Global Markets Weekly Update: November 06, 2020
U.S.
Potential “Goldilocks” election outcome drives rally
Stocks posted their largest weekly rally since April, despite the lack of a clear winner emerging from Tuesday’s presidential election as vote-counting continued in several pivotal states. With former Vice President Joe Biden appearing to have the clearest path to victory and Republicans seeming likely to retain control of the Senate, investors began to anticipate a Goldilocks scenario of additional fiscal stimulus but more limited tax increases than under a “blue wave” Democratic sweep. The tech-heavy Nasdaq Composite Index and the small-cap Russell 2000 Index performed even better than the broad large-cap S&P 500 Index.
T. Rowe Price traders noted that value stocks outperformed high-valuation growth companies early in the week, but the momentum that has driven many growth stocks higher all year took control following the election. While this was the second-busiest week of the quarter for earnings releases from S&P 500 companies, broad macro sentiment about politics and the economy seemed to drive the market.
Fed policymakers discuss outlook for quantitative easing
Federal Reserve policymakers met on Wednesday and Thursday but announced no changes to monetary policy. The Fed’s post-meeting statement noted that the coronavirus pandemic continues to meaningfully weigh on economic growth. In his press conference after the meeting, Fed Chair Jerome Powell said that the central bank still has monetary policy tools it can deploy to boost the economy if needed and that policymakers discussed the outlook for the central bank’s quantitative easing (QE) programs. Powell left open the possibility that the Fed could expand its purchases of long-term Treasuries.
The government’s October employment report, released on Friday, showed that the economy added a better-than-expected 638,000 jobs last month, driving the unemployment rate down to 6.9% from 7.9% in September. However, COVID-19, the disease caused by the coronavirus, has surged in many parts of the country, with more than 100,000 new daily cases reported nationwide for the first time and hospitalizations rising. This widely anticipated fall wave of the pandemic caused some states and municipalities to consider adding new restrictions on consumer businesses, threatening to slow the improvement in the labor market.
Treasury yields decrease amid expectations for Republican Senate
Longer-term Treasury yields ticked down during a volatile week, driven by election news. (Bond prices and yields move in opposite directions.) Indications that Republicans would retain control of the Senate led investors to revise down expectations for new stimulus spending in the new year, which could have weighed on Treasury prices. Although the Fed did not make any changes at its monetary policy meeting, T. Rowe Price traders noted that Fed Chair Jerome Powell’s comments about the possibility of expanding the central bank’s purchases of long-term Treasuries may have also pressured yields.
Munis, corporates benefit from limited new issuance
Municipal bonds held up well following the election, although the prospect of a divided federal government could result in less fiscal support for state and local governments. Munis benefited from limited new issuance and declining Treasury yields. However, Illinois general obligation bonds sold off after voters in the state rejected a graduated income tax amendment. The ballot measure’s defeat enhanced concerns among investors that the state’s credit rating could be cut to below investment grade.
The investment-grade corporate bond market received technical support as issuance virtually came to a halt around Election Day. High yield corporates, meanwhile, benefited from the strong equity rally and from generally solid corporate earnings reports.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
28,323.40 |
1821.80 |
-0.75% |
S&P 500 |
3,509.44 |
239.48 |
8.63% |
Nasdaq Composite |
11,895.23 |
983.64 |
32.57% |
S&P MidCap 400 |
2,026.95 |
133.76 |
-1.75% |
Russell 2000 |
1,644.16 |
111.40 |
-1.46% |
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
Shares in Europe rallied in sympathy with U.S. equities while also receiving a lift from the generally strong quarterly earnings reported by European corporations and the additional stimulus measures announced in the UK. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 7.02% higher, while Germany’s DAX Index rallied 7.99%, France’s CAC 40 gained 7.98%, and Italy’s FTSE MIB climbed 9.69%. The UK’s FTSE 100 Index advanced 5.97%.
Core eurozone bond yields bounced around but ended the week roughly level. The German 10-year bund yield, for example, plummeted on Wednesday after early U.S. election results proved indecisive. This downward pressure eased as the odds of a Biden victory and a divided Congress appeared to increase. Yields on peripheral eurozone bonds fell overall. The growing likelihood of a Biden win drove demand for riskier assets, pushing the yield on Italy’s 10-year bonds to record lows on Friday. UK gilt yields largely tracked core eurozone yields.
England, Greece impose lockdowns to stamp out coronavirus cases
Aiming to prevent the spread of the coronavirus, England started a nationwide lockdown that will last until the beginning of December. Greece also implemented a lockdown that will last three weeks to prevent the spread of the novel coronavirus. In France, which now has the highest caseload of infections in Europe, the mayor of Paris announced further restrictions to augment the nationwide lockdown, which began at the end of October. The Spanish government, which has imposed a nationwide nighttime curfew to deal with the second-highest number of coronavirus cases, came under pressure from regions to reimpose a nationwide lockdown. Italy classified four regions as red zones, where people must stay in their municipalities and are only allowed to leave for work, study, health, or other essential reasons.
BoE increases bond-buying program; Sunak extends jobs support
The Bank of England (BOE) increased its bond-buying program by a larger-than-expected GBP 150 billion to GBP 895 billion, with an eye toward helping to offset any damage caused by a renewed nationwide lockdown and uncertainty surrounding post-Brexit talks. The central bank said the increase would allow it to extend the asset-purchase program until the end of 2021. The bank also said that the outlook for the economy remained “unusually uncertain.”
In an abrupt change of policy, UK Chancellor of the Exchequer Rishi Sunak announced an extension of a program that pays 80% of temporarily laid-off workers’ wages. He said the new support package, which will run through the end of March, was coordinated with the BoE, although the central bank denied it increased its program to finance the extension.
The UK and EU say gaps remain on core issues in post-Brexit talks
Two weeks of intensified negotiations between the UK and the European Union (EU) broke up with both sides saying they were still far apart on the core issues of state aid for companies, solving trade disputes, and fishing rights. Formal talks are expected to resume either on Sunday or Monday.
Japan
Japanese stocks finished sharply higher in the holiday-shortened trading week. Japan’s stock markets were closed on Tuesday in observance of Culture Day. The Nikkei 225 Stock Average advanced 5.87% (1,348 points) and closed at 24,325.23. This week’s market rally also lifted the widely watched market yardstick into positive territory for the year-to-date period (+2.8%). The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, also recorded strong results, although both remain underwater in 2020.
Japanese stocks recouped their late-October losses (and closed the week at a multi-decade high) as uncertainty about the U.S. presidential election was offset by investor optimism about Japanese corporate earnings and better-than-expected Chinese manufacturing data. The yen strengthened and traded near JPY 103 versus the U.S. dollar. Reuters reported on Friday that Japanese Prime Minister Yoshihide Suga has pledged to work closely with overseas authorities to maintain currency stability. He said that the government is closely monitoring the yen’s movements for signs that it will hamper Japan’s economic recovery.
Central bank Governor Kuroda vows to stay the course on monetary policy
In a speech to business leaders in Nagoya, Bank of Japan (BoJ) Governor Haruhiko Kuroda confirmed his support for the central bank’s current monetary policy efforts, which have aided corporate financing and created stability in financial markets. While Kuroda acknowledged that Japan’s economy is in a severe situation due to the global pandemic, in part because of the recent resurgence of new cases in Europe and the U.S., he believes the economy has turned the corner and is picking up gradually after bottoming in the April-May period. The governor noted that Japan’s exports have started to increase, especially in automobile-related goods. However, domestic demand remained lackluster as business fixed investment has slowed because of the decline in corporate profits.
He specifically cited the weakness in the September Tankan survey and the falloff/postponement of domestic capacity expansion in manufacturing and new store openings in the services segment. Kuroda believes that the current monetary policy course is necessary to ensure stability in markets and will support sustainable economic growth after the impact of the coronavirus subsides. He said the central bank will closely monitor the effects of the coronavirus on the economy and was willing to pursue additional monetary easing to support corporate activities.
BoJ has no intention of altering its ETF buying program
Despite some critics who have asserted that the central bank’s purchases of exchange-traded funds (ETFs) are distorting the equity markets, the BoJ has no plans to change the course of its purchases or trim those holdings. On Thursday, BoJ Governor Kuroda told parliament, “Our monetary easing steps, including our purchases of ETFs, are necessary measures. At present, we have no plan to review our ETF-buying program or consider unloading our holdings.” The central bank doubled its annual ETF buying to JPY 12 trillion (USD 115 billion) in March to provide liquidity, soften the blow from the coronavirus, and preserve market stability. He added that “Our ETF buying isn’t directly aimed at pushing up stock prices” and that the buying helped prevent significant market swings that could hurt investor sentiment.
China
Stocks gain on potential Biden win; PMI gauges underscore recovery
Chinese stocks advanced as the prospect of a Biden presidency raised the outlook for improved U.S.-China relations. The benchmark Shanghai Composite Index ended up 2.2% and the large-cap CSI 300 Index rose 3.4%, according to Reuters data. The yield on China’s 10-year government bond increased to 3.22% as economic data showed the country’s recovery was on track. In currency trading, the renminbi rose 1.1% versus the dollar and closed at 6.621. Many policy analysts see scope for more cordial U.S.-China relations in trade, cross-border investment, and climate change. However, they caution that a major reengagement with China appears unlikely and that U.S. policy toward China regarding intellectual property rights, technology transfer, and national security may not change much under a Biden administration.
On the economic front, a batch of Purchasing Managers’ Index (PMI) surveys added to evidence of China’s rapid recovery from the coronavirus. The official PMI reports were both solid and suggested that Chinese business leaders had high confidence in Beijing’s management of the economy. Meanwhile, PMI reports from the private Caixin survey were also strong, with the manufacturing gauge recording its highest level since 2011. Taken together, the latest PMI readings showed that China’s strong economic momentum continued into the fourth quarter, though new export orders and lagging employment figures hinted at some weakness in the recovery.
In corporate news, the shock suspension of the widely anticipated USD 37 billion initial public offering (IPO) of Chinese fintech company Ant Group rocked the investment world. The last-minute postponement of what was on track to be the world’s biggest-ever IPO, which the Shanghai Stock Exchange attributed to a changing regulatory environment, came after founder Jack Ma criticized China’s banks and financial regulators at an October 24 conference. Chinese regulators had been increasing their oversight of Ant Group well before Ma’s speech and on Monday issued draft rules calling for stricter regulations for online micro-lending companies. However, the timing of the suspension just two days before Ant Group’s public trading debut suggested that the authorities were uncomfortable with the fintech upstart’s threat to China’s politically connected financial institutions and its outspoken founder.
Other Key Markets
Improving risk sentiment boosts Mexican equities
Stocks in Mexico, as measured by the IPC Index, returned about 4.2%. Mexican shares rose with other emerging markets as investors embraced riskier assets following U.S. elections and the growing likelihood that former Vice President Joe Biden will become the next president of the U.S. Biden is seen as being less aggressive than President Donald Trump on matters involving trade and immigration.
Late last week, the Mexican government released fiscal data for September, which continued to show its efforts to use extraordinary compensatory measures—including drawing on extrabudgetary resources, pursuing tax evasion, and austerity—to offset the negative impact of the coronavirus crisis on government revenues. For the year through September, the government has generated a primary fiscal surplus worth 0.7% of gross domestic product (GDP) and a moderate overall deficit of -2.3% of GDP, quite a bit better than its revised fiscal year targets of 0.1% and -4.8%, respectively, with only three months left in 2020. Total year-to-date revenues are down 5.4% year over year in real terms, mostly driven by oil, as non-oil revenue is still impressively positive on the year. This is a function of better tax collection and the crack-down on tax evasion as well as surging non-tax revenues.
T. Rowe Price emerging markets sovereign analyst Aaron Gifford considers Mexico’s pandemic recovery strategy, which involves minimal fiscal stimulus, limited lockdowns, and riding the coattails of the U.S. economic recovery, to be controversial. Nevertheless, it seems to be helping Mexico avoid the twin budget and current account deficits that have plagued the country in the past. Ultimately, Gifford believes that growth will be the shock absorber. Only a mild economic recovery is expected next year.
Brazil considers bill to give more autonomy to central bank
Stocks in Brazil, as measured by the Bovespa Index, returned about 7.4%.
On Tuesday, Brazil’s Senate passed a bill that formally gives autonomy to the country’s central bank. This is a change from the current arrangement, which has the central bank governor and the entire monetary policy board serving at the pleasure of President Jair Bolsonaro. The bill goes next to the Chamber of Deputies for consideration. If it is passed by the lower chamber of the legislature and signed into law by Bolsonaro, it would make the central bank governor and board have fixed four-year terms that span presidential terms.
According to T. Rowe Price sovereign analyst Richard Hall, the bill represents an important structural reform. One notable feature of the bill is that the central bank’s current monetary policy committee (COPOM) would be allowed to automatically start the new staggered terms without having to go through another Senate confirmation. So, since the head of the central bank is supposed to be appointed in the third year of a president’s term, once the law is passed and promulgated—which Hall believes could take place early next year—the central bank head would have a mandate until January 2025, which is through the first two years of the next presidential term. The other board members are also appointed to four-year terms, so the next president, which may or may not be Bolsonaro, would only be able to replace two of the eight directors each year.
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