Global Markets Weekly Update: June 12, 2020
U.S.
Renewed coronavirus fears send stocks to biggest decline since March
Stocks suffered their worst weekly decline in almost three months, as investors appeared to harvest recent gains and respond to a worsening of the pandemic in parts of the country. Slower-growing value stocks surrendered their recent market leadership and recorded the steepest drops, and smaller-cap shares also underperformed. Relatedly, two prominent value sectors—energy and financials—fared worst within the S&P 500 Index, while the fast-growing information technology sector held up best. Reflecting the renewed virus fears, Amazon.com, Netflix and other “stay at home” stocks easily outperformed airlines and other shares reliant on the reopening of the economy.
Sharp turn in sentiment as economy reopens
The week saw a dramatic reversal in sentiment, with retail- and travel-oriented shares getting off to a strong start Monday, as investors appeared to welcome reopening steps in hard-hit New York and elsewhere. T. Rowe Price traders noted that sentiment also got a lift from White House Senior Advisor Kevin Hassett, who placed the odds of another fiscal stimulus package at near 100%. The gains boosted the S&P 500 into positive territory for the year to date, while the technology-focused Nasdaq Composite Index established new record highs.
The market’s momentum began to fade at midweek, with investors seemingly spending much of their time trying to predict what Federal Reserve Chair Jerome Powell would say after the central bank’s scheduled policy meeting concluded on Wednesday afternoon. The meeting brought few surprises, according to the firm’s traders, with the policymakers predicting an extended period of low interest rates but not announcing any new immediate stimulus measures. At his post-meeting press conference, Powell may have surprised some investors with a fairly bleak assessment of the pace of the recovery in the coming months, predicting the unemployment rate would end 2020 at 9.3% and warning of permanent job losses.
Pandemic worsens in some states
Powell’s outlook may have been one factor in Thursday’s sell-off—the worst daily decline for the S&P 500 since March 16—but a larger one appeared to be growing fears of a resurgence of coronavirus infections as Americans made their way back to offices, stores, and restaurants. Investors appeared to be reacting to recent reports of increasing numbers of cases—and more tellingly, hospitalizations and higher positivity rates—in Arizona, Texas, and several other states. (Most of these less populated areas had been spared the worst of the pandemic in March and April, leading some experts to argue that this was actually a continuation of the first wave instead of the beginning of a new one.)
No single data point on the virus on Wednesday evening or Thursday seemed to spark the sell-off, however, leading to speculation that profit taking after the recent rally may also have been at work. Indeed, Thursday also brought news of some encouraging progress in developing possible vaccines and treatments for the coronavirus, including an announcement from Regeneron that its antibody cocktail for both preventing and treating infection might be available as early as the fall.
The week’s economic calendar was relatively light and brought few surprises. Weekly jobless claims remained elevated (1.54 million) but fell for the 11th consecutive week and were in line with expectations. Continuing claims fell less than expected, but the University of Michigan’s preliminary gauge of consumer expectations in June surprised somewhat on the upside.
Bond yields decrease; muni demand remains strong
The risk-off response to renewed pandemic fears sent the yield on the benchmark 10-year Treasury note sharply lower, reversing most of the previous week’s surge. The broad municipal bond market posted positive returns through most of the week but underperformed the rally in Treasuries. Demand for new issues was strong, and T. Rowe Price traders noted meaningful improvement in demand for higher-yielding debt. According to the most recent industrywide flow figures from the Investment Company Institute, municipal bond mutual funds experienced inflows of USD 2.3 billion for the week ended June 3—the largest weekly inflow since late February.
Credit spreads in the investment-grade corporate bond market widened as investors demanded more yield to compensate for risk, especially late in the week amid increased volatility. In a reversal of the recent performance trend, riskier market segments lagged higher-quality industries and experienced greater spread widening. The primary calendar was relatively active with total issuance at the low end of expectations, and the majority of new deals were well received, according to the firm’s traders.
Continued robust inflows provided technical support and helped the high yield market absorb steady new issuance, although increased volatility late in the week prompted some investors to harvest gains in names that performed well over the past three weeks. The previous weekend’s announcement of OPEC’s decision to reduce output through July aided the energy segment, which has a relatively heavy weighting in high yield indexes.
U.S. Stocks1
Index |
Friday's Close |
Week's Change |
% Change YTD |
DJIA |
25,605.54 |
-1505.44 |
-10.28% |
S&P 500 |
3,041.31 |
-152.62 |
-5.86% |
Nasdaq Composite |
9,588.81 |
-225.27 |
6.87% |
S&P MidCap 400 |
1,752.38 |
-158.77 |
-15.06% |
Russell 2000 |
1,387.68 |
-119.47 |
-16.83% |
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 fell—snapping four weeks of gains—on fears of a resurgence of coronavirus infections and a delayed economic recovery. The pan-European STOXX Europe 600 Index ended the week 4.99% lower. Among European markets, Germany’s Xetra DAX Index fell 6.13%, France’s CAC 40 Index declined 6.05%, and Italy’s FTSE MIB Index dropped 5.77%. The UK’s FTSE 100 Index slid 4.89%.
UK economy posts record contraction
Gross domestic product (GDP) in the UK shrank by a record 20.4% in April from March as the country spent the month in a coronavirus lockdown, official data showed. The economy contracted by 24.5% year on year. ONS Statistician Rob Kent-Smith noted that the economy in April was the same size as it was in 2002.
Bank of England (BoE) Governor Andrew Bailey said that there were some signs of an economic pickup as the lockdown restrictions began lifting in May, but he warned that there was still likely to be long-term economic damage. The BoE was expected to expand its bond-buying program the following week.
Record drop in German industry output, trade
German industrial output and trade data were much worse than expected, shaking confidence in a quick recovery from the pandemic. Output plunged by a record 17.9% in April from March and more than 25% year on year, official data showed. Seasonally adjusted exports dropped 24% on the month, and imports fell 16.5%. The trade surplus shrank to EUR 3.2 billion, which was much smaller than consensus estimates. However, the Bundesbank said at the start of the week that the economy had already bottomed out in April and was starting to grow again.
The Bank of France estimated that the eurozone’s second-biggest economy would shrink by 15.3% in the second quarter, after a contraction of 5.3% in the first three months of the year. It also anticipated a 10.3% contraction this year, although a recovery would start in the second half. The economy would then rebound 6.9% in 2021 and 3.9% in 2022. However, the forecasts do not include a recovery plan that is being considered by the government.
ECB recommends longer ban on bank dividends
The European Systemic Risk Board, which is hosted by the European Central Bank (ECB), recommended that the ban on dividend payments, bonuses, and share buybacks by banks in the European Union should be extended by another three months, which would be at least until the end of 2020. The ban is designed to help banks build buffers to withstand the coronavirus-induced economic slump.
Japan
Stocks in Japan declined for the week. The Nikkei 225 Stock Average fell 558 points (2.4%) and closed at 22,305.48. The widely watched benchmark has returned -5.7% for the year-to-date period. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, recorded similar-sized weekly losses. The yen strengthened versus the U.S. dollar and traded near JPY 107 per U.S. dollar on Friday.
On Wednesday, the Organization for Economic Cooperation and Development (OECD) said the coronavirus has contributed to the worst economic crisis since World War II. The organization expects the global GDP to contract 6.0% in 2020 versus the year-ago period based on the assumption that the pandemic will continue to recede and remain under control. The latest forecast is significantly worse than the March projection of a 2.4% decline in global growth. The OECD concurrently reduced its growth forecast for Japan. The group now believes Japan's GDP will contract 6.0% in 2020 versus the March forecast for 0.2% growth.
Business sentiment tumbles
A joint survey by the Finance Ministry and Cabinet Office showed that its measure of business sentiment tumbled to -47.6 from -10.1 in the prior quarter, marking a third consecutive quarterly decline. The sentiment index, which covers more than 14,000 companies, is calculated by subtracting the percentage of businesses reporting worsening conditions from those reporting improving business conditions. The June-quarter sentiment index of large-cap companies recorded its lowest reading since the 2008-2009 global financial crisis.
Tokyo set to reopen
The nationwide state of emergency ended in late May. However, Tokyo government officials issued a “state of alert” on June 2 for a potential second wave of coronavirus infections. The alert suggested that people should exhibit extra caution but fell short of enforcing stricter social distancing measures. The Nikkei reports that the government is now willing to lift all restrictions on business in Tokyo on June 19.
The government has determined that restaurants can stay open until midnight and that some establishments, including theme parks and karaoke parlors, will be permitted to reopen. However, venues considered high risk (the so-called “3C businesses” that operate in closed spaces, crowded places, and close-contact settings) will be required to implement additional safety measures. Tokyo’s governor, Yuriko Koike, affirmed that the city would remain on guard for a possible second wave of coronavirus infections and “has entered a new stage—to live with the novel coronavirus.”
China
Stocks in China declined amid disappointing credit data and weaker global sentiment. The domestic large-cap CSI 300 Index was unchanged from the previous week, while the benchmark Shanghai Composite Index slipped 0.4%. China’s sovereign 10-year bond yield declined as inflation continued to slow and stayed below the government’s full-year target.
Domestic credit growth could overstate recovery
China's broad credit growth, as measured by total social financing, rose to 12.5% year on year in May compared with 10.7% last December, though a surge in net issuance of government debt appeared to drive the increase. Analysts said that China’s strong credit growth could overstate the prospects for an economic recovery as it includes short-term corporate bonds and coronavirus relief loans from the central bank, in addition to new loan demand from enterprises and households.
PBOC moves suggest conflicting aims
Over the past month, the People’s Bank of China (PBOC) allowed interbank rates to rise by around 30 basis points. Meanwhile, a one-month rolling average of the overnight repo rate rose to 1.3% at the start of June from around 1% in early May. Among longer-dated securities, the yield on five-year government bonds increased by 70 basis points, while the yield on the 10-year sovereign bond rose 30 basis points.
The PBOC’s tolerance of the upward trend in interest rates contrasts with its stance earlier this year, when policymakers consistently guided rates lower. Many analysts have charged the central bank with failing to do enough to spur economic growth, particularly as China’s annual inflation rate fell for the fourth straight month in May. Though some analysts believe that the recent tightening reflects Beijing’s concerns about currency weakness, the upshot has been to send mixed signals to the market.
Street vendors return to Chinese cities
In a welcome sign that China’s economy is returning to normal, the central government welcomed the return of street vendors across the nation. The change, which was initiated in Chengdu in the Sichuan province, is expected to help absorb some of China's newly unemployed, particularly among the migrant and rural workers who are excluded from official unemployment measures. The number of China’s unemployed is expected to increase from 10 million to 30 million this year, according to brokerage forecasts.
Other Key Markets
Botoucharov: New measures attempt to stabilize Turkey’s currency
Turkish stocks, as measured by the BIST-100 Index, returned about -0.2%. Stocks held up fairly well following the U.S. Federal Reserve policy meeting, even as policymakers offered a downbeat assessment of the U.S. economy that weighed on some world markets.
Turkey continues to increase control over foreign exchange (FX) transactions in an attempt to reduce lira volatility, and further efforts are about to be implemented, according to T. Rowe Price Sovereign Analyst Peter Botoucharov. Starting next week, Turkey’s central bank will receive weekly reports from companies with FX borrowings in excess of approximately USD 15 million. These companies will need to report their balances in line with another requirement by the Ministry of Finance, the Uniform Chart of Accounts. These measures are on top of a recent increase in the FX transaction tax, the imposition of an asset ratio, and a limitation on local asset managers’ exposure to foreign currencies.
Hall: Brazil tax code reforms could occur in fall
Stocks in Brazil, as measured by the Bovespa Index, returned about -2.3%. The market was closed on Thursday for a holiday. After strong gains on Monday, the market skidded, particularly after the Federal Reserve’s gloomy assessment of U.S. economic prospects on Wednesday. Falling commodity prices also weighed on Brazilian assets, including the real.
While the coronavirus pandemic and the economic downturn have dominated Brazilian news headlines in recent months, members of President Jair Bolsonaro’s administration are quietly continuing to seek ways to pursue reforms following last year’s landmark passage of pension reform. T. Rowe Price Sovereign Analyst Richard Hall says that Economy Minister Paulo Guedes is working on a proposal to combine a number of social transfer programs and provide additional funding that would come from eliminating certain exemptions in the tax code. This would be part of a larger plan to reform the tax code. Hall is encouraged by the efforts, but because the tax reform plans would likely affect parts of the code that have traditionally been untouchable, he believes that a vetting of tax reform proposals will likely not take place until after municipal elections in October.
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