Global Markets Weekly Update: January 17, 2020
U.S.
Stocks continue record march on trade and economic optimism
Most of the major indexes moved to record highs, as investors welcomed the signing of a phase one U.S.-China trade deal and some positive economic signals. The small-cap benchmarks regained market leadership for the first time in a month, although the Russell 2000 Index remained roughly 2% below its August 2018 peak. The small utilities sector led the gains, while energy stocks trailed the rest of the market.
T. Rowe Price traders noted that optimism about the initial trade deal between the U.S. and China appeared to help boost sentiment early in the week, as investors awaited its signing Wednesday. A report from Bloomberg on Tuesday that tariffs on Chinese imports would likely stay in place through the U.S. November elections seemed to derail the day’s rally, however.
China agrees to massive increase in U.S. imports, but some are doubtful
Stocks moved only modestly higher after the White House signing ceremony Wednesday, which was accompanied by the release of some previously withheld details of the agreement. Investors may have paid the most attention to a pledge from China to buy an additional $200 billion of U.S. goods by the end of 2021, but some doubted that the Chinese could achieve such a target. As earlier reports suggested, the U.S. agreed in return to cut tariffs on some Chinese goods from 15% to 7.5%, but it left in place 25% tariffs on roughly $250 billion in Chinese imports.
The week kicked off the unofficial start of fourth-quarter earnings season. Reports from Citigroup, JPMorgan Chase, and Wells Fargo on Tuesday brought a mixed reception, but Morgan Stanley shares rose sharply on Thursday and seemed to give an overall lift to sentiment after the company topped earnings estimates and forecast strong growth in the year ahead. Analysts polled by both FactSet and Refinitiv (formerly Thomson Reuters) expect overall earnings for the S&P 500 Index to be flat to slightly lower for the quarter, however.
New home construction at highest level since 2006
Some positive economic data also appeared to drive stocks higher, particularly later in the week. An index of factory activity in the mid-Atlantic region, released Thursday, rose well above expectations, and weekly jobless claims fell to their lowest level in over a month. On Friday, news came that housing starts had reached their highest level in 13 years in December. Investors also appeared cheered by some Chinese economic growth data (see below). U.S. industrial production numbers remained disappointing, however.
The housing starts data, in particular, seemed to push the yield on the benchmark 10-year Treasury note slightly higher for the week. (Bond prices and yields move in opposite directions.) The municipal market outperformed Treasuries through much of week. Chicago’s general obligation and sales tax-backed refunding deals were heavily oversubscribed and repriced to lower yields.
Corporate bonds see continued strong demand
The investment-grade corporate bond market was mostly focused on earnings releases, according to T. Rowe Price traders. The primary calendar was quiet during the first half of the week due to earnings-related blackout periods. However, a few large deals on Thursday caused the week’s issuance volume to exceed expectations. The firm’s investment-grade corporate bond traders reported healthy demand for new deals.
Meanwhile, the firm’s high yield bond traders reported that elevated cash balances continued providing technical support to the noninvestment-grade market, with investors mostly focused on changes in specific company fundamentals. The tone in the market reflected risk-on sentiment, although several new deals from energy companies that have come to the market this year continued to trade somewhat poorly. Below investment-grade funds reported positive inflows.
U.S. Stocks1
Index |
Friday's Close |
Week's Change |
% Change YTD |
DJIA |
29,348.10 |
524.33 |
2.84% |
S&P 500 |
3,329.62 |
64.27 |
3.06% |
Nasdaq Composite |
9,388.94 |
210.08 |
4.64% |
S&P MidCap 400 |
2,095.42 |
44.02 |
1.57% |
Russell 2000 |
1,699.79 |
42.64 |
1.88% |
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 rise on waning trade tensions, reassuring China data
European stocks rose, as trade tensions eased, and investors welcomed strong Chinese economic data (see below). The pan-European STOXX Europe 600 Index ended the week 1.33% higher, and the UK’s FTSE 100 Index gained 1.30%. Germany’s exporter-heavy DAX Index advanced 0.3%.
Fitzsimmons: Bank of England rate cut likely as insurance move
Poor UK economic data, together with recent dovish speeches and comments by Bank of England (BoE) Monetary Policy Committee (MPC) members, fueled speculation that an interest rate cut is in the cards at the January 30 policy meeting. The probability of a quarter-point reduction in the benchmark Bank Rate, from 0.75% to 0.50%, rose to 80%, with lower rates fully priced in three months out, according to swap contracts—which had implied little chance of a rate move the previous week.
T. Rowe Price Fixed Income Portfolio Manager Quentin Fitzsimmons expects a rate cut as a form of insurance given the sharp slowdown at the end of the year, a move that probably should have occurred at the end of 2019 but for the fact that a general election loomed. He also expects data to begin improving as uncertainty has receded since the Conservative Party election victory, so purchasing managers’ surveys of the construction, manufacturing, and services sectors, due to be released before the meeting, will still be key to policymakers’ voting intentions.
UK inflation slows to three-year low; UK GDP almost flat
The UK consumer price index rose 1.3% in December from a year earlier, the least since November 2016. The core inflation rate slowed to 1.4%. Inflation has been below the BoE’s 2% target since August. Separately, UK gross domestic product (GDP) grew by 0.1% in the three months to November 2019 due to weakening services and falling production.
Dovish sentiment gaining ground at BoE
Gertjan Vlieghe, an external member of the BoE’s MPC, said in an interview with the Financial Times that he needed “to see an imminent and significant improvement in the UK (economic) data to justify waiting a little bit longer” to cut interest rates. His comments followed those of fellow MPC member Silvana Tenreyro and outgoing BoE Governor Mark Carney earlier in the week. Tenreyro said at a conference that if uncertainty over a post-Brexit trade deal continued to weigh on demand, “my inclination is towards voting for a cut in rates in the near term.” Carney said that MPC members were debating the need for more stimulus and that “if evidence builds that weakness in activity could persist, risk management considerations would favor a relatively prompt response.” The nine-member committee voted 7-2 against cutting rates in December, with Jonathan Haskel and Michael Saunders voting for a rate cut for a second month in a row. After January, the MPC next meets on March 26.
German GDP growth slows in 2019
According to a preliminary estimate from the Federal Statistics Office, German GDP expanded 0.6% in 2019 versus 1.5% in 2018. This was the slowest growth rate since 2013 and below the average of 1.3% of the past 10 years, although the economy has expanded for 10 consecutive years. Growth in 2019 was mainly supported by consumption expenditures and gross fixed capital expenditures in construction. On the production side, services and construction recorded mainly high growth rates, but manufacturing slumped primarily due to an auto industry slowdown. Exports also grew at a slower pace than in previous years, rising only 0.9%.
U.S. Treasury adds Switzerland to monitoring list
The Swiss franc surged against the dollar and the euro after the U.S. Treasury Department said it had added Switzerland to a list of countries whose currency practices and macroeconomic policies gave it cause for concern. The Swiss central bank has bought large amounts of foreign currencies in recent years to dampen demand for the Swiss franc, seen as a refuge by investors during times of uncertainty. The Swiss finance ministry responded in a statement that Switzerland does not in any way engage in manipulation of its currency to gain an unjustified competitive advantage.
Japan
Japanese stocks generated mixed performance in the holiday-shortened trading week. Japan’s stock markets were closed on Monday, January 13, to celebrate Coming of Age Day. (The holiday has historically celebrated those turning 20 years old—between April 2 last year and April 1 of the current year—into adulthood. Japan will lower the age of adulthood to 18 in 2022.) The Nikkei 225 Stock Average advanced 191 points (0.8%) and closed at 24,041.26, up 1.6% for the year to date. The large-cap TOPIX Index was almost unchanged for the week (+0.8% YTD), and the TOPIX Small Index declined for the week (-0.9% YTD). The yen weakened and closed at ¥110.19 per U.S. dollar.
Manufacturers remain glum on near-term business prospects
The monthly Reuters Tankan survey, which closely follows the Bank of Japan’s (BoJ) quarterly Tankan survey, recorded a -6 sentiment reading among manufacturers in January, unchanged from the reading in December. The index measures the difference in the percentage of responders who say business conditions are poor from those who say they are good. Reuters reports that many of the responders are concerned about the weakness in global demand for cars and other goods and the negative impact the October 1 value-added tax increase has had on consumer sentiment and spending. Despite the dour mood among manufacturers, the service sector component of the survey remained strong, recording a +14 reading.
BoJ downgrades its economic assessment for three regions
The Bank of Japan downgraded its economic assessment for three regions—northern Hokuriku, central Tokai, and western Chugoku—primarily due to weakness in exports. Despite the downgrades, monetary policymakers remain confident that domestic demand will largely offset the downturn. Moreover, the BoJ reported that all nine of the nation’s regions were either expanding or recovering due to "a virtuous cycle from income to spending operating in both the corporate and household sectors.” The overall upbeat assessment infers no changes to monetary policy at the next central bank meeting on January 20-21.
China
Trade deal with U.S. fails to move the stock market
After opening higher on Monday, China's A-share stock market eased gently ahead of the signing of the long awaited “phase one” trade deal with the U.S. on Wednesday and did not rebound after the announcement. The Shanghai Composite lost 0.8% during the week (Monday close to Friday close) while the CSI 300 large-cap index edged down 1.2%. The trade deal itself came largely as expected, with the main focus being on steps to reduce the bilateral U.S. deficit with China.
Many observers in the region viewed the deal as driven primarily by U.S. election politics and as a band-aid rather than a solution, though it may be enough to sustain the current truce. China has pledged to import much more from the U.S. and also to maintain a relatively stable renminbi. Worries also exist that the target of a USD 200 billion increase in imports of goods and services from the U.S. over the next two years will be very difficult to achieve, so there is scope for the deal to fail further down the line. China's claim that other countries will not suffer as it redirects purchases back to the U.S. also seems unlikely to many.
China fourth-quarter GDP as expected
China's fourth-quarter real GDP data posted 6.0% growth year over year (YoY) and 1.5% quarter over quarter, both numbers unchanged from the third quarter, pointing to a stabilizing economy. The National Bureau of Statistics official release said the economy expanded by 6.1% for the year as a whole and was “generally stable” as China continues to shift toward a consumer-led model. Although this was the lowest annual growth rate since 1990, investors and analysts have typically treated the data skeptically. For foreign investors, growth in China's GDP in nominal (non-inflation-adjusted) U.S. dollars is a better measure to monitor.
Monthly economic data surprise to the upside
In a very heavy week for data releases, there was little to spoil the positive mood ahead of the Chinese Lunar New Year. Industrial production exceeded expectations, climbing 6.9% YoY in December from 6.2% in the prior month. There was also better news on trade, as December exports rose 7.6% from the year before, the first such increase since July.
Money and credit also picked up a bit in December, with total social financing increasing by ¥2.103 trillion. Net government bond issues rose from ¥172 billion in November to ¥374 billion in December, indicating that fiscal easing has restarted. Although the credit data surprised positively, annual growth in M2 money supply remains below that of nominal GDP, while question marks remain over the declining efficiency of China's credit transmission.
Other Key Markets
Botoucharov: Russia begins careful political transition
The Russian stock market, as measured by the Russian Trading System (RTS) Index, returned about 1.4%, thanks to brisk gains on Friday. For most of the week, the market was largely unaffected by some interesting political developments that T. Rowe Price sovereign analyst Peter Botoucharov believes represent the beginning of a well-coordinated plan of political transition ahead of general elections in September 2021 and presidential elections in 2024.
During the week, President Vladimir Putin delivered his State of the Union speech, in which he emphasized the need to address the country’s social and economic weakness and proposed Constitutional changes aimed at rebalancing Russia’s political powers between the presidential administration, the executive branch, and the legislative branch of government. According to Botoucharov, if the proposed changes are approved in a nationwide referendum, Russia’s political structure will change in several ways. For example, the legislature would have the right to nominate the prime minister, instead of just giving its consent to a candidate named by the president. Also, the president’s tenure will be limited to two terms. In addition, the State Council, which so far has only an advisory function, will get constitutional status, as well as larger responsibilities and powers.
Following Putin’s speech, Prime Minister Dmitry Medvedev and all of his cabinet ministers resigned, and Putin nominated Mikhail Mishustin, the head of the Federal Tax Service, as the new prime minister—the first steps toward preparing for the referendum and the constitutional amendment process. Botoucharov believes that Mishustin’s appointment is a longer-term positive for the economy and the financial markets. He also believes that, on balance, the institutional redistribution of power is a long-term positive for the country’s stability—though he acknowledges that there will be short-term uncertainties around the structure and aims of the new government, as well as the final proposal for constitutional changes.
Adkins: Eskom problems may pose threat to South African reform efforts
Stocks in South Africa, as measured by the FTSE/JSE All Share Index, returned about 2.6%. The rand, however, struggled during the week amid economic concerns stemming from continued power outages and blackouts (locally called “load-shedding”) by the heavily indebted state-owned utility Eskom. The central bank, which reduced its short-term repurchase rate when its monetary policy meeting concluded on Thursday, characterized the economic outlook in its post-meeting statement as “fragile” and acknowledged that “electricity supply constraints will likely keep economic activity muted in the near term.”
According to T. Rowe Price credit analyst Roy Adkins, South Africa has had some troubling political developments over the past week. Eskom’s recent load-shedding has been the catalyst for some political maneuvering on the part of President Cyril Ramaphosa's opponents within the African National Congress (ANC). Adkins believes that Ramaphosa’s opponents see an opportunity to weaken him by harping on the issue of load-shedding and the efforts to restructure Eskom.
By calling for Pravin Gordhan, minister of the Department of Public Enterprises, to be removed and by suggesting that Eskom to be transferred to the Department of Mineral Resources and Energy, Ramaphosa’s opponents are appealing to unions and the left-wing faction of the ANC that opposes Eskom’s restructuring. Adkins believes that Ramaphosa needs the left wing of the ANC to ensure his hold over the party. If his opponents can drive a wedge between him and the left-wing faction, Adkins believes that Ramaphosa could be meaningfully weakened.
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