Global Markets Weekly Update: February 07, 2020
U.S.
Stocks hit record highs as virus fears moderate
Stocks recorded solid gains on the back of encouraging economic data and hopes that the global economy would prove resilient in the face of the new coronavirus outbreak centered in China. (For a view on the possible implications of the coronavirus from one of our emerging markets analysts, click here.) The large-cap benchmarks and the technology-heavy Nasdaq Composite Index established record highs, with the S&P 500 Index notching its weekly best gain since June. Slower-growing value shares trailed their higher-valuation growth counterparts for the week, but T. Rowe Price traders noted a pronounced rotation into value at midweek. Reflecting the ongoing outperformance of technology stocks, the Russell 1000 Growth Index ended the week up 6% in terms of total return (including dividends) for the year to date, while the Russell 1000 Value Index was roughly flat.
Information technology stocks outperformed within the S&P 500 Index, helped by a gain in Microsoft shares. Other notable standouts included Tesla, which surged early in the week following news of positive results in its battery division, and Twitter, which jumped after beating revenue and user growth estimates. The interest rate-sensitive utilities sector lagged as longer-term Treasury bond yields rebounded from multi-month lows reached late the previous week.
China developments drive sentiment
Wall Street kept an especially close eye on China during the week. News that the Chinese central bank had added extra stimulus to offset the impact of the virus outbreak helped U.S. markets get off to a strong start on Monday (see China section below). Signs of progress in containing the virus also boosted confidence, as did reports that researchers were making progress on a vaccine. Some discouraging news Friday on the number of new infections in China, as well as an outbreak on a cruise ship anchored in Japan, may have fostered a pullback in stocks to end the week, however.
Investors were also encouraged by China’s announcement later in the week that it was cutting tariffs on some U.S. imports, effective February 14, as part of the “phase one” trade deal. Some observers have questioned whether the coronavirus outbreak will complicate China’s plans to increase imports of U.S. goods by $200 billion over the next two years, but Treasury Secretary Steven Mnuchin said Thursday that he was confident China would meet its commitments.
Labor data upside surprise
The week’s economic data, particularly on the labor market, also appeared to support sentiment. On Wednesday, payroll processing firm ADP reported that its tally of private sector jobs had jumped by 291,000 in January, the biggest monthly gain in nearly five years and nearly double consensus estimates. The Labor Department’s official employment report on Friday confirmed January’s jobs strength, with private and public sector payrolls rising by a combined total of 225,000, well in excess of estimates. Average hourly earnings also increased at a healthy pace, and the labor participation rate picked up as the tight job market encouraged more Americans to re-enter the workforce.
One of the few dark spots in the January report was a continued decline in manufacturing jobs, but encouraging signals emerged in other manufacturing data. On Monday, the Institute for Supply Management’s (ISM) index of manufacturing activity moved unexpectedly back into expansion territory for the first time since July, with new orders also showing resilience. The service sector remained in more robust shape. The ISM’s gauge of nonmanufacturing activity, reported Wednesday, showed the service sector expanding in January at the fastest pace in six months.
Bond yields rebound from multi-month lows
The moderation of coronavirus fears reduced demand for the perceived safe haven of U.S. government securities, pushing the 10-year Treasury yield off its lowest level since October. (Bond prices and yields move in opposite directions.) The firm’s traders reported that the investment-grade corporate bond market traded with a firm tone, partly due to strong demand from investors in Asia and China’s decision to reduce tariffs. Headlines about pharmaceutical companies redoubling their efforts to develop a coronavirus vaccine also buoyed investor sentiment somewhat. New issuance volume was in line with expectations.
The high yield market was quiet at the start of the week, as many investors remained on the sidelines due to coronavirus concerns. However, buying in the secondary market of names with notable exposure to the new coronavirus picked up as fears moderated. In issuer-specific news, satellite operator Intelsat’s bonds experienced significant volatility. The company is said to be considering a possible Chapter 11 bankruptcy filing if U.S. regulators do not increase the compensation it would receive from the public auction of 5G spectrum assets.
The broad municipal market declined but outperformed U.S. Treasuries amid light issuance and steady inflows. Puerto Rico general obligation bonds traded higher on reports of a tentative agreement between the Puerto Rico Financial Oversight and Management Board and bondholders that would increase recovery rates for distressed bonds.
U.S. Stocks1
Index |
Friday's Close |
Week's Change |
% Change YTD |
DJIA |
29,102.51 |
846.48 |
1.98% |
S&P 500 |
3,327.71 |
102.19 |
3.00% |
Nasdaq Composite |
9,520.51 |
369.57 |
6.11% |
S&P MidCap 400 |
2,049.32 |
40.96 |
-0.66% |
Russell 2000 |
1,657.07 |
42.63 |
-0.68% |
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
Equities in Europe rebounded and reached record highs over the week after some strong earnings results and an advance in global markets triggered by China’s moves to halve some tariffs on U.S. imports and to mitigate the impact of the coronavirus. The pan-European STOXX Europe 600 Index ended the week 3.22% higher, Germany’s DAX Index rose 4.02%, France’s CAC-40 Index climbed 3.67%, and the UK’s FTSE 100 Index advanced 2.32%.
ECB President Lagarde: Eurozone growth still modest
European Central Bank (ECB) President Christine Lagarde said in testimony to the European Parliament that eurozone economic growth remained modest and that ultra-easy monetary policy was still required. She also noted that moderate growth was delaying the pass-through from wage increases to prices and inflation developments remained subdued. She said that while domestic growth remained resilient, citing private consumption and low unemployment, global factors weighed on regional growth. She said the outbreak of the coronavirus in China was now the main risk to global growth, as trade war risks had receded. She defended ECB policies, saying they supported the real economy via better financing conditions, although care was needed to ensure financial stability.
German, French industrial output slump at end of 2019
Industrial production in Germany and France plunged in December, as factories struggled amid a broad European slowdown and strikes in France. The monthly declines of 3.5% in Germany and 2.8% in France were much greater than forecast. The annual decline in Germany was 6.8%, the worst since 2009, and 3.0% in France. Separately, German manufacturing orders fell 2.1% in December, mainly due to a decrease in foreign orders.
UK services PMI revised up
The January purchasing managers’ index (PMI) for UK services was revised up to 53.9 from 52.9 in the flash estimate; readings above 50 signal growth. The composite index, including manufacturing and construction, also pointed to a recovery, rising to 53.3 in January from 49.3 in December. It was above the 50 level for the first time since August last year.
Japan
Stocks in Japan rallied for the week, recouping the prior week’s steep losses. The Nikkei 225 Stock Average advanced 623 points (2.7%) and closed at 23,827.98, up 0.7% for the year to date. The large-cap TOPIX Index and the TOPIX Small Index posted similarly strong gains. The yen closed at ¥109.90 per U.S. dollar.
Wakatabe and central bank committed to easy money policy
Bank of Japan (BoJ) Deputy Governor Masazumi Wakatabe confirmed in a speech to business leaders in the Ehime prefecture that the central bank will not hesitate to employ additional easing measures if there is a loss of momentum toward achieving price stability. Wakatabe noted a “decoupling” between the performance of the manufacturing and nonmanufacturing segments due to the slowdown in the global economy, which was largely the result of trade friction between the U.S. and China. He believes that the progress on the U.S.-China trade front and the UK’s exit from the European Union reduces uncertainty and should lead to a resumption of global growth. He already views global manufacturing and business sentiment as improving, especially in the information technology sector, where semiconductor shipments have picked up. Wakatabe believes demand related to data centers and the 5G network are positioned to increase and is driving increased activity in the sector.
While most market watchers forecast a fourth-quarter economic growth contraction (around -2% to -4%) due to the impact of natural disasters and the October 1 consumption tax increase, the central bank expects 0.8%, 0.9%, and 1.1% gross domestic product growth for fiscal years 2019, 2020, and 2021, respectively. The first estimate of Japan’s economic growth in its third fiscal quarter (ended December 31) will be released by the Cabinet Office on February 17.
Coronavirus impact
Although stocks rebounded sharply during the week, Japanese leaders stated that they remain attentive to the longer-term impact that the new coronavirus might have on the country’s economy. In a message to Parliament, BoJ Governor Haruhiko Kuroda affirmed that the central bank would not hesitate to buttress the Japanese economy against economic disruptions caused by the virus. The governor’s concern focused on the importance of China to Japan’s economy. Economists have lowered China’s economic growth projections as a result of supply-chain disruptions. The outbreak is also expected to have negative growth implications for Japan and most other Asian nations.
China
Equity markets reopened on February 3, having been shut since January 23 ahead of the Chinese Lunar New Year holidays. After their extended closure, A-shares fell heavily on Monday, with the Shanghai Composite Index dropping 7.7%. Over the remainder of the week, Chinese equities were able to first stabilize and then stage a partial recovery. By Friday, the fall in the Shanghai Composite from January 23 had been reduced to 3.4%. Over the same period, the CSI 300 Index of large-cap stocks fell 2.6%.
Helping to sustain the more positive tone to markets, the number of new reported cases of the Wuhan coronavirus fell for two consecutive days, although it is much too soon to tell if the situation is really stabilizing. Also encouraging, the number of recoveries from the coronavirus has been increasing, which could help to keep the mortality rate close to its current estimate of 2% to 3%. Markets also appeared to draw comfort from press reports that some existing antiviral drugs were proving helpful against the virus, although the World Health Organization stressed that a therapeutic cure was not available, while an effective vaccine would take time to develop and undergo trials. What analysts are looking for now are signs that China's unprecedented quarantine efforts in Wuhan and Hubei province are starting to succeed in reducing the spread of the coronavirus.
China introduces raft of financial support measures
Ahead of the market reopening on February 3, the Chinese authorities announced a package of 30 financial measures intended to both support the economy and alleviate some of the financial pressures arising on account of the coronavirus. China's central bank, the People’s Bank of China, promised to use its monetary policy toolkit to keep financial markets functioning normally and, on Monday, injected RMB ¥1.2 trillion of liquidity into the banking sector.
Most of the 30 measures are relatively modest steps. They are basically aimed at offsetting some of the short-term financial stress by ensuring ample liquidity in money and credit markets, as well as providing interest rate subsidies and loan forbearance for companies and mortgage holders in temporary financial difficulty. Development and policy banks, such as the Export-Import Bank and Agricultural Development Bank, will also increase their lending support to the economy. In a move also partly designed to support the domestic economy, China announced on Thursday that it would lower import tariffs by 50% on USD $75 billion of U.S. imports. Some local governments have also announced their own financial support measures.
Manufacturing PMI beats estimates, but trade data are postponed
China's Markit PMI for manufacturing came in slightly better than consensus, but as the survey only covered the period up to January 20, it will largely exclude the effect of the coronavirus. Although it has softened recently, the PMI remains above the levels of early last year. The Caixin Services PMI eased further in January, suggesting that service sector activity was not particularly robust before the coronavirus outbreak.
Other Key Markets
United Arab Emirates remains vulnerable to close travel ties with China
Stocks in Dubai, as measured by the Dubai Financial General Market Index (DFMGI), slipped about 0.7% in the five trading sessions since the close of business on Thursday, January 30. The market is closed on Fridays and Saturdays, like many other markets in the Gulf Cooperation Council.
Unlike other markets in the region, Dubai has a service-based economy that depends on tourism, transport, and real estate rather than oil production and export. The government’s oil revenues are minimal, so it relies almost entirely on fees and tax revenues to fund its budget. Dubai, unfortunately, has been going through an economic slowdown since 2016, and the economic fallout from the coronavirus outbreak in China is now exacerbating this slump.
According to T. Rowe Price Credit Analyst Razan Nasser, China has been one of the few growth markets for Dubai’s service sectors, with close to one million Chinese tourists visiting Dubai in 2019, up from just 450,000 just four years earlier. The Dubai-based Emirates airline normally operates 35 flights per week to China carrying about two million passengers a year—either passing through or visiting Dubai. As of February 6, most of these flights have been suspended.
Investors disappointed by halt in Brazilian rate cuts
Shares in Brazil, as measured by the Bovespa Index, returned about 0.1%. The market benefited in the first half of the week from improved global sentiment. Investors were hopeful that a treatment for the coronavirus spreading in China would soon be found and would limit the economic damage to China, which is a major consumer of commodities and natural resources developed and exported by Brazil and other Latin American countries. However, equities gave up almost all of their gains in the final two trading sessions.
Late on Wednesday, as was widely expected, the Brazilian central bank decided to reduce its benchmark Selic interest rate from 4.50% to 4.25%. Investors were somewhat disappointed, however, that the central bank decided to call a halt to its rate-cutting efforts. In their post-meeting statement, central bank officials acknowledged that they felt “the interruption of the monetary easing process” was “appropriate” in light of the delayed economic reaction from interest rate cuts going back to July 2019.
T. Rowe Price Sovereign Analyst Richard Hall notes that central bank officials characterized the economic recovery as being gradual—a downgrade from an earlier assessment that the recovery was gaining traction. Hall believes that Brazil’s recovery is uneven: Services and consumption-oriented sectors are growing, but the industrial sector, as indicated by some recent disappointing industrial production data, is weighing on the broader economy.
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