Global Markets Weekly Update: November 13, 2020
U.S.
Stocks build on gains following vaccine news
Most of the major benchmarks added to the previous week’s sharp gains, bolstered by positive vaccine news. All of the major indexes touched all-time intraday highs in early trading Monday but surrendered much of their gains at midweek, before rebounding again on Friday. The narrow Dow Jones Industrial Average and the smaller-cap benchmarks performed best, while slower-growing value shares easily outperformed their growth counterparts. Relatedly, the technology-heavy Nasdaq Composite Index lagged, and tech shares within the S&P 500 Index trailed most other sectors. The small real estate and materials sectors were also weak, while energy shares recorded solid gains.
Stock futures were solidly higher before trading started Monday, seemingly boosted by media declarations on Saturday that former Vice President Joe Biden crossed the 270 electoral vote threshold needed to win the presidential election. At about 6:40 a.m. ET, S&P 500 futures shot even higher (from indicating a gain at the start of trading of around 1.25% to approximately 4.00%) after Pfizer announced that preliminary data showed that the coronavirus vaccine candidate it had developed in partnership with Germany’s BioNTech was over 90% effective in preventing infections—a level well above expectations. Investors also seemed encouraged that the company announced that it could begin rollout of the vaccine in limited quantities by the end of the year.
Vaccine optimism prompts market rotation
The Pfizer news prompted a sharp rally in cyclical shares, especially those of travel and leisure-oriented firms. Energy stocks also rallied as oil prices rebounded, and bank shares benefited from an initial sharp rise in longer-term bond yields, which augurs well for higher lending margins. Conversely, investors sold out of “stay-at-home” stocks, such as Amazon.com and Netflix.
Growing signs that the pandemic would worsen before it got better seemed to drain the market’s gains over the next few days, however. Case counts and hospitalizations continued to rise significantly in nearly every state, with some cities reporting new strains on their hospital systems. News on Thursday that Chicago was considering reinstating stay-at-home orders and that New York might shut down its school system seemed to particularly concern investors. The broader political backdrop also remained uncertain. President Donald Trump refused to concede the election, while reports emerged that the White House was dropping out of negotiations over a new stimulus package. The president also issued an executive order banning U.S. investments in firms declared to have ties to the Chinese military.
The week’s relatively light economic calendar offered a mixed picture. Weekly jobless claims fell more than expected and reached a new pandemic low (709,000), while continuing claims fell below 7 million for the first time since March. The National Federation of Independent Business’s measure of small business sentiment surprised investors by remaining steady at pandemic highs, but the University of Michigan’s preliminary measure of consumer sentiment in November missed expectations and fell to a three-month low.
Long-term Treasury yields hit highest levels since March
The yield on the benchmark 10-year U.S. Treasury note ended higher for the week. (Bond prices and yields move in opposite directions.) Early in the week, long-term yields surged to their highest levels since March on encouraging news about Pfizer’s late-stage vaccine trial. However, yields decreased on Thursday amid fears of new lockdowns and weak inflation data, with the headline and core consumer price index readings surprising investors by remaining unchanged in October.
The broad municipal bond market was little changed over most of the week and outperformed Treasuries. Lower-quality municipals generally performed better than high-grade bonds. However, Illinois general obligation debt continued to struggle amid concerns about the state’s willingness to enact spending cuts to bridge its near-term budget gap.
Investment-grade corporate bond credit spreads—the additional yield offered over Treasuries, and an inverse measure of the sector’s relative appeal—tightened on Monday as news of the potential vaccine boosted sentiment. Higher-risk sectors and those impacted heavily by the coronavirus led the way. Spreads widened later in the week amid concerns about the current state of the pandemic. The level of new deals exceeded expectations, with many issuers having waited until after the election to come to market. Strong buying from Asia and healthy trading volumes in the U.S. helped counter the increase in supply.
After a strong start to the week, concern over rising infection rates caused the high yield market to give back a portion of its gains, according to T. Rowe Price traders. However, the generally positive sentiment provided a boost to coronavirus-impacted industries. High yield funds throughout the industry reported positive flows, and credit spreads tightened across the credit ratings spectrum.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
29,479.81 |
1156.41 |
3.30% |
S&P 500 |
3,585.15 |
75.71 |
10.97% |
Nasdaq Composite |
11,829.29 |
-65.94 |
31.84% |
S&P MidCap 400 |
2,113.26 |
86.31 |
2.44% |
Russell 2000 |
1,744.04 |
99.88 |
4.53% |
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 with global markets on encouraging news regarding the development of a vaccine to combat the novel coronavirus, although surging coronavirus infections and lockdowns in key European economies capped the gains. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 5.13% higher. Major European indexes also posted strong gains: Germany’s DAX Index climbed 4.78%, France’s CAC 40 surged 7.45%, and Italy’s FTSE MIB added 6.21%. The UK’s FTSE 100 Index rose 6.88%.
Core eurozone bond yields climbed after Pfizer and BioNTech disclosed that their vaccine candidate had exhibited strong efficacy in Phase III trials. The movement in 10-year German bond prices was especially pronounced. Yields subsequently moderated on rising coronavirus cases, ongoing lockdown measures, and the European Central Bank’s (ECB’s) dovish comments. Peripheral eurozone bond yields largely tracked their peers in the core European economies.
France extends coronavirus lockdown; Germany may follow
France said there would be no easing of the lockdown for two weeks, as the number of hospitalizations had exceeded the peak reached during the first wave of coronavirus infections. Portugal extended a nightly curfew and weekend lockdown, already affecting more than 100 municipalities to a further 77 areas. In Germany, Chancellor Angela Merkel said that the number of coronavirus infections was still too high even if rapid increases showed signs of slowing, suggesting that the partial lockdown might be extended into December, Bloomberg reported. In the UK, which imposed a lockdown at the beginning of the month, the total number of coronavirus cases rose to 1.3 million after new infections increased to 33,470 on Thursday, a daily record.
Lagarde hints at more stimulus
At the ECB’s annual symposium, President Christine Lagarde signaled that the central bank would expand its pandemic emergency purchase program (PEPP), which has bought more than EUR 640 billion of bonds, and its targeted longer-term refinancing operations (TLTROs), which have lent almost EUR 1.5 trillion to banks at accommodating rates, by year-end. “All options are on the table,” but the PEPP and TLTROs had “proven their effectiveness in the current environment” and were “therefore likely to remain the main tools for adjusting our monetary policy,” she said. Her comments appeared to rule out any further reduction in the ECB’s deposit rate, currently at -0.5%.
“There are reasons why interest rates had not been reduced in the past,” ECB Executive Board Member Isabel Schnabel said in an interview with CNBC, “but policymakers would have to check whether the reasons were still relevant in December.” The ECB had raised expectations at its October meeting that policymakers would inject more stimulus into the economy to prevent a double-dip recession.
UK economic growth slows
The UK economy grew by a slower-than-expected 1.1% in September, month-over-month data showed. Gross domestic product (GDP) rebounded 15.5% in the third quarter—a quarterly record—but failed to fully offset the almost 20% slump that occurred between April and June.
At the Financial Times’ Global Boardroom event, Bank of England Governor Andrew Bailey acknowledged that there was still a “huge gap” between where the UK economy stands today and its pre-pandemic size, but he asserted that a potentially effective coronavirus vaccine would help lift uncertainty surrounding the economic outlook. Bailey also advocated remaining cautious about the vaccine “because there’s still a long way to go in trialing, in production and distribution, and putting all this into action.”
Japan
Japanese stocks posted strong back-to-back weekly performances. For the week, the Nikkei 225 Stock Average advanced 4.4% (1,061 points) and closed at 25,385.87. The widely watched market yardstick climbed further into positive territory for the year-to-date period (+7.3%). The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, also recorded positive returns, although both are still in the red in 2020. The yen weakened and traded near JPY 105 versus the U.S. dollar.
Earnings forecasts revised higher for the fiscal year
More than 30% of the listed Japanese companies with fiscal years ending in March have increased their forecasts for full-year earnings, when they reported their first-half (April–September) results. However, the full-year net profit forecast for these companies is still widely expected to be about one-third lower than in fiscal 2019, due to the impact of the coronavirus and the effects of the social distancing mandates. According to Nikkei research, 32% of Japan’s listed companies that made profit forecasts before the September quarter ended up revising their earnings higher (60% remained unchanged, and 8% were revised lower). While concerns linger about the effect of the growing wave of coronavirus infections, the positive trend was led by manufacturers that market their products globally, especially auto-related manufacturers. Thanks to work-from-home/stay-at-home demand and China’s rapid recovery, about 60% of the companies that raised their earnings forecast were manufacturers. Within the services sector, which includes road and rail operators and airlines, many companies expect a worst-ever fiscal year earnings shortfall.
Suga wants a third stimulus package
In an effort to boost Japan’s economy, Japanese Prime Minister Yoshihide Suga asked his cabinet to provide a proposal for a third stimulus package. Economy Minister Yasutoshi Nishimura said that the size of the extra budget has not been determined and that lawmakers have lobbied for as much as JPY 30 trillion (USD 286 billion), although many believed that the stimulus would be closer to JPY 10 trillion (USD 95 billion). Nishimura said that the aid package would be targeted at structural changes to the economy and increased productivity with an eye on government spending that would attract private investment (5G technologies and “green” investments to help achieve a carbon-neutral economy, as the government has pledged by 2050) rather than direct payments to households. Some economists worry about the impact of the additional spending on the country’s public debt load, which is already twice the size of Japan’s USD 4.6 trillion economy.
New infections climb as colder weather forces more indoors
Prime Minister Suga issued a warning on Friday about a resurgence in coronavirus infections. On Thursday, the government reported 1,661 new cases with spiking rates in Hokkaido, Osaka, and Aichi. The increase in new cases in Tokyo, at 393, was also alarming. However, Suga said that his panel of experts believed that national emergency status was unwarranted, although several regions have been moved to the second-most serious stage. Suga urged the population to avoid gatherings without wearing face masks. The prime minister also pledged to secure enough vaccines to inoculate the entire Japanese population by the first half of 2021.
China
Chinese stocks declined slightly for the week as unfavorable macro news outweighed generally positive corporate earnings. The Shanghai Composite Index shed 0.1%, while the large-cap CSI Index ended down 0.6%. In credit markets, the yield on China’s 10-year sovereign bond increased by six basis points to end at 3.28%, as solid monthly trade data underscored the strong post-pandemic recovery. Corporate bonds sold off following a default by state-owned Yongcheng Coal & Electricity, an event that proved disruptive to China’s money markets and led the country’s central bank to inject liquidity into the financial system. Foreign flows into China’s bond market slowed in October following an especially strong third quarter, which recorded inflows of USD 21 billion for each month. In currency trading, the renminbi stayed broadly unchanged and ended at 6.610 against the U.S. dollar.
On the geopolitical front, U.S.-China relations suffered their latest setback on Thursday, when outgoing President Trump announced an executive order prohibiting Americans from investing in Chinese firms that his administration claims have ties to the country’s military. Under the order, U.S. investors are banned from trading securities of companies named by the Defense Department as having links to China’s military effective January 11, 2021, though it gives investors until next November to divest their holdings. The list of prohibited companies includes prominent state-backed companies such as China Mobile and China Telecom, whose U.S.-listed shares fell sharply in U.S. trading on Friday.
Earlier in the week, Chinese equity investors received unwelcome news after the government released a draft of antitrust guidelines aimed at curbing the power of the country’s leading internet-based platforms. The proposed antitrust laws from the State Administration for Market Regulation were the second recent setback for China’s top internet companies after financial regulators abruptly pulled the initial public offering of fintech company Ant Group on November 3. The uptick in regulatory actions affecting China’s online companies comes as authorities worldwide have raised concerns over the power and influence of digital platforms and their anticompetitive practices, though China is the first to issue new rules for its internet industry.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned about 8.3%. Shares were buoyed by strength in world markets following news that a prospective coronavirus vaccine showed a high degree of effectiveness in test results, as well as reduced political uncertainty following the U.S. presidential election. Investors also seemed to be optimistic about the Turkish government’s new economic management team.
Late the previous week—on the heels of significant lira weakness—President Recep Tayyip Erdogan removed central bank Governor Murat Uysal; a few days later, Treasury and Finance Minister Berat Albayrak resigned from his position. In response, Erdogan appointed Naci Ağbal to be the new head of the central bank and Lutfi Elvan to be Treasury and Finance Minister. The former is a well-respected government official, both internally and internationally. He has previously served as Undersecretary of Treasury and as Minister of Finance, and since 2018, he has been chairman of the Presidential Directorate for Strategy and Budget. The latter is currently the chairman of Parliament’s Planning and Budget Committee and has previously served as transportation minister and development minister.
T. Rowe Price sovereign analyst Peter Botoucharov believes these changes to the economic management team could signal that the central bank will move toward more orthodox and transparent policymaking. The central bank’s actions at its next monetary policy meeting later this month could provide clarity. Botoucharov also believes that the new minister of finance is likely to focus on policy continuity and attempt to implement more balanced policy choices.
Chile
Stocks in Chile, as measured by the IPSA Index, returned about 5.1%. During the week, the lower chamber of Congress approved a pension withdrawal bill—the second one this year—by a substantial margin. The bill will now be voted on by the Senate. With a high level of legislative approval, T. Rowe Price emerging markets sovereign analyst Aaron Gifford believes that the bill will ultimately become law.
Gifford notes that about USD 16 billion of outflows took place following the first withdrawal bill, which permitted affiliates to take out up to 10% of their savings accounts managed by private pension funds. This second bill is similar, and he estimates that another USD 12 billion to USD14 billion could leave the pension system. Gifford also notes that the first round of redemptions was relatively well absorbed by the financial markets, particularly because the central bank stepped in with repurchase agreements (repos) for bank deposits, bank debt, and other eligible collateral. While some investors and analysts are concerned about the possible impact of the second withdrawal bill, Gifford does not believe that the central bank will be opposed to using its balance sheet as needed to foster stability.
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