Global Markets Weekly Update: June 26, 2020
U.S.
Virus resurgence sends stocks lower
Stocks gave back the previous week’s gains, as worries over a resurgence in the coronavirus offset enthusiasm over some positive economic data. Growth stocks handily outperformed value shares, and the technology-heavy Nasdaq Composite Index fared best relative to other benchmarks. The declines pushed the S&P 500 Index back into correction territory (i.e., down more than 10% from its February peak), according to a broadly used definition.
The overall market swung between gains and losses for much of the week, but bank stocks were particularly volatile. On Thursday, financials rallied on news that the Federal Reserve was easing restrictions put in place following the financial crisis of 2008–2009, including allowing certain types of riskier investments and lowering some margin requirements. Financials fell back sharply Friday morning, however, on the previous evening’s news that the Fed was planning to restrict banks’ ability to pay out profits to shareholders through dividends and share repurchases.
U.S. sees record daily increase in new coronavirus infections
The rapid increase in confirmed new coronavirus cases, particularly across the South and in California, weighed heavily on sentiment throughout the week. While trends remained positive in the New York region and other areas that had been hard hit earlier in the pandemic, the national total of daily new confirmed infections reached a record high on Wednesday. Although some of the rise appeared due to increased testing, hospitalizations also increased. On Wednesday, Houston officials reported that over 97% of the city’s intensive care unit beds were occupied.
Whether the resurgence would lead to renewed wholesale lockdowns appeared unclear, but it already showed signs of having a modest economic impact. The scheduled July 17 reopening of Disneyland in California was pushed back on Wednesday, while employees at Florida’s Disney World petitioned for a similar delay. On Thursday, Texas’s governor announced a pause in the easing of further lockdown rules in the state, and then both Florida and Texas ordered the partial closure of bars on Friday. Apple also announced temporary store closures in the two states.
The political backdrop seemed largely supportive through much of the week and may have helped cushion the declines. On Monday, President Donald Trump told a reporter that another “very generous” stimulus bill would be coming, and White House Economic Advisor Larry Kudlow later told Fox News that the plan might include another round of direct payments to individuals. The president also tweeted early in the week that the trade deal with China was “fully intact.” On Friday afternoon, however, stocks fell back after The Wall Street Journal reported that Chinese officials had quietly warned U.S. Secretary of State Mike Pompeo that “meddling” in the affairs of Hong Kong and Taiwan could put the phase one trade deal at risk.
Manufacturing data surprise on upside
The week’s economic data may have also helped shore up sentiment. IHS Markit’s gauges of both current service and manufacturing sector activity surprised modestly on the upside, and May durable goods orders, reported by the Commerce Department, beat expectations by a wider margin. Existing home sales in May fell short of estimates, but new home sales came in well above consensus. Labor market data were similarly mixed. Weekly jobless claims declined by less than expected, but continuing claims fell more than anticipated and moved below 20 million for the first time since late April.
Yield on 10-year Treasury note hits lowest level since May 15
Coronavirus fears appeared to push the yield on the benchmark 10-year Treasury note down to around 0.64%, its lowest level since mid-May. (Bond prices and yields move in opposite directions.) The broad municipal market posted modestly positive returns over most of the week but underperformed Treasuries. T. Rowe Price traders noted that, despite diminished trading activity given the low yield environment, technical pressures from solid demand and muted supply continued to buoy the market.
Virus headlines weighed on the investment-grade corporate sector, and credit spreads—the extra yield offered over Treasuries and an inverse measure of the sector’s relative appeal—drifted wider with riskier market segments underperforming. The firm’s traders noted a lighter volume of trades overall, and new issuance for the week was at the low end of expectations.
Meanwhile, coronavirus fears caused several industry segments, including energy and airlines, to trade lower and underperform the broad high yield market. A sharp decline in crude oil prices contributed to the weakness, and even energy sector fallen angels—companies that have recently lost investment-grade status—came under pressure after a period of strong interest. Positive flows to the asset class continued, however, with high yield funds not reporting an outflow since late March.
U.S. Stocks1
Index |
Friday's Close |
Week's Change |
% Change YTD |
DJIA |
25,015.55 |
-855.91 |
-12.34% |
S&P 500 |
3,009.05 |
-88.87 |
-6.86% |
Nasdaq Composite |
9,757.22 |
-188.90 |
8.74% |
S&P MidCap 400 |
1,721.85 |
-68.11 |
-16.54% |
Russell 2000 |
1,382.76 |
-38.14 |
-17.12% |
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 amid trepidation about a resurgence of coronavirus infections that could halt an economic recovery and a flare-up in trade tensions between the U.S. and Europe. The pan-European STOXX Europe 600 Index ended the week 1.89% lower, with major European indexes mixed. Germany’s DAX Index declined 2.09%, while Italy’s FTSE MIB Index slipped 2.33%, and France’s CAC-40 Index slid 1.34%. The UK’s FTSE 100 Index fell 0.87%.
Eurozone PMI, confidence data surge
Upbeat economic data provided signs that the coronavirus-induced slump in the eurozone may be bottoming out, reviving hopes of a V-shaped recovery. The flash IHS Markit Eurozone Composite Purchasing Managers’ Index (PMI) surged to 47.5 in June from 31.9 in May, the second-biggest jump in the survey’s history. Although the PMI reached its highest level since February, the data still point to a drop in business output. German and French business confidence recovered at record rates in June and more than expected by most economists, although they were still well below pre-pandemic levels, two national surveys showed.
However, European Central Bank Chief Economist Philip Lane warned in a speech that any substantial improvement in near-term indicators would “not necessarily be a good guide to the speed and robustness of the recovery.” He added that it might take a sustained period of improving economic and public health conditions before confidence is fully restored.
BoE changes policy on asset purchases
Bank of England (BoE) Governor Andrew Bailey said that the central bank should begin cutting back its bond-buying program before raising interest rates on a sustained basis, a major shift in its asset purchase policy. He said now was not the time for such action but that the high level of asset purchases “shouldn’t always be taken for granted.” T. Rowe Price International Economist Tomasz Wieladek noted that the BoE previously said that it would reduce its balance sheet once the bank rate hits 1.5%. In his view, the change in policy means that rates could stay at 0.10% for two to three years, if not longer, as the balance sheet becomes the main monetary policy tool.
Bailey also told Sky News TV that the government would have struggled to raise money in March if the BoE had not intervened with GBP 200 billion of asset purchases to calm bond markets.
The UK Treasury is considering a temporary cut in the value added tax (VAT) and specific reductions for some sectors, such as tourism, following pressure from industry and Tory MPs, the Sunday Times reported. However, the Financial Times said Chancellor Rishi Sunak is also contemplating deferred tax rises and lower public spending as part of the UK budget in the fall. Germany and Austria have already announced hefty VAT cuts, while Italy is thinking about reducing it by 10% for its most affected industries.
UK Prime Minister Boris Johnson announced that pubs, restaurants, and hairdressers will be able to reopen on July 4, providing they adhere to coronavirus secure guidelines. Coronavirus deaths in England and Wales fell to the lowest total for nine weeks in a sign that the pandemic may be easing.
EU warns U.S. tariff threat will harm both sides
Tensions between the U.S. and Europe intensified as the European Union (EU) chastised the U.S. for threatening to slap additional tariffs of USD 3.1 billion on EU and UK products. The EU said widening the range of tariffs would inflict unnecessary economic damage on both sides of the Atlantic. In 2019, the World Trade Organization allowed the U.S. to impose levies of as much as 100% on USD 7.5 billion of European goods for illegally supporting Airbus.
Japan
Stocks in Japan were flat for the week. The Nikkei 225 Stock Average advanced 33.29 points (0.15%) and closed at 22,512.08. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, were also little changed. After a strong rally in May and early June, equity gains have largely stalled over the past two weeks.
Global coronavirus, trade concerns weigh on stocks
Concerns about rising numbers of coronavirus cases in some countries and reports of increasing trade tensions weighed on stocks at times. However, Japanese equities recovered on Friday following Thursday’s late rally in the U.S.
For the week, the Japanese government bond yield was down slightly, finishing at 0.010%; the yield had been as high as 0.091% during March’s market volatility but has traded in a narrow range just above zero in recent weeks. The yen was little changed versus the U.S. dollar.
Services PMI improves while manufacturing stagnates
As expected, the au Jibun Bank Flash Japan Composite Purchasing Managers’ Index moved higher in June, reflecting the increase in economic activity following the lifting of the country’s coronavirus state of emergency in May. However, all of the improvement was due to the services sector, which rose from 26.5 to 42.3, whereas the manufacturing sector remained roughly unchanged at 38 as output and new orders showed little improvement.
According to Reuters, the manufacturing index has been below 50—indicating contraction—for 14 straight months and is at the lowest level since the global financial crisis in 2009. Reuters also reported that Japanese Finance Minister Tarō Asō said that the country remains committed to returning to a budget surplus by 2025. Although S&P Global Ratings cut the outlook for Japan’s sovereign debt earlier in June, Asō said Japan could avoid a credit downgrade if its stimulus spending rejuvenated the economy.
China
China’s large-cap CSI 300 Index and benchmark Shanghai Composite Index rose 1.0% and 0.4%, respectively, in a week containing few major economic readings. On Thursday, China’s government said that it would increase the number of sectors open to foreign investment starting July 23, mostly via shorter “negative lists.” The move was viewed as part of Beijing’s efforts to bolster overseas investment to support an economy battered by the coronavirus pandemic. Previously, the number of sectors listed as off-limits to foreign investors was lowered to 33 from 40.
China’s sovereign 10-year bond yield was broadly flat for the week as investors mostly stayed on the sidelines waiting for clarity regarding further monetary measures. China is expected to see heavy foreign investor inflows into its bond market, driven by historically wide yield spreads between Chinese and U.S. bonds. The yield spread between U.S. and Chinese 10-year government bonds recently increased to 215 basis points, its widest gap in the past decade.
PBoC holds off on rate cuts
The People’s Bank of China (PBoC) left its loan prime rate (LPR), which serves as a reference rate for new local currency bank loans in the country, on hold for the second month at its latest policy meeting. Investors awaited signs of other easing measures, including a possible reduction in the reserve requirement ratio (RRR). However, China has resorted to other means of freeing capital besides cutting interest rates. Beijing has reportedly urged commercial banks to help smaller businesses and mortgage holders weather the coronavirus downturn by sacrificing RMB 1.5 trillion, or roughly USD 212 billion, of profits this year. Banks have also been asked to offer lower lending rates, defer loan repayments, and cut fees, according to reports. Analysts regard these easing measures as roughly equivalent to a 40-basis point cut in LPR.
Green shoots appear in property market
China's property sector, which has proven to be surprisingly resilient amid the coronavirus pandemic, continued to show signs of strength. Residential investment and land sales have rebounded in the last few months as housing sales have increased despite rising unemployment. In May, home sales in Tier 2 cities rose 10% year on year even as sales in Tier 1 cities—the country’s wealthiest coastal cities—fell 17%. Housing is one of the few consumer-driven sectors in China to see a V-shaped recovery and has almost returned to pre-crisis growth levels.
Other Key Markets
South Africa releases grim government budget
South African stocks were volatile around Wednesday’s release of an emergency government budget, and the FTSE/JSE All Share Index ended the week down almost 1%. The country’s projections indicate that its debt will be more than 100% of gross domestic product (GDP) by 2025, one of the largest fiscal deficits in the world. T. Rowe Price traders noted that South Africa’s elevated debt levels led to higher yields on its government bonds and downward pressure on its currency, the rand, early in the week.
The emergency budget was grim, forecasting that the budget deficit would more than double to 15% of GDP amid surging government borrowing, although it did not contain any major surprises. The South Africa government plans to present another adjusted budget in October. The country is in talks with the International Monetary Fund for loans to provide temporary relief.
Turkish stocks move into positive territory for 2020
Turkey’s XU100 Index finished the week up almost 1% and moved into positive territory for 2020 despite MSCI’s announcement that it may reclassify Turkey as a frontier market instead of an emerging market. MSCI could move the country into the frontier category as a result of Turkey’s bans on short selling, which involves selling borrowed shares in the hopes of buying them back at a lower price, and stock lending. T. Rowe Price traders note that the market has already experienced significant outflows from foreign investors.
Early in the week, Turkey’s central bank announced that it would postpone regulations limiting bank loan growth, boosting bank stocks and helping to offset any drag from the MSCI statement about potential reclassification.
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