Global Markets Weekly Update: January 31, 2020
U.S.
Coronavirus concerns weigh on U.S. stocks
The major U.S. equity benchmarks lost ground for the week amid growing concerns about the impact of the coronavirus on global economies. The Nasdaq Composite Index held up the best, while the mid- and smaller-cap benchmarks had the weakest results. Performance was mixed for the month—the Nasdaq recorded positive results, but the other major benchmarks finished January with flat or negative returns.
Stocks suffered their worst losses on Monday and Friday, when markets seemed focused on the spreading virus. By the end of the week, approximately 10,000 cases had been reported, the World Health Organization (WHO) had declared the outbreak a global health emergency, and the U.S. State Department had issued a warning for U.S. citizens to avoid traveling to China. (See the China section below.) T. Rowe Price traders noted that airline, cruise line, and casino stocks were particularly hard-hit by coronavirus worries. Energy stocks were pressured by falling oil prices.
Strong earnings reports buoy some stocks
It was a busy week for quarterly earnings reports, and strong results by some of the largest U.S. companies helped offset the market’s losses for the week. Apple and Microsoft, the two largest companies in the S&P 500 by market capitalization, reported better than expected earnings. Apple was bolstered by strong iPhone sales, while Microsoft was supported by its Azure cloud-computing business. Amazon.com rallied after beating earnings expectations and recording solid growth in its Prime membership program.
Risk-off environment sparks Treasury demand
The week’s risk-off environment supported higher-quality segments of the fixed income market. Treasuries rallied, and the yield of the benchmark 10-year Treasury note fell to its lowest level since early September 2019. (Bond prices and yields move in opposite directions.) Fears of slowing long-term growth led to an inverted Treasury yield curve—by the end of the week, the three-month bill was yielding more than the 10-year note.
In the investment-grade corporate bond market, T. Rowe Price traders noted that riskier segments underperformed. The high yield market followed equities lower on Monday but partly retraced the losses as the week progressed. In sector-specific news, high yield bonds in the satellites industry experienced weakness after a bill was introduced in the U.S. Senate that could limit the proceeds that satellite operators receive from the public auction of 5G spectrum assets.
In the municipal bond market, strong demand pushed yields for 10- and 30-year securities to record lows. T. Rowe Price traders said Puerto Rico Electric Power Authority (PREPA) bonds saw price gains on renewed optimism for approval of a proposed restructuring deal.
Fed keeps rates unchanged
As expected, the Federal Reserve’s monetary policy committee voted at its January meeting to keep its short-term benchmark lending rate in a range of 1.50% to 1.75%. After cutting rates three times last year to address a slowing economy, the Fed has now kept rates steady for two straight meetings. The central bank’s post-meeting statement was virtually unchanged from the one issued following the Fed’s December meeting, but the policymakers did note that the rise in household spending has dropped from a strong pace to a more moderate level.
Economic news was mixed for the week. Core durable goods orders (excluding defense and transportation) fell in December, but the Conference Board’s Consumer Confidence Index rebounded in January. In its initial estimate, the Commerce Department reported that gross domestic product grew at an annualized rate of 2.1% in the fourth quarter of 2019, which was in line with expectations and the same as in the third quarter.
U.S. Stocks1
Index |
Friday's Close |
Week's Change |
% Change YTD |
DJIA |
28,256.03 |
-733.70 |
-0.99% |
S&P 500 |
3,225.52 |
-69.95 |
-0.16% |
Nasdaq Composite |
9,150.94 |
-163.97 |
1.99% |
S&P MidCap 400 |
2,008.36 |
-57.46 |
-2.65% |
Russell 2000 |
1,614.44 |
-47.87 |
-3.24% |
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
Stocks fall on risk to global growth from coronavirus
European stocks fell as the rapid spread of the coronavirus in China sparked fears of a pandemic and a hit to global economic growth. The pan-European STOXX Europe 600 Index ended the week down 2.28%, while Germany’s exporter-heavy DAX Index fell 3.47% and the CAC-40 Index in France dropped 2.94%. The UK’s FTSE 100 Index declined 3.29%, sapped by a stronger UK pound after the Bank of England’s (BoE) decision to leave monetary policy unchanged.
Eurozone economic growth slower than expected in fourth quarter
The eurozone economy grew at a slower-than-expected rate in the fourth quarter, according to a flash estimate of the statistics office. Gross domestic product (GDP) expanded 0.1% on the quarter and 1.0% on the year, slightly below the consensus estimate of economists surveyed by FactSet. T. Rowe Price International Economist Tomasz Wieladek says France and Italy were the main reason for slower-than-expected overall GDP growth. The French economy contracted, rather than expanded, in the period, probably due to the public sector strikes at the end of 2019. Wieladek expects France to rebound sharply in the first quarter of this year since the strikes abated, which will likely boost eurozone growth as well.
Separately, consumer prices fell 1.0% on the month in January, while rising 1.4% on the year, up from 1.3% in December and 1.0% in November. But stripping out food, alcohol and tobacco, a core rate favored by economists, the rate slowed to 1.1% from 1.3% in December.
Euro area jobless rate drops to lowest level in about 12 years
The eurozone’s unemployment rate dropped to 7.4% in December, its lowest level in almost 12 years. Economists polled by FactSet had expected 7.5%. The number of jobless fell by 592,000 last year to 12.25 million people. In a further positive signal for the eurozone economy, the European Commission’s economic sentiment indicator rose in December to a five-month high, reflecting improved sentiment in the industrial and construction sectors. The consumer and services sectors were flat.
“Turning point” for a German recovery?
Germany’s economy ministry raised its forecast for 2020 growth to 1.1% from a previous 1.0%, citing an improved trade outlook, strong domestic demand, and a higher number of working days this year. Peter Altmaier, the minister, said that the recovery had reached a “turning point” after two years when forecasts were revised down and that “we are now seeing a silver lining on the horizon.” The ministry said the government would also step up investment to EUR €162.4 billion over the next four years, one-third more than in the previous parliament, as reported by the Financial Times.
BoE leaves policy on hold, downgrades outlook
The BoE’s Monetary Policy Committee voted 7-2 for a third month to keep monetary policy unchanged. It decided an immediate cut in its bank rate was unnecessary given an improvement in business sentiment and stabilization of global growth. Wieladek notes that the BoE presented a significantly lower growth forecast but did not cut interest rates in response since the revision was mostly the result of lower underlying supply, rather than demand growth. While swap contracts had implied a high probability of a rate cut ahead of the decision, the supply judgment means that any expansion in growth that exceeds the BoE’s forecast in the coming year will be accompanied by more hawkish language, he adds.
Japan
Japanese stocks declined for the week. The Nikkei 225 Stock Average fell 622 points (-2.6%) and closed at 23,205.18—1.9% lower in January. The widely watched blue chip market yardstick tumbled to below 23,000 on Thursday, a 13-week low, before recovering 200+ points on Friday. The large-cap TOPIX Index and the TOPIX Small Index endured similar-sized declines. The yen was modestly stronger and closed at ¥108.84 per U.S. dollar.
Stocks trended lower on worries about a global economic slowdown caused by the coronavirus. Economy Minister Yasutoshi Nishimura said that Japan’s corporate revenues, earnings, and factory production might be hurt by the outbreak. In addition to being Japan’s leading trading partner, China accounted for about one-third of the tourists visiting Japan last year, and their spending represented about 40% of the total spent by foreigners.
Japanese government OKs extra-budget funding
The Jiji Press reports that the National Diet has approved a ¥4.5 trillion fiscal 2019 supplementary budget for economic stimulus and disaster prevention measures. The extra budget received approval from the House of Representatives (the lower chamber) on Tuesday, and the nod from the House of Councillors (the upper chamber of parliament) on Thursday. Approximately ¥2.3 trillion is for disaster prevention, such as the reinforcement of levees and other river facilities. About ¥1.1 trillion is targeted for efforts to bolster the economy after the Tokyo Olympics and Paralympics, and about ¥0.9 trillion will be earmarked to buttress small businesses and farmers against overseas economic slowdowns. The government will sell bonds to fund the extra budget.
Abe looks to replace Harada with another dove
Reuters reports that Prime Minister Shinzo Abe’s government has nominated Seiji Adachi, an economist known for favoring easy money policy and Abenomics, to join the Bank of Japan’s (BoJ) policy-setting committee. If approved by the legislature, Adachi, an economist at Marusan Securities, will replace Yutaka Harada, whose five-year term expires in late March. Both Harada and Adachi are regarded as having dovish leanings. The story suggests that Abe wants to maintain the current program of aggressive monetary policy initiatives to bolster the economy and boost inflation to the 2% target.
China
China’s financial markets were shut during the week after authorities extended the Lunar New Year holiday as part of their administrative efforts to contain the spread of the Wuhan coronavirus. Trading is set to resume on Monday, February 3. Before markets were shut, Hong Kong’s Hang Seng Index was down 9.5% from the last peak on January 20. Emerging markets stocks were weak overall, with the MSCI Emerging Markets Index losing 2.9% in the week to January 29.
WHO declares coronavirus a public health emergency
On January 30, the WHO declared the coronavirus a Public Health Emergency of International Concern. But the WHO did not recommend any travel or trade restrictions, though the Chinese have imposed extensive travel barriers. T. Rowe Price analysts expect that the strong efforts of the authorities to isolate the entire province of Hubei is likely to disrupt economic activity and impact first-quarter growth figures.
Weakness extends to other emerging markets in Asia
Markets in Asia were weak across the board. Thailand's SET Index fell below key support levels, and Malaysia's KLCI index declined to its 2019 low. The weakness in Asian emerging markets may reflect their linkages to China. The latest weekly fund flows data to January 29 showed redemptions of $900 million from Asia ex-Japan equity funds, equal to 0.2% of assets under management.
Other Key Markets
South Africa
Stocks in South Africa, as measured by the FTSE/JSE All Share Index, fell about 2.1%. Shares were pressured during the week by broad weakness in emerging markets stemming from fears that the unchecked spread of the coronavirus in and beyond China could significantly weaken global growth.
The South African market is already struggling with concerns about domestic economic growth. As reported by Reuters, the International Monetary Fund (IMF) recently reduced its growth projections for the country in 2020 (from 1.1% to 0.8%) and in 2021 (from 1.4% to 1.0%). The continuing financial and operational challenges faced by state-owned utility Eskom are a major part of the problem.
Eskom, which delivers electricity to most of the country, has substantial debt and depends heavily on fiscal support from the government, and its poorly maintained equipment is one factor that occasionally forces the utility to cut power (locally called “load-shedding”) to various parts of South Africa. On Thursday, Eskom cautioned customers that there would be additional load shedding from 9 p.m. on Thursday until 6 a.m. on Friday, and that there was a possibility of more power outages throughout the weekend. On Friday, Eskom’s CEO further warned citizens that power outages are likely to become more frequent as the utility proceeds to make necessary repairs to its facilities.
Mexico
Mexican stocks, as measured by the IPC Index, returned about -2.3%. The market held up fairly well for most of the week, but stocks tumbled with U.S. shares on Friday amid concerns about the spreading coronavirus and its possible impacts on global growth.
President Trump’s signing of the United States-Mexico-Canada Agreement, which replaces the North American Free Trade Agreement (NAFTA), was one positive factor for the Mexican market—though the treaty still needs to be approved by the Canadian government. On the other hand, preliminary economic data released during the week showed that Mexico’s economy contracted 0.1% in 2019, the first full year of Andrés Manuel López Obrador’s (AMLO’s) presidency. In response to the data, AMLO commented that while there may not have been growth in Mexico, the country has experienced “development” and “well-being,” which he implied as being more important. According to T. Rowe Price sovereign analyst Aaron Gifford, this comment shows that AMLO is more focused on wealth distribution than overall wealth. Gifford believes both are necessary for Mexico to thrive.
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