Global Markets Weekly Update: June 19, 2020
U.S.
Nasdaq leads stocks higher
Stocks recorded gains and erased part of the previous week’s steep declines. The technology-heavy Nasdaq Composite Index fared best and briefly moved close to the all-time intraday high it established on June 10. Energy stocks led the rebound, helped by signs that major oil-exporting nations were adhering to previously agreed production cuts as well as optimism for increased global demand. Health care and materials stocks also outperformed, while Boeing and airline stocks were especially strong early in the week, boosted by reports of a resurgence in air travel. The small real estate and utilities sectors lagged.
The week ended on a volatile note due in part to Friday’s “quadruple witching”—the simultaneous expiration of four types of options or futures contracts, which occurs once each quarter. T. Rowe Price traders noted that the rebalancing of the S&P 500 Index and several other benchmarks was also likely to result in elevated volumes and price movements. (The likelihood of further volatility in the months ahead is a prominent theme in our Midyear Market Outlook. Click here to read an Insights article summarizing the views of three of our investment leaders.)
Fed Chair Powell announces expanded bond-buying program
Stocks had a poor start to the week, as concerns over the worsening of the pandemic in several states as well as a new outbreak in Beijing seemed to continue weighing on sentiment. The market then rebounded late Monday following the Federal Reserve’s announcement that it will begin buying a broad portfolio of U.S. corporate bonds. The purchases will be made by the Fed’s Secondary Market Corporate Credit Facility, an emergency lending program that to date has purchased only exchange-traded funds.
On Tuesday and Wednesday, Fed Chair Jerome Powell testified before Congress and urged that recent monetary stimulus be paired with more fiscal support. While no clear plans have yet to emerge, T. Rowe Price traders noted that reports of a USD 1 trillion infrastructure plan being prepared at the White House seemed to further support sentiment. Markets early in the week also seemed to get a lift from a major study showing that a common steroid drug, dexamethasone, helped save lives in serious COVID-19 (the disease caused by the coronavirus) cases, marking the first treatment to have a demonstrable impact on reducing the fatality rate.
Retail sales jump, but jobs data disappoint
The week’s economic data offered mixed signals as to whether the economy will be able to manage a “V shaped” recovery. On Tuesday, the Commerce Department reported of a 17.7% surge in retail sales in May, better than double consensus expectations and the biggest gain in history—albeit one measured against the 23.3% cumulative decline over the previous three months. Labor market data disappointed, however. Weekly jobless claims fell less than expected, and continuing claims remained elevated, at over 20.5 million. A gauge of current manufacturing activity in the mid-Atlantic region surprised dramatically on the upside, indicating considerable expansion instead of continued contraction, but overall industrial production in May rose less than expected.
Reflecting the conflicting signals, longer-term Treasury bond yields ended the week roughly unchanged. (Bond prices and yields move in opposite directions.) The broad municipal debt market marginally outperformed Treasuries through most of the week, and T. Rowe Price traders noted that new municipal issuance was elevated, both in terms of overall size and number of deals. Demand for new issues was strong across all sectors, including the first deal from the beleaguered life-care sector since before the pandemic. Industrywide flows into municipal bond funds continued to trend higher. According to Lipper, muni bond mutual funds experienced inflows of USD 2.8 billion for the week ended June 10.
New deals flood corporate bond market
Investment-grade corporate bond credit spreads—the additional yield offered over Treasuries, and an inverse measure of relative appeal—moved tighter after the Fed announced that it will begin buying individual corporate bonds to supplement its purchases of exchange-traded funds. However, our traders noted that spreads moved wider as the week progressed amid increased selling to fund purchases in the primary market. The volume of new deals was well above expectations.
T. Rowe Price traders reported that news of the Fed’s expanded bond-buying program was supportive for the performance of high yield bonds. This was particularly true of issues from Ford and other “fallen angels”—companies that have recently lost an investment-grade rating. While the robust retail sales numbers also fostered positive sentiment toward risk assets, the high yield market struggled somewhat to absorb a large volume of new deals.
U.S. Stocks1
Index |
Friday's Close |
Week's Change |
% Change YTD |
DJIA |
25,871.46 |
265.92 |
-9.35% |
S&P 500 |
3,097.92 |
56.61 |
-4.11% |
Nasdaq Composite |
9,946.12 |
357.31 |
10.85% |
S&P MidCap 400 |
1,789.96 |
37.58 |
-13.24% |
Russell 2000 |
1,420.90 |
33.22 |
-14.84% |
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 ended the week higher, supported by stimulus efforts and the reopening of key economies. However, a resurgence of COVID-19 cases in the U.S. and China cast doubt on a quick recovery and hindered the advance. The pan-European STOXX Europe 600 Index ended the week 3.31% higher, while Germany’s Xetra DAX Index climbed 3.51%, France’s CAC 40 Index added 3.23%, and Italy’s FTSE MIB Index advanced 3.99%. The UK’s FTSE 100 Index rose 2.93%.
Core eurozone bond yields were mixed on the week. Yields edged up following the Federal Reserve’s move to buy corporate debt, reducing demand for safe-haven assets. However, yields declined later in the week after it emerged that eurozone banks had borrowed a record EUR 1.31 trillion under the European Central Bank’s targeted longer-term refinancing operations (TLTRO). The Fed announcement and TLTRO uptake put downward pressure on peripheral eurozone bond yields, which fell markedly on the week. Meanwhile, the German 10-year bund yield was trading at -0.41% on Friday, up slightly from Monday’s -0.46%. The Italian 10-year yield traded at 1.35% on Friday, compared with Monday’s 1.41%.
BoE increases bond-buying program
The Bank of England (BoE) enlarged its bond-buying program by GBP 100 billion and left its key interest rate at a record low of 0.1%. It also said it would slow the rate of purchases and expected to meet the new target of GBP 745 billion by the end of the year. However, T. Rowe Price International Economist Tomasz Wieladek noted that the language in the Monetary Policy Committee meeting minutes was on the hawkish side, pointing to a faster recovery than previously expected, while acknowledging that unemployment could remain high for some time. Futures markets indicated that traders no longer expect negative interest rates in the UK through the end of 2021.
UK inflation slowed to a four-year low of 0.5% in May, from 0.8% in April, as crude oil prices fell.
The number of people claiming out-of-work benefits in the UK climbed by 528,000 in May, to 2.8 million. The number of payroll employees fell by 600,000 between March and May as employers cut jobs; the number of self-employed dropped 131,000 in the three months ended April 30, a record decline of almost 9%.
UK and European Union (EU) agree to step up post-Brexit talks
UK and EU institutional leaders held video talks on a post-Brexit trade accord and agreed to step up the pace of negotiations, which have yielded little so far. UK Prime Minister Boris Johnson suggested afterward that an agreement could be reached in July, but a document leaked to Reuters showed that German leaders expected talks to enter a “hot phase” in September.
The Swiss National Bank (SNB) left its benchmark lending rates at -0.75% and said it would keep its ultra-loose monetary policy for “some time.” The SNB is expected to keep intervening in currency markets as well to curb the Swiss franc, which reached its highest level against the euro in almost five years last month, to protect the export-oriented economy.
EU holds summit on recovery fund, budget
EU leaders met to hash out the details of a recovery fund at a video summit amid low expectations for an imminent decision. German Chancellor Angela Merkel reiterated that she expects a deal by July. Geopolitical challenges have added urgency to the talks, according to diplomats quoted in news services. Germany’s coalition cabinet signed off on an additional EUR 62.5 billion in debt to finance the country’s stimulus program, pushing net borrowing up to EUR 218 billion this year. Parliament will need to approve the spending increase.
Many EU countries began easing border controls designed to contain the coronavirus but continued restrictions and health concerns are still expected to curb tourism and business travel. In France, President Emmanuel Macron lifted most of the remaining lockdown restrictions and said he would focus on rebuilding the economy in the last two years of his presidency.
Japan
Stocks in Japan produced small gains for the week. The Nikkei 225 Stock Average advanced 173.31 points (0.78%) and closed at 22,478.79. The widely watched benchmark has made up much of the ground lost in February and March but remained down about 5% for the year-to-date period. The TOPIX Small Index was up 1.6% for the week, outperforming both the Nikkei and the large-cap TOPIX Index.
Despite drop in exports, stocks notch small gains
Global sentiment seemed to be the largest driver of Japanese markets, as hopes for a strong economic recovery and news of additional stimulus measures from the U.S. Federal Reserve narrowly outweighed fears of a resurgence of the coronavirus in China and the U.S. Data showing a sharp drop in exports also weighed on Japanese stocks.
Japan’s Finance Ministry reported that the country’s exports declined 28.3% year over year in May as the coronavirus impacted global demand. Vehicle exports dropped by more than 60% during the period, and total Japanese exports to the U.S. also fell by about half. Reuters reported that the monthly decline—the largest since the global financial crisis—was worse than consensus expectations.
In a separate report, core consumer prices, which exclude fresh food, dropped 0.2% year over year, staying negative for a second straight month. The Tankan manufacturers’ sentiment index also fell slightly in the latest monthly data and continued to hover at its lowest point since 2009.
Bank of Japan boosts program for smaller businesses
At its scheduled monthly meeting, the Bank of Japan (BoJ), as expected, kept its monetary policy largely unchanged. The central bank maintained its yield curve control targets, which aim to keep the 10-year Japanese government bond (JGB) yield around 0%. The BoJ also continued its purchases of exchange-traded funds and Japanese real estate investment trusts at current levels. In a change, the central bank did increase the amount of loans available in a lending program that is designed to support smaller businesses.
For the week, the 10-year JGB yield was down slightly, finishing near the BoJ target at 0.012%; the yield had been as high as 0.091% during March’s market volatility. The yen was little changed versus the U.S. dollar and traded near 107 yen per U.S. dollar on Friday.
China
China’s domestic large-cap index, the CSI 300 Index, gained 2.4% for the week, outpacing the 1.6% advance in the country’s benchmark Shanghai Composite Index. The gains in Chinese stocks came despite a reported surge in new COVID-19 cases in Beijing over the June 13 weekend, highlighting the risk of a second wave of infections. In response, Beijing returned to tight movement restrictions, though not a complete lockdown, after the new cases were traced to a wholesale food market. Despite fears of another wave, public health experts believe that China will be able to better manage a resurgence in infections given the country’s extensive experience in battling the coronavirus.
On the political front, a meeting between U.S. Secretary of State Mike Pompeo and Chinese Politburo member Yang Jiechi in Hawaii, the first high-level U.S.-China talks this year, was described as constructive. Less pleasing for China, however, was President Donald Trump’s signing on Thursday of the Uighur Human Rights Policy Act, which authorizes sanctions against Chinese officials involved in the mass detention of Muslim minority groups in Xinjiang Province.
Bond market under further pressure
In China’s bond market, yields on government bonds continued to rise. The yield on the 10-year bond increased from 2.78% to 2.90%. Yields rose as the scale of new debt issuance required to fund stimulus plans to counter the coronavirus came into focus. At the country’s recent State Council meeting, Premier Li Keqiang said that China's central bank would reduce its reserve requirement ratio and re-lending to keep “liquidity reasonably sufficient.” While news of central government special purpose bond auctions saw rates sell off, supply pressures may ease following the issuance of RMB 1.3 trillion of local government bonds in May.
Monthly gauges underscored the uneven nature of China’s recovery and how the supply side of the economy continues to improve faster than domestic demand. Industrial output rose 4.4% year on year, led by manufacturing. Fixed asset investment also accelerated, rising by 3.9% year on year compared with less than 1% in April, boosted by property and infrastructure. However, retail sales grew less than expected. The Chinese consumer continues to lag, with retail sales down 2.8% versus a Bloomberg consensus decline of 2.3%, though auto sales picked up.
On the employment front, the latest quarterly Manpower employment survey showed Chinese hiring intentions moving into positive territory (+4—still the lowest print for four years). The Organization for Economic Cooperation and Development’s industrial confidence index for China rose to its highest level since July 2018. Both indicators suggested a swifter recovery in business sentiment than many had expected.
PBoC governor announces 2020 credit targets
People’s Bank of China (PBoC) Governor Yi Gang announced a new bank lending target of RMB 20 trillion for 2020 and a total social financing (TSF) target of RMB 30 trillion. The targets imply much slower credit growth in the second half of 2020, indicating that the PBoC remains cautious about fully opening the credit taps. Yi was speaking at the 12th Lujiazui Forum, an annual gathering of senior government officials in Pudong. With regard to the PBoC’s financial support during the coronavirus outbreak, Yi said it had been phased, with a need to “pay attention to the hangover of the policy.”
The new targets imply increases of 18.9% and 17.3% in new bank loans and new TSF, respectively, in 2020. With growth in credit having been front-end loaded, the pace of monetary policy easing in China is set to fade rapidly in the second half of the year. Yi also said the central bank will maintain a roughly stable balance sheet in 2020, which stands in strong contrast to the massive balance sheet expansion by the Fed and some other major central banks.
Other Key Markets
Indian shares rise despite border clashes
Stocks in India, as measured by the S&P BSE Sensex Index, returned about 2.8%. Geopolitical tensions between India and China, which flared up in early May due to a border skirmish, increased again following news that another clash of Indian and Chinese troops along the border in the Himalayan mountains resulted in the deaths of 20 Indian soldiers. Prime Minister Narendra Modi, in a televised speech, acknowledged the deaths and cautioned Beijing that, if provoked, India is “capable of giving a befitting reply.” T. Rowe Price credit analyst Chris Kushlis believes that the standoff could continue for some time but hopes that the border dispute will eventually be resolved with diplomacy, as was a similar border dispute several years ago that lasted for months.
On Thursday, credit rating agency Fitch lowered its outlook for India to “negative” from “stable,” citing uncertainty regarding the country’s medium-term growth potential and fiscal situation. Kushlis said that the decision was generally expected and had little market impact. He believes that Fitch will keep the negative outlook for some time to get a better sense of how India comes out of the COVID-19 crisis.
India has indeed been hammered by COVID-19, despite some fairly tight quarantine measures that were implemented in late March and extended a few times in an attempt to contain the pandemic. As of the end of the week, the country had more than 380,000 confirmed cases—the fourth highest in the world behind only the U.S., Brazil, and Russia—and about 12,500 fatalities attributable to the virus, according to Johns Hopkins University data. Unfortunately, the government’s efforts have not been successful at “flattening the curve,” but they have significantly hurt the Indian economy. In recent weeks, government officials have been allowing parts of the country where infection rates are relatively low to reopen, while telling citizens that they will need to accept the coronavirus as a fact of life until a vaccine is discovered.
Brazilian shares gain on rate cut
Stocks in Brazil, as measured by the Bovespa Index, returned about 3.9%. Shares rose as investors waited for the outcome of the central bank’s latest monetary policy meeting, which concluded late Wednesday. As was widely expected, policymakers decided to reduce the benchmark interest rate, the Selic rate, by 75 basis points, from 3.00% to 2.25%.
In its post-meeting statement, central bank officials stated that “the magnitude of the monetary stimulus already implemented seems compatible with the economic impacts” of the pandemic and that “new information on the evolution of the pandemic, as well as a reduction in fiscal uncertainties, will be essential to define its next steps.” T. Rowe Price sovereign analyst Richard Hall interprets this as meaning that more rate cuts have not been ruled out, but that the central bank is on hold until the outlook for the economy—which depends greatly on how the pandemic plays out—is clearer.
Brazil has also been hit hard by COVID-19, arguably due in part to President Jair Bolsonaro’s lack of interest in quarantine and social distancing measures, although local officials have taken some measures on their own to stem the spread of the virus. Nevertheless, early in the week, officials indicated that the country had a staggering one-day increase of about 35,000 new coronavirus infections. With more than 970,000 confirmed cases and more than 47,000 deaths attributable to COVID-19, according to Johns Hopkins University data, Brazil has been affected more than any other emerging country, and second only to the U.S. in the entire world.
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