Global Markets Weekly Update: September 06 2019
U.S.
Trade hopes lead to second week of gains
Stocks recorded a second consecutive week of solid gains, as optimism grew that progress will be made in the U.S.-China trade dispute. The large-cap S&P 500 Index moved within 2% of its July 26 record high, while the smaller-cap indexes remained well off their 2018 peaks. Trading volumes picked up as many investors returned from summer vacations, and the Cboe Volatility Index (VIX) fell back to its lowest level since late July. Markets were closed Monday in observation of Labor Day.
Within the S&P 500, energy shares outperformed as oil prices rose in response to falling U.S. inventories and Iran’s announcement that it was scaling back its commitments under the nuclear deal negotiated in 2015. Technology shares were also strong, helped by a rise in semiconductor shares. Utilities stocks lagged as longer-term bond yields increased, making their typically above-average dividends less attractive in comparison. Potential for infrastructure damage from Hurricane Dorian may have also discouraged investors.
Trade and overseas developments drive sentiment
The trading week started off on a down note as trade worries resurfaced. According to T. Rowe Price traders, investors reacted negatively to a Bloomberg report that U.S. officials had turned down a request from China to delay the tariffs on its goods that went into effect the previous Saturday. Technology stocks were also weak on news that Chinese telecommunications giant Huawei Technologies had accused the U.S. government of harassing its workers and attacking its internal computer network.
Positive news from overseas seemed to drive a rebound Wednesday. News that Hong Kong’s leadership had formally withdrawn the extradition proposal that had led to weeks of protests in the province seemed to encourage investors, as did the passage of a bill in the UK Parliament calling for an extension of Brexit (see below).
Better news on the China trade front delivered an even bigger boost on Thursday. Futures markets jumped on reports that Chinese and U.S. negotiators were preparing to meet in Washington in early October—later than originally scheduled, but a relief to many given recent signs that the talks might be canceled altogether. T. Rowe Price traders noted that diminishing prospects for a no-deal Brexit also provided a moderate tailwind.
Conflicting signals on manufacturing and jobs
A third factor driving Thursday’s rally seemed to be favorable economic data. U.S. productivity rose more than expected in the second quarter, and factory orders jumped 1.4% in July, their best gain in nearly a year. The Institute for Supply Management’s (ISM’s) gauge of service sector activity also rose more than expected.
The rest of the week’s economic data were more mixed, however. The ISM’s gauge of manufacturing activity, released Tuesday, moved into negative territory in August for the first time since 2016. August payroll gains, reported Friday, also disappointed. Overall payrolls rose by 130,000 versus consensus expectations for a gain of 160,000, while private sector employers added only 95,000 jobs. Average hourly earnings rose a healthy 0.4% in the month, however, and the labor force participation rate moved back to the multiyear high (63.2%) it had reached at the start of the year. The mixed nature of the report appeared to have little impact on stock prices, causing equities to end the week on a flat note.
Corporate and muni bonds see strong demand
The jobs data did seem to weigh a bit on bond yields, but trade hopes helped push the yield on the benchmark 10-year Treasury note higher for the week as a whole. (Bond prices and yields move in opposite directions.) The investment-grade corporate bond market saw a surge of new issuance, but the new supply was met with strong demand, helped by elevated cash positions in the market due to the light new issuance calendar in the second half of August and steady inflows to the asset class.
The dynamics that have guided the high yield market over the past few months remained in place: Prices of BB rated bonds were bid higher amid strong demand, cash balances were elevated, and issuer-specific news drove price movements and trades in lower-quality names. Overall, developments in the U.S.-China trade conflict continued to drive investor sentiment, and the market received a boost when officials agreed to meet in early October.
Municipal bonds continued to see robust demand, with muni bond funds recording their 34th consecutive week of net inflows. The new issuance calendar was relatively busy for the holiday-shortened week, though nearly $2.4 billion of issuance came from California general obligation (GO) bonds, which were well received. Illinois GO bonds were heavily traded in the secondary market, extending a rally that began last week after a lawsuit seeking to invalidate $14.3 billion of the state’s GO debt was dismissed by a circuit court judge.
U.S. Stocks1
Index |
Friday's Close |
Week's Change |
% Change YTD |
DJIA |
26,797.46 |
394.18 |
14.88% |
S&P 500 |
2,978.71 |
52.25 |
18.82% |
Nasdaq Composite |
8,103.07 |
140.19 |
22.12% |
S&P MidCap 400 |
1,911.36 |
30.16 |
14.93% |
Russell 2000 |
1,505.44 |
10.60 |
11.63% |
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 markets experienced one of the best weeks since June as U.S.-China trade tensions eased, hopes for an end to unrest in Hong Kong increased, and the prospects of the disorderly Brexit receded. The pan-European STOXX Europe 600 Index rose almost 2%. T. Rowe Price traders noted that moves out of defensive stocks and into cyclicals helped propel the market higher.
UK pound, stocks gain as chances of no-deal Brexit fall
The British pound gained more than 1% against the U.S. dollar and the FTSE 100 rose 1.25% as the chances of a disorderly exit from the European Union (EU) on October 31 decreased. The gains came despite the political turmoil that ensued as UK. Prime Minister Boris Johnson lost a series of parliamentary votes, thwarting both his efforts to take Britain out of the EU without a deal at the end of October and his call for a snap election. T. Rowe Price Fixed Income Portfolio Manager Quentin Fitzsimmons still sees a roughly 80% chance of a no-deal Brexit—although it is possible that the October 31 deadline gets extended. Opposition leaders have agreed to work together to block Johnson’s renewed call for an October 15 general election until a bill forcing him to seek a three-month Brexit delay is approved by Parliament and signed into law. Nevertheless, the odds of an election before year-end remain very high, in Fitzsimmons’ view.
Italian yields hit record lows as coalition approved
Italian government bonds rallied, pushing yields to record lows after Italy’s president approved the new coalition government between the anti-establishment Five Star Movement and the center-left Democratic Party, which is expected to be more EU friendly. Former Prime Minister Giuseppe Conte will resume his post and lead the coalition. T. Rowe Price Sovereign Analyst Ivan Morozov expects the alliance to be more market-friendly than the previous government; however, he cautions that it will have to deal with significant fiscal challenges, including keeping the budget deficit below 3% of gross domestic product in 2020. Rome is expected to submit its 2020 draft budget to the European Commission in October, and the government is required to find €20 billion in savings to meet EU fiscal targets.
German data show toll of trade tensions
German data gave more evidence that trade disputes are pushing the German economy toward recession. German manufacturing orders fell more than expected in July as new orders from foreign buyers dropped 6.7%, much more than expected. Industrial production also disappointed, falling 4.2% on a year-over-year basis.
Japan
Japanese stocks rose during the week, as global investor sentiment was lifted by reduced tensions in Hong Kong and expectations for U.S.-China trade negotiations to resume in October. The Nikkei 225 Stock Average closed on Friday at 21199.57, up 495.20 points (2.39%) for the week. The large-cap TOPIX Index and the TOPIX Small Index rose to a lesser extent: 1.67% and 0.68%, respectively. Gains may have been restrained by investor caution ahead of central bank meetings in Japan, the U.S., and various European countries later this month—meetings that could result in increased global monetary stimulus and greater clarity about the intentions of central bank officials as trade tensions take their toll on world economies.
Tensions rise with South Korea
Tensions between Japan and South Korea continued to dominate market headlines. The Japan News reported that the Ministry of Economy, Trade and Industry had protested Seoul’s decision to drop the country from a list of “trusted” trade partners, even though the Japanese government recently took a similar action against South Korea. Prior to that, South Korea decided to stop sharing intelligence with Japan—despite a common North Korean missile threat—following Japan’s decision in July to restrict exports of certain technology-related chemicals to South Korea.
In domestic matters, reports surfaced that Prime Minister Shinzo Abe of the ruling Liberal Democratic Party (LDP) is planning on a potentially major reshuffling of his cabinet and the LDP leadership on or around September 11. On September 19, the Bank of Japan (BoJ) will conclude its next monetary policy meeting—one day after the U.S. Fed concludes a two-day policy meeting that is widely expected to result in another 25-basis-point rate cut. While no major changes to the BoJ’s already highly accommodative monetary policy are expected, The Japan News reported that BoJ Board member Goushi Kataoka is in favor of a preemptive central bank action to keep inflation from falling further away from the BoJ’s 2% target.
Consumption tax likely to weigh on spending
The BoJ meeting will take place less than two weeks before the twice-delayed increase in the country’s consumption tax rate, from 8% to 10%, finally takes effect on October 1. According to The Nikkei, many consumers are buying expensive merchandise ahead of the tax increase. While the acceleration of such purchases could boost the economy in September, the tax increase is likely to eventually weigh on the economy, as was the case five years ago, when the consumption tax rate was raised from 5% to 8%. In an attempt to blunt the impact of the tax increase on the economy, the Japanese legislature approved various stimulus measures when it passed the fiscal 2019 budget earlier this year.
China
Stocks rally on stimulus expectations after State Council calls for lower borrowing costs
China’s benchmark stock index posted its best weekly performance since June, after China’s cabinet signaled that it would roll out fresh stimulus measures to bolster an economy increasingly battered by U.S. tariffs. For the week, the benchmark Shanghai Composite Index and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, each surged 3.9%. Sentiment improved after Chinese Premier Li Keqiang issued a statement Wednesday saying that the country’s State Council called for the “timely” use of tools including broad and targeted cuts to banks’ required reserve ratios and “faster” implementation of measures to reduce real borrowing costs. China’s central bank—which typically follows State Council requests regarding required reserve ratios, or the amount of cash banks must hold in reserve—last cut the required reserve ratio in January after a similar statement from the State Council last December.
Indeed, after Friday’s market close on the mainland, the People’s Bank of China (PBOC) said it would cut the required reserve ratio for all banks by half a percentage point, effective September 16. Moreover, the PBOC said it would cut the ratio by a full percentage point for some city commercial lenders over two stages in October and November, according to its website. The rate cuts will release ¥900 billion ($126 billion) of liquidity into China’s financial system, the PBOC said. The central bank’s moves amounted to the strongest easing measures undertaken by China’s government this year as the trade war with the U.S. shows no sign of fading. Despite news that U.S. and Chinese trade officials would head back to the negotiating table in October, many T. Rowe Price analysts believe that a meaningful breakthrough in the current trade impasse is unlikely ahead of the 2020 U.S. presidential elections.
Other Key Markets
Turkish shares rise on resilient economic signals
Turkish stocks, as measured by the BIST 100 Index, returned about 2.3%. Turkish assets were supported by improved global sentiment, as well as domestic economic data, such as better-than-expected gross domestic product figures and signs of slowing (though still elevated) inflation. T. Rowe Price Sovereign Analyst Peter Botoucharov believes that Turkey’s headline inflation is on track—assuming no disruptive U.S. sanctions or sharp lira currency movements—to slowly grind lower toward a 13% to 14% rate by mid-2020. He also believes that the central bank will continue using both orthodox measures, such as one-week repo rate reductions, and unorthodox tactics, such as cutting reserve rate requirements for certain banks based on their level of credit growth, to gradually ease monetary conditions.
Argentine shares soar following implementation of currency controls
Argentine stocks, as measured by the Merval Index, rose slightly more than 11%. The equity market recovered some lost ground—having dropped more than 50% in U.S. dollar terms in August, according to RIMES/MSCI data—as the government and central bank implemented currency controls over the previous weekend in an attempt to keep assets from fleeing the country, to support the currency, and to stem the bleeding of the country’s foreign exchange reserves. Under the new restrictions, individuals may not buy more than USD $10,000 per month; exporters must convert their U.S. dollar proceeds into Argentine pesos within five days after completing a sale; and corporations need central bank permission to access foreign currencies for investments, for paying dividends, or for pre-settling debts.
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