite Index added 1.4%.
On Friday, the U.S. Commerce Department said that it was adding Semiconductor Manufacturing International Corp. (SMIC) to its so-called Entity List, which deprives targeted companies from accessing U.S. technology ranging from software to circuitry. The addition of SMIC to the export blacklist came after the U.S. found “evidence of activities between SMIC and entities of concern in the Chinese military industrial complex,” according to the Commerce Department’s statement.
The U.S.’s move against SMIC, which is central to Beijing’s drive to build a self-sufficient chip industry, marked the latest in a string of Trump administration-directed actions targeting Chinese tech companies. Deteriorating Sino-U.S. relations have dampened investor sentiment this year as both sides clashed on issues, including trade, Hong Kong protests, and managing the coronavirus outbreak.
Even so, demand for Chinese assets has stayed resilient amid ample evidence that the economy is firmly recovering after being among the first countries to contain the pandemic. On Tuesday, official data revealed that November industrial output, fixed asset investment, and retail sales grew strongly from year-ago levels. The November data raised expectations that China’s fourth-quarter economic growth would accelerate from the third quarter, when gross domestic product grew 4.9% from a year earlier. Despite signs of growing economic momentum, the yield on China’s sovereign 10-year bond ended nearly unchanged for the week until Friday morning.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned about 2.7%. Equity investors did not seem to react negatively to the imminent likelihood of long-threatened sanctions from a NATO ally.
Late the previous week, the U.S. House of Representatives and the U.S. Senate passed—with broad support that could override a possible presidential veto—the National Defense Authorization Act for fiscal year 2021. Part of this military spending legislation requires President Donald Trump to impose sanctions on Turkey—within 30 days after the bill becomes law—for its 2019 purchase of the S-400 missile defense system from Russia. President Recep Tayyip Erdogan and other Turkish leaders and the media condemned the sanction efforts.
Given Trump’s hesitation to impose sanctions on Turkey, T. Rowe Price sovereign analyst Peter Botoucharov believes that the initial sanctions, which have been technically required under the provisions of the Countering America’s Adversaries Through Sanctions Act, are likely to be limited to select individuals and are unlikely to directly impact banks or corporations and their access to financing. Botoucharov notes that it will be up to President-elect Joe Biden, after he takes office, to dial up sanctions further or to find some common ground for dialogue to resolve the situation.
South Africa
Stocks in South Africa, as measured by the FTSE/JSE All Share Index, returned about 0.6%. The market was closed on Wednesday for a holiday.
In the latter part of the previous week, Health Minister Zweli Mkhize declared that the country was in the “second wave” of the coronavirus and cautioned that citizens should expect a faster rate of increase in cases and a higher peak in the number of cases than earlier this year. On Monday night, President Cyril Ramaphosa addressed the nation and announced that the government was introducing some additional social gathering and business restrictions, particularly in certain coronavirus “hot spots.” Ramaphosa also increased the hours of an evening curfew—now 11 p.m. until 4 a.m.—and ordered the closure of bars, restaurants, and various nonessential businesses at 10 p.m. so that people have time to get home before the curfew begins.
While T. Rowe Price credit analyst Roy Adkins believes that these restrictions could help, he also believes that reversing the increase in cases will be a tall order. Ramaphosa says that much has been done to prepare the country to deal with the coronavirus during the first lockdown, but media reports suggest that hospital capacity in various hot spots is at its limit.
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