Global Markets Weekly Update: October 09, 2020
U.S.
Stocks see best gains in three months
The S&P 500 Index had its best weekly gain in three months, as investors seemed to grow more optimistic about a new round of fiscal stimulus, as well as treatments for the coronavirus. The small-cap Russell 2000 Index surged over 6%, pulling it out of correction territory, or within 10% of its 2018 peak. Utilities and energy stocks outperformed, with the latter boosted by a rise in oil prices after OPEC Secretary General Mohammed Barkindo claimed that “the worst is over” for producers. Communication services shares lagged, weighed down by weakness in video gaming and cable stocks.
Stimulus hopes boost sentiment despite conflicting signals
Wall Street kept a close eye on on-again, off-again negotiations over a new coronavirus relief package. Shares rose Monday after reports that House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin had spoken by phone and were prepared to exchange new proposals. The rally continued through Tuesday morning, but the market pulled back sharply after President Donald Trump tweeted in the afternoon that the economy was “doing really well” and that he had “instructed my representatives to stop negotiating until after the election.”
The president seemed to reverse course later that evening, however, tweeting his support for targeted assistance for airlines and small businesses, as well as a new round of USD 1,200 direct payments to individuals. Stocks seemed to rally on the news on Wednesday, despite Speaker Pelosi’s avowed opposition to standalone relief measures. On Thursday, Pelosi stated in a press conference that the priority was crushing the coronavirus and that there would be no standalone bill for airlines unless there was a more comprehensive deal. Meanwhile, Republican Senate Majority Leader Mitch McConnell stated that a large portion of his caucus thinks enough aid has already been offered.
Events took yet another turn Friday afternoon. Stocks built on their gains following reports that the White House was upping its offer on the scale of a broad stimulus plan from USD 1.6 trillion to USD 1.8 trillion. The offer narrowed the gap with the USD 2.2 trillion bill that House Democrats passed on October 1, but the president later told a conservative radio talk show host that he was prepared to go even higher than the Democrats’ proposal.
Hopes rise for antibody therapies
President Trump’s seemingly rapid recovery following his COVID-19 diagnosis the previous week also seemed to boost sentiment. In videos recorded after returning to the White House from the hospital on Monday, the president attributed his recovery to the new antibody (Regeneron’s REGN-COV2) and antiviral (Gilead’s Remdesivir) treatments he received, while promising that they would soon be free and widely available to Americans.
Although some medical and scientific experts questioned the latter assertion, the consensus seemed to grow that monoclonal antibodies, in particular, held substantial promise in treating the disease and perhaps even preventing infection. On Thursday, Eli Lilly announced that it was seeking emergency use authorization for its antibody therapy and planned to have a million doses available by late December. The news may have helped moderate concerns over a continued rise in daily new infections, particularly in the Upper Midwest.
The week’s economic calendar was relatively thin, but investors seemed encouraged by several closely watched data sets. On Monday, Markit and the Institute for Supply Management (ISM) released several purchasing managers’ indexes (PMIs) for September, which generally met or modestly exceeded consensus expectations. In particular, the ISM’s gauge of service sector activity rose unexpectedly and marked the fourth straight month of solid expansion. Weekly jobless claims fell less than expected, but continuing claims fell sharply, from 12 million to 11 million.
Bond yields touch four-month highs
The yield on the benchmark 10-year Treasury note surged during the week and hit its highest level in four months. (Bond prices and yields move in opposite directions.) T. Rowe Price traders reported that rising stimulus hopes were partly behind the increase, with polls showing a widening lead for Vice President Joe Biden indicating the potential for a larger relief package in 2021. The municipal bond market sold off over much of the week, as increased supply, slowing demand, and the upward movement in Treasury yields weighed on the market. Nevertheless, the issuance of New York City general obligation bonds saw strong investor demand. The deal followed last week’s downgrade of New York City bonds by Moody’s Investors Service, which lowered its rating on the credit to Aa2 from Aa1.
Updates on the president’s health and economic data caused investment-grade credit spreads—the extra yield offered over Treasuries, and an inverse measure of the sector’s relative appeal—to tighten earlier in the week. However, the positive momentum stalled somewhat due to headlines of stimulus talks being postponed. Meanwhile, high yield bonds tracked equities higher, as flows into the asset class provided technical support, and credit spreads tightened across all rating tiers. In industry-specific news, the entertainment and leisure space underperformed after Cineworld Group revealed that it will temporarily close all its American and British theaters due to the release of winter blockbusters being pushed back to 2021.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
28,586.90 |
904.09 |
0.17% |
S&P 500 |
3,477.13 |
128.69 |
7.63% |
Nasdaq Composite |
11,579.94 |
504.92 |
29.06% |
S&P MidCap 400 |
1,995.53 |
92.72 |
-3.27% |
Russell 2000 |
1,636.97 |
97.67 |
-1.89% |
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 rose on hopes that the U.S. government would pass additional measures to stimulate the economy. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.11% higher, while Germany’s DAX Index rose 2.85%, France’s CAC 40 advanced 2.53%, and Italy’s FTSE MIB added 2.79%. The UK’s FTSE 100 Index climbed 1.94%.
Rising COVID-19 cases trigger local lockdowns
Brussels shuttered cafes, beer halls, drinking establishments, and tea rooms for a month as part of a lockdown to counter soaring coronavirus infections and hospital admissions. COVID-19 cases continued to rise sharply in Spain, Italy, France, and the UK despite targeted measures to control the disease’s spread. Fatalities and hospital admissions rose in the UK, where the government was poised to close pubs and restaurants in northern England as the increase in cases threatened to overwhelm the health care system. France is ready to place more cities on maximum alert after the daily case count rose above 18,000 for a second consecutive day. Spanish Prime Minister Pedro Sanchez is considering whether to declare a state of emergency in the Madrid region, after the regional High Court ruled against the central government’s latest measures to restrict people’s movement, Spanish newspaper El Pais reported.
UK economy falters; France rebounds strongly
UK gross domestic product (GDP) rose 2.1% sequentially in August, compared with a monthly growth rate of 6.6% in July. The August figure was less than half the consensus of estimates in a Reuters poll. Most of the expansion appeared to stem from a temporary restaurant subsidy and a boost in accommodation bookings, as people took holidays after the government eased lockdown restrictions. Chancellor of the Exchequer Rishi Sunak announced targeted measures to support jobs in pubs, restaurants, and other businesses that had to close due to the imposition of tighter restrictions.
Bank of England Governor Andrew Bailey told an online webinar hosted by the European Commission that the UK economic recovery was uneven, that third-quarter output was probably 7% to 10% below pre-COVID-19 levels, and that the risks to the economy were “very much on the downside” because of the growing number of coronavirus infections in Britain.
The French economy rebounded 16% in the third quarter from an almost 14% contraction in the previous three months, the French central bank said. Business activity has picked up since the national lockdown was lifted early in May.
UK and EU step up pace of post-Brexit trade talks
The UK and European Union (EU) stepped up meetings on a post-Brexit relationship ahead of a summit of EU leaders in Brussels next week. A senior EU diplomat cited by the Reuters news agency said the EU’s chief Brexit negotiator Michel Barnier wants a few more concessions before entering the “tunnel,” or the last phase of negotiations. Last week, UK Prime Minister Boris Johnson and EU Commission President Ursula von der Leyen agreed to carry on discussions for another month.
Japan
Japanese stocks surged over the week, recording their best weekly return in about two months. The Nikkei 225 Stock Average advanced 590 points (2.6%) and closed at 23,619.69. The market benchmark has declined (-0.16%) 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 large gains. The yen weakened and traded near JPY 106 per U.S. dollar on Friday.
BoJ becomes more upbeat on economic prospects
At the quarterly Bank of Japan (BoJ) branch managers meeting on Thursday, central bank Governor Haruhiko Kuroda asserted that Japan’s economy is starting to recover. The BoJ governor affirmed that fiscal and monetary stimulus measures have been effective, and he predicted that inflation would begin to rebound following a period of short-term weakness in oil prices. The statement led analysts to believe that the central bank would likely refrain from any additional stimulus measures for the remainder of 2020 and that it would continue with its current lending programs. The central bank last expanded its stimulus initiatives in April.
The BoJ also raised its outlook for eight of its nine economic regions and left the last (Shikoku) unchanged. Japan’s policymakers believe that economic conditions remain severe but are gradually improving for most of the country as the impact of the coronavirus wanes and uncertainties abate. The central bank committee will next gather on October 28 and 29 for a rate review and to provide its revised quarterly economic and inflation projections.
Lower mobile phone fees for Japanese customers
Top executives at Japan’s three largest mobile phone carriers, SoftBank, Nippon Telegraph and Telephone, and KDDI, have discussed lowering their wireless rate charges with Communications Minister Ryota Takeda. He has made it clear that rate reductions of 10% were not sufficient and is urging for significantly larger price cuts to bring Japan’s rates in line with its global peers. While serving as chief cabinet secretary in 2018, newly elected Prime Minister Yoshihide Suga suggested that wireless phone rates could be cut as much as 40%.
China
Stocks gain after Golden Week holiday
China's stock markets rose Friday after being closed from October 1 to 8 for the national Golden Week holiday. The Shanghai Composite A-share Index rose 1.7% and the large-cap CSI 300 Index gained 2.0%. Bonds sold off after the People’s Bank of China (PBOC) set out to drain a net RMB 560 billion of liquidity from money markets via open market operations. The yield on China’s 10-year sovereign bond increased 4 basis points to 3.21%.
The PBOC’s more hawkish stance, along with the relatively higher yields on Chinese bonds, added to the carry appeal of the renminbi over other currencies. The U.S. dollar/renminbi exchange rate rose 1.3% on Friday to close at 6.702. The dollar’s relative weakness against other Asian currencies has reduced concerns that the renminbi has become stretched. However, many analysts believe that the PBOC wants to support the currency ahead of U.S. elections in early November, which is expected to spur heightened volatility in foreign exchange markets.
In economic news, the private Caixin Services PMI rose to 54.8 in September from 54.0 in August, indicating the fifth straight month of improvement for the services sector and the latest evidence of China’s strong, post-COVID-19 recovery. In the coming weeks, September and third-quarter data are expected to show a broadening of the recovery. During the Golden Week holiday, high-frequency data were mixed: Tourism revenue fell 30% from the prior-year period, and holiday passengers and road traffic fell steeply from a year ago. However, daily consumer spending during the holiday rose 4.7% from a year earlier.
The Fifth Plenum of the 19th Communist Party Congress starting October 26 will also be of interest to investors, who will look for more details regarding China’s “dual circulation” development model recently touted in numerous forums by President Xi Jinping. Under the plan, Beijing is believed to want to pivot from export-led growth in favor of an economy more strongly driven by domestic drivers as the U.S. and other Western countries become more vocal against China’s practices in Hong Kong and other controversial areas. Foreign flows into Chinese stocks have yet to resume on a substantial scale, and the Fifth Plenum could act as a catalyst if President Xi commits China to further economic and financial reforms.
Other Key Markets
Mexico
Mexican stocks, as measured by the IPC Index, returned 5.0%. At the beginning of the week, President Andres Manuel Lopez Obrador and his administration presented the country's new infrastructure plan, which includes 39 private-public partnership (PPP) projects worth nearly USD 14 billion. The targeted sectors include communication and transportation, energy, water, and environment. On energy, there are five PPP projects listed for USD 4.6 billion being promoted by Pemex and the Federal Electricity Commission, which include an ethane terminal, a fertilizer plant, the installation and rehabilitation of two cokers, and a liquefaction unit.
According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, these projects will benefit from the participation of the private sector, which he believes is a positive tilt for the government, though it’s uncertain how profitable the projects will be and how much interest they’ll garner. Gifford notes that the anticipated investment in the projects—about 1.4% of GDP—is not that sizable relative to the economy. Nevertheless, if the infrastructure plan is implemented, Gifford believes it should help Mexican growth on the margin.
On Thursday, the Mexican central bank (Banxico) released the minutes to its September 24 policy meeting, at which the board unanimously voted for a 25-basis-point cut in the overnight interest rate, from 4.50% to 4.25%. Gifford was surprised that policymakers were not unanimous in their opinions, however: Two board members said that space for additional easing is probably "exhausted," one member said there is "limited room" to maneuver, and two members indicated that there is "space" for additional easing even if the pace should be reduced. Differences of opinion mostly come down to the tug-of-war between sticky inflation that recently pierced the upper limit of Banxico's 2% to 4% target band and the large economic shock from the pandemic.
Gifford believes that the evolution of inflation—which has been driven higher by processed food prices and a reorientation of spending due to the pandemic—is critical to watch. Positively, the consumer price index reading for September took a small notch down to 3.93% year over year in the second half of the month (from 4.10% previously), signaling that a peak in inflation may already be in the cards. Gifford believes that Banxico may cut rates one more time this year at its November 12 meeting, but it will be a close call. Further easing next year is also a possibility should inflation ultimately give way to a large negative output gap, and as one of the most hawkish central bank board members is likely to be replaced by a dovish one at the end of this year.
Turkey
Turkish stocks, as measured by the BIST 100 Index, returned about 1.8%. The equity market advanced despite an increase in regional tensions and geopolitical concerns, but the lira was pressured lower versus the U.S. dollar.
Fighting between Turkey’s eastern neighbor Armenia and Azerbaijan continued, with Turkish officials voicing support for the latter’s efforts to seize greater control over Nagorno-Karabakh—an enclave of Azerbaijan with a sizable Armenian population. While many governments around the world have called for a cease-fire, and while Russia has offered to mediate the dispute between the two former Soviet republics, there are allegations that Turkey has been sending Syrian mercenaries to fight alongside Azeri forces.
In addition to the regional flare-up, Bloomberg is reporting that Turkey plans in the days ahead to test the S-400 missile defense system that it purchased from Russia. This controversial purchase has raised concerns among Turkey’s NATO allies, especially the U.S., that it could compromise the effectiveness of the F-35 stealth fighter that NATO is developing. U.S. lawmakers have also called upon the Trump administration—which has already ejected Turkey from the F-35 program—to impose sanctions on Turkey for buying Russian military hardware.
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