Global Markets Weekly Update: July 24, 2020
U.S.
Stocks end mixed as market rotation continues
The major indexes ended mixed for the week after surrendering early gains; at its Thursday peak, the S&P 500 Index moved within nearly 3% of its all-time high in February. The market rotation that began the previous week remained in evidence, with mid-caps and value stocks regaining some of the substantial ground lost in recent months to large-caps and growth shares. Technology stocks and the tech-heavy Nasdaq Composite Index fared worst, dragged down by declines in Apple and several chipmakers. Energy stocks outperformed within the S&P 500 as oil prices rallied early in the week.
Credit for the week’s strong start seemed to go, in part, to good news on the vaccine front. Confirming earlier reports, Oxford University and AstraZeneca announced that their vaccine candidate under joint development had produced healthy levels of both antibodies and T-cells—with the latter offering the hope of prolonged immunity—in a trial involving 1,077 participants. Studies on candidates being developed by Pfizer in partnership with BioNTech and CanSino Biologics working with the Beijing Institute of Biotechnology also indicated significant immune responses, though with moderate side effects in some patients.
Level and timing of additional U.S. fiscal stimulus remain uncertain
Tuesday morning’s news of the European Union’s agreement on a massive fiscal stimulus plan also boosted sentiment (see Europe section below). The stimulus picture remained more clouded in the U.S., however. T. Rowe Price traders noted that stocks turned lower Tuesday afternoon following Politico’s report that Senate Majority Leader Mitch McConnell did not expect Congress to meet the White House’s goal of passing a stimulus bill within the next two weeks. Reports also surfaced that Republican leaders were considering extending additional unemployment benefits—currently set to expire at the end of July—but at a much lower level ($100 per week, down from $600). Many GOP lawmakers believe that the current level of benefits is a disincentive to return to work, while critics argue that such a reduction would have a highly negative impact on overall consumer spending.
Stocks took their sharpest turn lower on Thursday afternoon. The firm’s traders noted that there appeared to be little that sparked the intraday swoon, but it was led by some of the best-performing stocks in recent weeks, suggesting concerns over the concentration of risks within the market. The closure of a Chinese consulate in Houston also seemed to weigh on sentiment (see China section below).
Weekly jobless claims increase for the first time since March
The week’s economic data were mixed but included some cautionary signals that growth was slowing after rebounding sharply in late spring. Most notably, initial unemployment claims from the previous week rose from 1.31 million to 1.41 million, the first increase since March. (Continuing claims fell back more than anticipated but reflected data from two weeks prior.) T. Rowe Price Chief U.S. Economist Alan Levenson currently expects nonfarm payrolls to expand by roughly 1.1 million in July, but he notes that this would mark a significant deceleration from June’s gain of 4.8 million.
The unemployment data and the Federal Reserve’s targeted purchases of 20- and 30-year Treasury bonds led to a significant decrease in longer-term yields over the week. The firm’s traders noted that another factor may have been comments from New York Fed President William Dudley, who suggested that the Fed could extend the duration of its bond purchases. (Bond prices and yields move in opposite directions.)
Inflows support munis and high yield bonds
The broad municipal market generated positive returns through much of the week but slightly trailed Treasuries. Muni bond mutual funds received USD 2.1 billion in net flows for the week ended July 22, according to Lipper data. T. Rowe Price’s muni traders noted that the strong pace of inflows in recent months has offset the severe outflows that overwhelmed the market earlier in the year.
Light new issuance—with the volume of new deals well below early estimates—contributed to favorable technical conditions in the investment-grade corporate bond market, while headlines about progress on a potential vaccine and stimulus measures seemed to bolster investor sentiment. However, the increase in jobless claims later caused credit spreads—the additional yield offered over Treasuries and an inverse measure of the sector’s relative appeal—to drift slightly wider.
The high yield market continued to benefit from inflows, which reached their highest single-day level in a month during the week. Limited new issuance also supported gains, and new deals were met with strong demand. In credit-related news, Eldorado Resorts completed its acquisition of Caesars Entertainment, creating the largest operator of casinos in the U.S. with more than 50 properties nationwide.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
26,500.81 |
-171.14 |
-7.14% |
S&P 500 |
3,218.57 |
-6.16 |
-0.38% |
Nasdaq Composite |
10,382.10 |
-121.09 |
15.71% |
S&P MidCap 400 |
1,852.98 |
15.54 |
-10.18% |
Russell 2000 |
1,471.92 |
-1.92 |
-11.78% |
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 shares fell, as a deterioration in U.S.-China relations eroded earlier gains from the European Union (EU) agreeing on a recovery fund and positive news on efforts to develop a coronavirus vaccine. In local-currency terms, the pan-European STOXX Europe 600 Index ended the week 1.17% lower, while Germany’s DAX Index eased 0.23%, France’s CAC 40 slid 1.47%, and Italy’s FTSE MIB declined 1.25%. The UK’s FTSE 100 Index fell 2.38%.
EU leaders agree to framework deal on recovery fund
After five days of haggling, EU leaders agreed to a historic deal on a EUR 750 billion stimulus plan. As a result, the European Commission, the EU’s executive branch, can now raise billions of euros in capital markets on behalf of all 27 states. The fund will comprise EUR 390 billion in grants—instead of the proposed EUR 500 billion—and EUR 360 billion in low-interest loans. Italy will likely be the biggest recipient. Reducing the proportion of the fund allocated to grants appeased fiscally hawkish northern countries, which also secured sizable budget rebates to lower their annual net contributions.
Eurozone business activity, UK retail sales jump
Business activity in the eurozone grew in July for the first time since February and at the fastest rate in more than two years, a survey by IHS Markit showed. The Flash Eurozone PMI Composite Output Index rose to 54.8—well above 50, the level that divides expansion from contraction, and the 48.5 reading registered in June. Both manufacturing and services portions of the economy returned to growth. New order inflows picked up and job losses eased, although job cutting was widespread as many companies continued to reduce capacity.
UK retail sales were much stronger than expected in June, growing 13.9% sequentially, compared with the consensus estimate of 7.3% and the 12.0% month-over-month increase in May. This improvement reflected the mid-June reopening of nonessential shops and the lifting of lockdown restrictions. Online retail and grocery stores continued to drive activity, while nonfood stores and fuel sales were still below pre-coronavirus levels.
UK, EU officials say Brexit deal possible in September
UK and EU officials told The Times newspaper that a comprehensive Brexit deal could be finalized in September. The EU reportedly has signaled its willingness to accept an agreement whereby the European Court of Justice has no role in policing a deal and access to British fishing waters changes. In return, the UK has accepted that there will be a single deal, rather than separate treaties, and that the agreement will be governed under a single arbitration structure when disputes arise. The UK’s chief negotiator said that an agreement could still be reached in September but “considerable gaps” remained in the most difficult areas of fishing rights and the level playing field.
Japan
Japanese stocks were relatively unchanged in the holiday-shortened trading week. Japan’s stock markets were closed on Thursday for Marine Day and on Friday for Health-Sports Day. The Nikkei 225 Stock Average advanced 55 points (0.2%) and closed at 22,751.61 on Wednesday, July 22. The widely watched market yardstick has returned -3.8% for the year-to-date period. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, posted a modest loss and gain, respectively. The yen was modestly stronger versus the U.S. dollar during the week and trended below JPY 107 per U.S. dollar.
Japan’s economic expansion ended in October 2018
The Cabinet Office is expected to declare that the business expansion that began in December 2012 officially ended in October 2018. The start of the expansion coincided with Prime Minister Shinzo Abe’s second administration. Under his leadership, Abenomics—a massive three-pronged monetary policy initiative that helped weaken the yen, boost stock prices, and reinvigorate the economy—was employed to generate economic growth and a 2.0% inflation rate, ending the country’s decadeslong deflationary spiral. However, growth and inflation proved elusive: The economy’s average annual growth rate during the 71-month expansionary period remained below 2%, and the inflation target was never achieved. The Cabinet Office said the expansionary cycle ended at about the same time the U.S.-China trade dispute intensified, crimping Japan’s exports and production.
Despite Japan’s relatively low infection rate in recent months, the coronavirus has pushed the country into the grips of its worst recession in decades. According to the latest Reuters poll, Japan’s economy is expected to contract about 5.3% in the 2020 fiscal year (ending March 31, 2021) and generate only 3.3% growth in fiscal 2021. Nevertheless, many analysts believe that auto exports to the U.S., China, and Europe have bottomed and automobile production is starting to improve, which has prompted the government to increase its near-term assessment for exports and output.
Record number of new coronavirus infections recorded
On Thursday, nearly 1,000 new coronavirus cases were reported in Japan, marking the second consecutive daily record since the government removed its state of emergency status about two months ago. The Kyodo News reported that, in aggregate, approximately 30,000 cases of the virus have been confirmed nationwide, resulting in about 1,000 deaths. In Tokyo, the metropolitan government reported triple-digit new cases in all but two days this month, and a cumulative tally of more than 10,000. Tokyo Governor Yuriko Koike has urged the public to limit nonessential outings over the four-day holiday weekend, and she has raised the pandemic alert level to the maximum of four available levels, indicating that the coronavirus is spreading.
China
Mainland Chinese stocks declined for the week. The large-cap CSI 300 Index declined 0.9% and the benchmark Shanghai Composite Index shed 0.5%, weighed by a Friday sell-off on news that the Trump administration withdrew consent for China to operate its consulate in Houston, Texas. This unexpected decision rattled investors who viewed it as an aggressive move that would ratchet up bilateral tensions at a time when China’s economic recovery remains fragile.
In China's bond markets, the yield on the sovereign 10-year bond ended the week almost unchanged at 2.98%. The People’s Bank of China kept the loan prime rate (LPR), a reference rate for new bank loans, unchanged for a third straight month, as expected. The one-year LPR remains at 3.85%, while the five-year rate stands at 4.65%. In the currency markets, the renminbi declined following the escalation in U.S.-Beijing tensions, losing 0.4% against the greenback and closing at 7.018 for the week.
July survey shows some sectors still lagging
No major economic readings were released during the week. In Taiwan, however, double-digit gains for the island’s electronics and information technology output in June were viewed as encouraging news given the close linkages in the electronics sectors between mainland China and Taiwan. Combined with better purchasing managers’ index subindexes for export orders and new export orders, Taiwan looks set for strong exports in July, driven by orders from mainland Chinese telecommunications giant Huawei Technologies.
A recent local survey suggested that China’s recovery could be slower than suggested by official June data. According to an early July survey of 1,600 Chinese workers in 129 cities by China Reality Research, one-fifth of employers were operating at less than 60% of their pre-outbreak norm, and one-half were reported as having reached 80% or higher. The survey underscored that China’s post-pandemic recovery remains a challenge and that some sectors are still in the process of catching up. The survey showed that information technology, medical services, and logistics exceeded their pre-crisis levels and were doing better than manufacturing, wholesale and retail services, food and lodging.
Other Key Markets
Chilean market braces for withdrawal of retirement funds...
Chilean stocks, as measured by the IPSA Index, returned about 0.6%. During the week, Chile’s Congress approved the pension withdrawal bill that allows savers to cash in up to 10% of their retirement accounts. Although President Sebastian Pinera has been opposed to the bill given the damage it could have on pension funds’ assets and future retirement income, he recently indicated that he will sign off on the measure.
According to T. Rowe Price Emerging Markets Sovereign Analyst Aaron Gifford, redemptions will be permitted for up to a year while allowing for initial liquidation of pension fund assets over a 40-day period. While the Finance Ministry suggested outflows from the pension fund system could amount to USD 10 billion, Gifford believes it could be less given anecdotal evidence from Peru, which recently underwent a similar event. In any case, Gifford believes the impact on Chilean assets could be relatively muted, as local pension funds are likely to first redeem their holdings abroad, which include nearly USD 100 billion of foreign equity and fixed income investments. If anything, he believes that the Chilean peso could strengthen as dollarized assets are sold.
...while Mexican shares rise as retirement contributions are set to increase
Mexican stocks, as measured by the IPC Index, returned 2.8%. During the week, President Andres Manuel Lopez Obrador (AMLO) unveiled a pension reform proposal alongside Finance Minister Arturo Herrera and with the support of one of Mexico’s largest business chambers. The proposal aims at increasing coverage and retirement income for Mexican workers while minimizing the impact on fiscal accounts that are under stress due to the health pandemic. The formal text will be presented for a vote in Congress when its ordinary session begins in September.
The proposal calls for increasing mandatory retirement contributions to 15% from 6.5%, with the burden mostly falling on corporations, as individual workers’ contributions will remain unchanged, though the government will provide support for those at the lower end of the income scale. Meanwhile, the minimum contribution period required before receiving a pension will fall to 15 years from 25 years, and the income replacement rate at retirement is expected to increase to 54% from 31%. There will be no change to the retirement age of 60.
According to Gifford, the proposal goes a long way in solving some of the inequities inherent within the current framework. However, he expresses some concern about the impact that this will have on Mexican businesses that are already struggling with the health crisis and have so far received little to no economic support from the central government. Positively, the proposal is less controversial than some market participants had feared, and greater contributions will provide additional inflows to the pension system while raising savings rates for the country as a whole.
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