Global Markets Weekly Update: July 02, 2020
U.S.
Nasdaq hits new record
Stocks recorded solid gains for the holiday-shortened week, helping push the technology-heavy Nasdaq Composite Index to a record intraday high, while the S&P 500 Index touched its best level since June 10. Within the S&P 500, communication services shares were particularly strong, helped by gains in Netflix and video game stocks, as was the small real estate sector. Financial and energy shares lagged. The week closed out the best quarters for the Dow Jones Industrial Average and S&P 500 since 1987 and 1998, respectively. Markets were closed Friday in advance of the Fourth of July holiday.
Stocks began the week on a strong note, although T. Rowe Price traders noted that there was no clear catalyst behind the gains. Worries remained about the continuing resurgence of the coronavirus across the South and Southwest, and governors in several states announced reversals or pauses in reopening plans. The rate of increase in cases nationally slowed early in the week, however, and optimism about progress in developing a vaccine may have helped support sentiment. Indeed, Wednesday brought news of encouraging early-stage test results for a vaccine under joint development by Pfizer and BioNTech, and investors seemed further encouraged by the companies’ aggressive timeline for possible regulatory approval.
Solid economic data offset coronavirus fears
Positive economic signals, particularly about the labor market, also seemed to support sentiment as the week progressed. Pending home sales jumped over 44% in May, more than double consensus estimates, and the Conference Board’s gauge of consumer confidence rose much more than expected. Payroll processing firm ADP’s monthly tally of private sector job gains rose by 2.4 million in June, which was less than expected, but May’s tally was revised remarkably higher, from an initially reported loss of 2.8 million to a gain of 3.1 million.
Thursday’s official payrolls report from the Labor Department confirmed the strong jobs momentum, showing a record 4.8 million gain in nonfarm payrolls in June. The unemployment rate also fell more than expected, from 13.3% to 11.1%. The weekly unemployment report was less encouraging, however, showing only a modest decrease in initial claims (from 1.48 million to 1.43 million) while continuing claims rose slightly. Many observers also noted that the Labor Department report reflected conditions in early June, before the recent surge in coronavirus cases. Stock futures jumped on the release of the payrolls report, but the gains moderated after trading opened.
Fed considers yield curve control
The positive jobs numbers failed to impress the bond market, with the yield on the benchmark 10-year Treasury note falling back Thursday to end the week modestly higher. (Bond prices and yields move in opposite directions.) Minutes from the recent Federal Open Market Committee meeting revealed that members discussed the possibility of implementing yield curve control, or the manipulation of yields to ensure that long-term yields remain above short-term yields. While further analysis on yield curve control was recommended, members appeared to consider such a policy unnecessary at this time.
The broad municipal market posted modestly positive returns through most of the week and outperformed Treasuries. Deal activity was light given the holiday-shortened week, but T. Rowe Price traders reported that primary market demand was still strong, particularly for higher-yielding issues.
The firm’s traders also reported that improved risk appetite and month-end buying caused investment-grade corporate bond market spreads to tighten and riskier segments to outperform, with the rebound in June hiring, encouraging manufacturing data, and favorable coronavirus vaccine test results bolstering investor sentiment. The week’s new deals were generally met with solid demand, and the volume of issuance was in line with expectations.
Conversely, selling by high yield exchange-traded funds in response to heavy outflows weighed on the sector’s performance, although solid equity gains were supportive for risk assets. June’s new issuance volume was the highest monthly total on record. In credit-specific news, ridesharing company Uber Technologies was revealed to be in negotiations to purchase Postmates as it seeks to expand its food delivery services to offset the decline in its primary business.
U.S. Stocks1
Index |
Thursday’s Close |
Week’s Change |
% Change YTD |
DJIA |
25,827.36 |
811.81 |
-9.50% |
S&P 500 |
3,130.01 |
120.96 |
-3.12% |
Nasdaq Composite |
10,207.63 |
450.41 |
13.76% |
S&P MidCap 400 |
1,778.95 |
57.10 |
-13.77% |
Russell 2000 |
1,431.86 |
49.10 |
-14.18% |
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 stocks rose through Thursday on encouraging news related to the development of a potential coronavirus vaccine and improving economic data. In local currency terms, the pan-European STOXX Europe 600 Index ended 2.11% higher for the first four days of the week. Germany’s DAX Index rose 3.33%, France’s CAC-40 Index added 2.41%, and Italy’s FTSE MIB Index gained 3.11%. The UK’s FTSE 100 Index increased 0.58%.
Improving data signal quicker recovery
Economic data indicated that the slump continued to ease in June as lockdown restrictions were lifted and shops and businesses reopened. The number of people out of work in Germany rose by a less-than-expected 69,000 to 2.943 million people, Labor Office data showed. The unemployment rate climbed to 6.4% from 6.3% in May. German retail sales jumped 13.9% sequentially in May, much stronger than the consensus estimate of 2.8%. Retail sales rose 3.8% year over year, whereas economists had expected a 3.5% drop.
Purchasing managers’ indexes (PMI) for manufacturing in the eurozone continued to show significant improvement with the easing of lockdown restrictions. The June flash manufacturing PMI rose to 46.9 from 39.4, exceeding expectations. Manufacturing in the UK returned to expansion in June, with the flash PMI rising to 50.1 from 40.7. Eurozone inflation quickened to 0.3% in June from 0.1% in May, although core inflation slipped to 0.8% from 0.9%.
ECB’s Lagarde says worst of slump might be past
European Central Bank (ECB) President Christine Lagarde said in a webinar that the worst of the coronavirus crisis might be over, adding that her view was expressed with some trepidation because there could be a second wave of infections. She warned that the recovery would be “incomplete,” as trade is unlikely to return to pre-crisis levels and productivity may be weaker. She also said the crisis might be “transformational.” Some business models will struggle to survive and adapt to the new world, while other firms will be created to address a changed reality, she said.
Speaking at an online conference, Isabel Schnabel, a member of the ECB’s Executive Board, said that the economic recovery is likely to be slow, although the central bank could adjust its coronavirus crisis measures depending on how financial markets adapt. She said the eurozone economy is not expected to recover to its pre-coronavirus size until 2022 at the earliest.
Italy is preparing to inject a further EUR 20 billion into the economy in July, Reuters reported, citing an unnamed senior government official. As a result, the budget deficit would expand to about 11.6% of gross domestic product from its 10.4% goal. The Treasury declined to comment.
UK to speed up infrastructure projects
UK Prime Minister Boris Johnson said the government would fast-track GBP 5 billion of spending on infrastructure works to help an economic recovery. More details are expected to be revealed July 8, when UK Chancellor of the Exchequer Rishi Sunak will unveil his plans for the economy, which reportedly include a temporary cut in the value-added tax.
Bank of England Chief Economist Andy Haldane said on a bank webinar that real-time economic data showed the UK economy was already two months into a recovery and rebounding faster than expected. “It is early days, but my reading of the evidence is so far, so V,” he said. Although the economy had suffered an unprecedented collapse and unemployment could still derail a recovery, he indicated that he was optimistic.
Japan
Stocks in Japan lost ground for the week through Thursday. The Nikkei 225 Stock Average fell 366.12 points (-1.6%) and closed at 22,145.96. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, also finished lower, with small-caps underperforming large-caps. After a strong rally in May and early June, equity gains have largely stalled over recent weeks, with the Nikkei benchmark down 4.7% from its recent high on June 8.
Manufacturing survey at lowest level since 2009
Along with the rise in coronavirus cases in the U.S., weak economic data in Japan weighed on sentiment. The Bank of Japan’s quarterly survey of economic conditions showed a steep drop in confidence in recent months as a result of the pandemic. In the latest Tankan survey, the sentiment level of large manufacturers had plunged from -8 in March to -34 in June. Reuters reported that the result was worse than expected and was the lowest reading since June 2009, during the global financial crisis. A separate report indicated that consumer spending also continued to drop. Retail sales fell 12.3% in May for the year-over-year period following a 13.9% annual decrease in April.
Longer-term bond yields rise
Longer-term Japanese government bond (JGB) yields rose for the week following muted auction results; the 10-year JGB yield reached 0.060%, its highest level since the end of March, but traded around 0.036% on Thursday. About JPY 2.6 trillion worth of 10-year JGBs drew a bid-to-cover ratio of only around 3.66, according to Ministry of Finance data. The bid-to-cover ratio, which can serve as a proxy for market demand, was up from the previous month but below earlies levels. The yen was slightly weaker versus the U.S. dollar.
China
CSI 300 Index hits two-and-a-half year high as recovery unfolds
Stocks in China rallied for the week until Thursday after several data points suggested that the economy was firmly recovering after a historic contraction in the year’s first quarter. On Thursday, the blue chip CSI 300 Index closed at its highest level since January 26, 2018, while the benchmark Shanghai Composite Index rose to its highest close since January. China’s sovereign 10-year bond yield was broadly flat for the week until Thursday.
Investor sentiment brightened after two separate gauges showed a pickup in the country’s manufacturing sector: On Wednesday, the Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) rose to a six-month high reading of 51.2 in June from May’s 50.7. The privately administered Caixin survey came a day after China’s official manufacturing PMI rose to a three-month high of 50.9 in June, its fourth straight month of a reading above 50, which signals improving conditions from the prior month. Meanwhile, car sales in China surged 11% in June from a year ago for the third straight monthly gain, according to an industry group. The preliminary figures from the China Association of Automobile Manufacturers offered evidence of a revival in consumer demand and a possible turnaround in a yearslong slump in the world’s largest car market.
Altogether, the data suggested that momentum was picking up in China after its gross domestic product shrank a record 6.8% in the first quarter, when widespread lockdowns to contain the coronavirus disrupted the economy. However, investor confidence in a sustainable recovery remains low after a renewed virus outbreak in Beijing in June raised fears of a second wave of infections. To help support the economy, the People’s Bank of China—which has rolled out a raft of easing measures since early this year to cushion the economy from the pandemic—cut its rediscount and relending rates by a quarter point each this week. Analysts said the moves were aimed at supporting small to mid-size businesses and signal that the central bank will continue to implement targeted easing measures in the coming months.
Other Key Markets
Adkins: Declining investment bodes ill for South African economy
South African stocks, as measured by the FTSE/JSE All Share Index, returned about 1.8% through the close of business on Thursday. During the week, the government released some notable economic data. In the first quarter, gross domestic product contracted at a 2% annualized rate, which, according to T. Rowe Price Credit Analyst Roy Adkins, was meaningfully better than expected but still showed an economy in an accelerating decline even before the onset of the coronavirus.
While the agriculture and financial services sectors held up well, investment saw the worst contraction in about 10 years. Private investment was particularly poor, which Adkins believes does not bode well for the robustness of any recovery. On the plus side, the country’s trade balance moved back into surplus, as exports recovered much of their previous plunge while imports continued to be weak.
Gifford: Mexico faces difficult balance
Mexican stocks, as measured by the IPC Index, returned about 1.2% through the close of business Thursday. According to MSCI, the market rose about 11% in U.S. dollar terms in the second quarter, lagging the MSCI Emerging Markets Index, which returned 18.18%, as the country was significantly affected by COVID-19, the disease caused by the coronavirus. As of this week, the country has more than 230,000 confirmed cases and more than 28,000 fatalities attributable to COVID-19, according to Johns Hopkins University data.
President Andrés Manuel López Obrador (AMLO) has downplayed the seriousness of the coronavirus. Furthermore, he has offered limited stimulus for an economy that is poised to shrink by 10.5% this year per the latest estimates from the International Monetary Fund. Many observers agree that certain anti-business measures adopted by the government have further dented confidence in a country that was already in recession before the current crisis hit. On the plus side, analysts expect that the full implementation of the new United States-Mexico-Canada Agreement starting this month will help strengthen trade between Mexico and its largest trading partners. However, several other external and domestic risks will likely hold the economy back in the near term.
According to T. Rowe Price Emerging Markets Sovereign Analyst Aaron Gifford, Mexico’s strategy of reopening its economy amid full-blown coronavirus cases is a risky one, particularly given the country’s fragile health sector. However, Gifford also acknowledges the damage that strict lockdowns have had in several Latin American countries in recent weeks, particularly those with large informal sectors. It’s a difficult balance, according to Gifford, and time will tell whether Mexico’s experiment was successful.
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