Global Markets Weekly Update: October 02, 2020
U.S.
Small-caps lead stocks higher
The large-cap indexes broke a string of four weekly losses and moved higher, although gains were more robust among small-caps. Most sectors within the S&P 500 Index recorded modest positive returns, with the exception of energy stocks, which added to their sharp recent declines. The week rounded out the third quarter, which saw healthy returns for all the major benchmarks. September was the first month since March to register declines, however.
Politics front and center
The political environment seemed to play a large role in driving sentiment over the week. Investors kept a close eye on conflicting signals on stimulus negotiations between Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi, with reports surfacing Tuesday that Republicans were willing to approve a fourth coronavirus stimulus package totaling as high as USD 1.6 trillion—somewhat closer to the Democrats’ latest USD 2.2 trillion proposal. On Wednesday, Pelosi said that she was "hopeful" a deal would be reached, and Mnuchin said there would be "one more serious try.”
On Thursday evening, Democrats went ahead and narrowly passed their USD 2.2 trillion package in the House, which appeared unlikely to be taken up in the Republican Senate and indicated to some that negotiations were on hold. On Friday, however, Pelosi announced that the House would take up legislation targeted at relief for the airline industry. During the week, carriers United and American announced plans for a combined 32,000 job cuts in the absence of further government support.
President Donald Trump’s announcement on Twitter Thursday night that he and his wife had contracted COVID-19 added to the uncertainty in Washington and sent stock futures sharply lower. The major benchmarks moderated their losses when trading began Friday morning, with the small-cap indexes even moving into positive territory. The White House announced that the president was experiencing only mild symptoms, and the vice president and several other top officials announced that they had tested negative.
The other major market news Friday morning was the monthly payrolls report, which showed that employers added 661,000 jobs in September, well below consensus estimates of around 850,000. Government employment fell by 216,000, highlighting growing fiscal stresses for states and localities and offsetting some of the bounce back in leisure and hospitality hiring (318,000 jobs). The workforce participation rate also slipped to 61.4% from a post-pandemic high of 61.7% in August. Weekly jobless claims, reported Thursday, were more encouraging, with the number of Americans filing for unemployment reaching a post-pandemic low of 837,000. The Institute for Supply Management’s gauge of September manufacturing activity missed expectations, but two regional gauges surprised to the upside.
Stimulus worries weigh on muni market
Intermediate- and long-term Treasury yields increased modestly through most of the week, seemingly driven by renewed hopes for a stimulus deal. (Bond prices and yields move in opposite directions.) The 10-year Treasury note yield ended Thursday at 0.68%, up from 0.66% last Friday. However, yields fluctuated Friday morning as investors digested the disappointing jobs report and developing news surrounding President Trump’s positive coronavirus test. The broad municipal bond market posted negative returns through most of the week. T. Rowe Price municipal traders commented that elevated issuance continued to weigh on the market, along with uncertainty related to the election and aid for states and localities.
Investment-grade corporate bond credit spreads—the extra yield offered over Treasures—moved tighter due to steady month-end buying, although T. Rowe Price traders noted somewhat tepid demand from investors in Asia. The primary calendar was active early in the week amid generally positive economic sentiment. However, the volume of deals coming to the market later subsided, and total issuance for the week was well below expectations.
Equity gains, merger and acquisition activity, and strong demand from exchange-traded funds buoyed the high yield market. Although the volume of new deals was somewhat subdued, September was the second-busiest month year-to-date for issuance. Credit spreads narrowed across all rating tiers, and below investment-grade funds industrywide reported negative flows.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
27,682.81 |
508.85 |
-3.00% |
S&P 500 |
3,348.44 |
49.98 |
3.64% |
Nasdaq Composite |
11,075.02 |
161.46 |
23.43% |
S&P MidCap 400 |
1,902.81 |
87.14 |
-7.77% |
Russell 2000 |
1,539.30 |
65.26 |
-7.74% |
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 rebounded as investors snapped up beaten-down stocks, especially in the financials sector. News that President Trump and his wife had tested positive for COVID-19 eroded some of the market’s gains. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.02% higher, with major indexes also posting gains. Germany’s Xetra DAX Index rose 1.76%, France’s CAC 40 gained 2.01%, and Italy’s FTSE MIB climbed 1.96%. The UK’s FTSE 100 Index added 1.78%.
Core eurozone bond yields declined overall. The 10-year German bund yield fell markedly as worries resurfaced over the effect of a second coronavirus wave on the economic recovery as well as low inflation. Uncertainty in U.S. politics following an acrimonious first presidential debate and President Trump testing positive for the coronavirus also put downward pressure on yields. Peripheral eurozone bond yields also fell on the week.
Local restrictions seek to curb resurgence in coronavirus infections
European countries announced more targeted actions to curb the resurgence of coronavirus cases. The Spanish government ordered a partial lockdown of the capital, Madrid, and its immediate surroundings. French Health Minister Olivier Veran said Paris likely will be put on maximum alert next week, a situation that could entail closing bars and restaurants and imposing more restrictions on public life. Veran said the level of COVID-19 infections was reaching alarming levels in five other major French cities. UK Health Secretary Matt Hancock imposed stricter restrictions across the northwest part of the country, including Liverpool, amid a surge in infections. Meanwhile, UK Prime Minister Boris Johnson said at a televised press conference that he would not rule out more stringent national measures if cases continued to rise. German Chancellor Angela Merkel said she would limit the size of gatherings and fine rule breakers but indicated there would be no national lockdown. Italian Prime Minister Giuseppe Conte said he would ask Parliament to extend the state of emergency until January.
EU-UK trade talks continue; eurozone faces deflationary pressures
The Times newspaper reported that unidentified officials said that EU and UK negotiators had found common ground for a trade deal. An EU official, however, dismissed this claim as “UK spin.” Later, EU sources cited by Reuters said that areas of disagreement remained and that the talks would continue next week and until an October 15–16 EU leaders’ meeting. As negotiators met, UK members of Parliament approved a draft law to create an internal market once the post-Brexit transition ends in December. This bill contains clauses that would override sections of the withdrawal accord agreed to last year, prompting the European Commission to take legal action against the UK for infringing on these terms.
Eurozone consumer prices fell for a second consecutive month in September, with the year-over-year inflation rate hitting a four-year low of -0.3%, according to an initial estimate. Tumbling oil prices and weaker prices for non-industrial goods were key deflationary factors. Earlier in the week, European Central Bank President Christine Lagarde told a committee of the European Parliament that “the sharp decline in economic activity earlier this year has weakened price pressures" and warned that “inflation is expected to remain negative over the coming months.”
Japan
Japanese stocks declined in the four-day trading week (see below). The Nikkei 225 Stock Average declined 175 points (0.75%) and closed at 23,029.90. The market benchmark has declined (2.7%) for the year-to-date period. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, also recorded losses. The yen stayed in a tight range for the week and traded above JPY 105 per U.S. dollar on Friday.
Trading suspended due to system outage
The Tokyo Stock Exchange halted stock trading on all of Japan’s exchanges for the full day on Thursday, October 1. A technical glitch, resulting from a system failure to switch to backup mode, caused a transmission outage. It was the first time that trading had been suspended for a full day in Japanese markets due to technical difficulties since 1999, when the exchange first instituted electronic trading. Technical issues have closed the markets for portions of several other trading days. The system administrators confirmed that the disruption was not the result of a hack, replaced the faulty equipment, and confirmed the trading platform was functioning properly. Trading resumed as normal on Friday, although market activity was light due to Golden Week and other holiday closures in several markets across Asia.
The Bank of Japan’s (BoJ’s) quarterly Tankan business conditions index stood at -27 in September, well below a predicted -23 level, yet significantly above the record-low -34 reading in June. While most sectors showed improvement, nonmanufacturers and small businesses were the least optimistic about future business conditions. The December quarterly Tankan index forecast is expected to show further improvement to -17. (A Tankan sentiment reading of zero reflects an equal percentage of businesses that are optimistic about future business conditions compared with those that have a negative outlook.)
Coronavirus cases in Tokyo slow in September
The Kyodo News reported that roughly 4,900 cases of the coronavirus were reported in Tokyo in September, a significant drop from the record 8,100 cases reported in August. In mid-September, Tokyo’s government reduced its coronavirus alert level to three from four (its highest alert level) and removed the curb on business hours for establishments that serve alcohol. Additionally, the government made Tokyo residents eligible to receive Go to Travel subsidies in an effort to breathe life into Japan’s struggling tourism industry. The nationwide program offers inducements totaling JPY 1.3 trillion (USD 12.3 billion) for domestic travel. The subsidy will pay up to half of travel spending with a limit of JPY 20,000 per night.
China
Chinese stocks rose slightly in a holiday-shortened week, lifted by several economic readings showing that the recovery was on track, but they ended September with their biggest monthly loss since May 2019. Technology shares outperformed, and Shanghai’s tech-focused STAR 50 Index rose 4.0% ahead of the initial public offering of Chinese fintech company Ant Group, which could raise up to USD 30 billion in a Hong Kong-Shanghai dual listing set to happen in the coming weeks. China’s stock markets are closed from October 1 to October 8 for a national holiday. In fixed income markets, the yield on China’s 10-year sovereign bond edged up four basis points and ended at 3.17%. The yuan strengthened 0.4% against the U.S. dollar and ended the week at CNY 6.79 per dollar.
On the economic front, China’s purchasing managers’ index (PMI) readings for September underscored the country’s strong recovery after being the first to tame the coronavirus. The private Caixin survey showed that manufacturing PMI remained at a high level, boosted by new export orders. An index for smaller enterprises came in above 50, the first time it landed in expansionary territory since May. Positive news also arrived on the services front, which has recovered more slowly than manufacturing since the pandemic: The business activity index for nonmanufacturing came in at 55.9, its strongest level since November 2013.
The strong economic data reduce the likelihood that Beijing will roll out fresh monetary and fiscal stimulus measures and suggest that the PMI cycle may be close to a peak. The latest COVID-19 data offered more evidence of China’s success in curbing the virus, with just 12 new imported cases reported. According to press reports, China has inoculated around 350,000 people with vaccines that are undergoing clinical trials, with priority given to businessmen and students traveling overseas. Sinopharm, a state-owned enterprise, said that its vaccine can provide protection for up to three years; however, its vaccine has not been subjected to the usual drug testing process used in the U.S. and other countries.
Looking ahead, high-frequency domestic travel data will be in focus as analysts try to gauge consumer sentiment during China’s Golden Week holiday, which began on October 1 and lasts until October 8. Domestic tourism is expected to surge as coronavirus outbreaks in other countries keep a lid on overseas travel. Golden Week also marks a peak online shopping season, which should give further clues to the strength of Chinese consumer confidence.
Other Key Markets
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about -3.0%. Brazilian assets were somewhat volatile as government officials struggled to find a way to help lower-income individuals with more financial assistance—possibly by extending the costly corona-voucher program that provides basic monthly income but expires at the end of 2020—while observing the limitations of the country’s mandatory spending cap. According to a constitutional amendment that took effect about four years ago, the growth rate of Brazil’s government spending is not supposed to exceed the country’s inflation rate over a 20-year stretch.
Tensions between various officials have become more visible in recent days, as some have done an about-face on their spending stances based on unfavorable market reactions, while others have proposed budget and accounting tricks to redirect spending and create the appearance of observing the spending cap.
T. Rowe Price sovereign analyst Richard Hall believes that the Brazilian government is in a “policy corner” and can only achieve two of the following three possible outcomes:
- preserve the existing spending cap
- avoid politically difficult reforms to mandatory government spending items
- increase social transfers to reduce the negative impact from the end of the corona-voucher program
While it remains to be seen what the government will decide to do, Hall acknowledges that maintaining the status quo would be fairly easy because constitutional amendments, which would require broad agreement among the parties in the governing coalition, are likely needed to make any significant changes to policy.
Turkey
Stocks in Turkey, as measured by the BIST 100 Index, returned about 1.9%. Equity investors did not seem concerned about an outbreak of hostilities in the Caucasus region between Turkey’s eastern neighbor Armenia and Azerbaijan, or the Turkish government’s offer of support to the Azeris.
The equity market benefited from news that the Turkish government—as reported by Bloomberg—was reducing a tax on foreign currency purchases from 1.0% to 0.2%. This tax was originally created around mid-2019 and was boosted earlier this year from 0.1% to 1.0%. Bloomberg also reported that the government, in an effort to encourage investors to save money in Turkish banks, reduced tax rates on bank accounts with lira deposits through the end of calendar year 2020.
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