Global Markets Weekly Update: September 11, 2020
U.S.
Stocks fall further from record highs
Stocks pulled back further from recent highs in a shortened but highly volatile trading week. The technology-heavy Nasdaq Composite Index fared worst and ended the week in correction territory, or down more than 10% from the all-time high it reached on September 2. Tech shares were also among the weakest within the S&P 500 Index, while energy stocks suffered as domestic oil prices sank below USD 40 per barrel for the first time since July, in part because of Saudi Arabia cutting oil prices for some customers. The small materials sector outperformed, and industrials shares also proved resilient. The market was closed Monday in observance of Labor Day.
Trading began Tuesday on a down note, although T. Rowe Price traders noted that there appeared to be no specific catalyst behind the declines other than continuing talk of overbought conditions on Wall Street following the recent rally. The continuing lack of progress in Congress on a new stimulus package also seemed to be weighing on sentiment, with investors particularly worried about the building financial pressures on states and municipalities. On Thursday, Republicans brought their “skinny” USD 300 billion relief package to a vote in the Senate, but it was blocked by Democrats, who passed a package roughly 10 times as large in the House of Representatives in May.
Pause in AstraZeneca trial weighs on sentiment
News late Tuesday that AstraZeneca was pausing the trials of its leading coronavirus vaccine candidate after a participant developed a serious neurological disorder may have also weighed on sentiment—particularly after recent reports that the White House was considering the vaccine’s fast-track authorization as soon as late October.
The week’s economic calendar sent conflicting signals. On Thursday, the Labor Department reported that initial jobless claims remained steady at 884,000 for the week ended September 5, defying consensus expectations for a decline. Continuing claims also rose unexpectedly, moving higher for the first time since mid-July. On the bright side, July job openings beat expectations, and early reports suggested healthy retail sales over the holiday weekend. A gauge of small business optimism also rose unexpectedly in August after July’s drop. Inflation data released Friday also surprised on the upside, with both core (less food and energy costs) and headline consumer prices rising 0.4% from July to August. A jump in used car prices—the largest in over five decades—was partly responsible for the uptick as Americans shunned public transportation and air travel.
Bond yields fall amid heavy corporate issuance
The yield on the benchmark 10-year Treasury note ended modestly lower for the week, pulled down in part by the news of the pause in the AstraZeneca trials, according to T. Rowe Price traders. (Bond prices and yields move in opposite directions.) The broad municipal bond market was little changed through most of the week. The firm’s traders reported solid demand for new issues but also noted that investors in the secondary market took a more cautious approach. Muni bond funds experienced roughly USD 1 billion in net cash flows for the week ended September 9, according to Lipper data, marking the 18th straight week of positive flows.
The investment-grade corporate bond primary calendar was very active, and the volume of issuance exceeded expectations. Most new deals were well received, partly due to stronger demand from investors in Asia. Strained U.S.-China relations and some negative Brexit headlines (see below) at times contributed to risk-off sentiment, however.
The primary calendar garnered most of the attention in the high yield market and drove much of the selling activity as investors sought to fund purchases of new deals. Equity weakness weighed on the performance of the asset class, and high yield funds reported negative flows. In credit-specific news, J. Crew Group—one of the first major clothing retailers to file for Chapter 11 bankruptcy protection due to the impact of the pandemic—emerged from bankruptcy after completing its restructuring plan.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
27,665.64 |
-467.67 |
-3.06% |
S&P 500 |
3,340.97 |
-85.99 |
3.41% |
Nasdaq Composite |
10,853.54 |
-459.59 |
20.96% |
S&P MidCap 400 |
1,855.29 |
-42.81 |
-10.07% |
Russell 2000 |
1,497.77 |
-38.35 |
-10.23% |
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
Stocks in Europe rose on the continuing economic recovery, shaking off disappointment that the European Central Bank (ECB) did not announce additional stimulus, as well as renewed fears of a hard Brexit. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.67% higher. Germany’s Xetra DAX Index rose 2.80%, France’s CAC 40 added 1.39%, and Italy’s FTSE MIB advanced 2.21%. The UK’s FTSE 100 Index gained 4.02%, which benefited from weakness in the British pound. UK stocks tend to gain when the pound falls because many companies in the index are multinationals that generate meaningful overseas revenues.
The resurgence in coronavirus infections continued across Europe. French Health Minister Olivier Veran said the situation in France is "worrisome" and hospitalizations and intensive care admissions are poised to rise. Infections are also increasing in Germany and the UK after a summer of lax containment. UK Prime Minister Boris Johnson said Britain will limit social gatherings to six people. The UK also instituted new quarantine measures on travelers coming from Portugal and Hungary.
UK threatens to renege on EU withdrawal accord
Tensions flared as the UK and European Union (EU) began a new round of talks to flesh out their post-Brexit relationship. The UK published a draft law to create an internal market after December 31, but some elements overwrote sections of the withdrawal accord that the two sides agreed to last year. The UK government conceded that some clauses would breach international law, prompting the European Commission to threaten legal action and to advise member states to prepare for a no-deal Brexit.
The UK economy grew for a third consecutive month in July but at a slower rate, as the government eased coronavirus-related restrictions on the hospitality industry. Output grew 6.6% on the month, down from 8.7% in June. The economy is still 11.7% smaller than in February. The government told Parliament last week that the economic outlook could come under pressure as the jobs support program ends. Finance Minister Rishi Sunak acknowledged that tax increases would be needed to pay for the extra spending stemming from the pandemic.
ECB maintains policy settings, assessing recovery
The ECB left its policy measures unchanged, as expected. ECB President Christine Lagarde said after the meeting that economic data since July suggested a strong rebound in activity. Lagarde asserted that the balance of risks to the euro area’s growth outlook remains to the downside, reflecting the pandemic’s uncertain economic and financial implications. In response to the euro’s appreciation, Lagarde indicated that the central bank’s governing council would “carefully monitor” exchange rate movements and their implications. She reiterated that ample monetary stimulus remains necessary to support the economic recovery and to safeguard medium-term price stability.
Japan
After some seesawing, Japanese stocks ended the week with gains. The Nikkei 225 Stock Average advanced 201 points (0.9%) and closed at 23,406.49. The market benchmark has declined 1.1% for the year-to-date period. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, recorded similar-sized weekly gains. The yen was relatively unchanged for the week and traded near JPY 106 per U.S. dollar on Friday.
Suga positioned to succeed Abe as prime minister
According to The Asahi Shimbun, Yoshihide Suga is on track for a landslide victory over his rivals, former Defense Minister Shigeru Ishiba and former Foreign Minister Fumio Kishida, in the Liberal Democratic Party (LDP) presidential election, which will be held on September 14. Prime Minister Shinzo Abe’s replacement will be chosen at an extraordinary Diet session on September 16. The three candidates engaged in debates on Wednesday, but Suga, the current chief cabinet secretary, already has the backing of approximately 80% of the members in parliament.
Suga has asserted that his primary objective would be to revive the economy, which has stalled during the pandemic. In his first campaign speech, Suga confirmed that he agreed with Abe’s current easy-money policies and government spending to revitalize Japan’s economy. However, it is widely believed that if Suga wins, he will dissolve parliament and call a snap election to solidify his political position. Nevertheless, he made it clear that preventing the spread of the coronavirus will take priority over that decision.
Japanese economic growth revised lower
Japan’s gross domestic product (GDP) growth was revised to an annualized pace of -28.1% in the first fiscal quarter ended June 30, 2020. The contraction was steeper than the first estimate of -27.8% but not as severe as economists’ consensus estimates of -28.5%. The further downgrade was caused by additional weakness in public demand and private nonresidential investment following the results of a Ministry of Finance corporate capital expenditures survey. Consumer spending also came in weaker than earlier projections, falling 7.6% year over year in July—significantly lower than earlier forecasts. The hardest-hit areas, as expected, reflected areas hurt by the coronavirus, including tourism, transportation, and autos. Offsetting some of the weakness were gains in demand for medical services and computers. Nominal wages fell for a fourth consecutive month in July—down 1.3% year over year but less than the 2.0% decline in June.
China
Mainland Chinese A-shares shed roughly 3.0%, taking their cue from the U.S. sell-off. In addition to the U.S. tech stock downturn, news that the Trump administration was considering adding Semiconductor Manufacturing International Corporation (SMIC), China’s top chip foundry, to a list of U.S.-sanctioned companies dealt a blow to investor sentiment. Shares of many Chinese technology companies fell on the news, reflecting SMIC’s importance as a key semiconductor supplier to the domestic market and the company’s close ties to Beijing and the defense industry.
The yield on China’s 10-year sovereign bond was unchanged. The tone of China’s fixed income market remained firm: Term spreads have narrowed since June, as have the spreads between bonds with the same maturity but different credit ratings. Most analysts expect domestic liquidity conditions will improve in September, providing a positive backdrop to the bond market. The yuan rose 1.7% against the U.S. dollar.
Rising food costs draw Beijing’s concern
Consumer inflation slid to a below-forecast 2.4% in August from a year ago, a three-month low, according to China’s statistics office. Excluding food and energy, the core inflation rate was unchanged from July. The headline number, however, belied a steep increase in food costs, driven by surging pork prices and a coronavirus-driven slowdown in imports. The uptick in pork prices explains Beijing’s “Clean Plate” campaign aimed at curbing food waste and improving long-term food security, a matter of growing concern amid China’s worsening relations with key import sources such as the U.S. and Australia. Prices for eggs, another food staple, also jumped in August amid a decline in the number of egg-laying hens following greater demand for chicken instead of pork.
Exports accelerate in August as lockdowns ease
China’s exports rose a greater-than-expected 9.5% in August from a year earlier—the latest sign of recovery as its trading partners emerge from lockdowns—while imports declined. China’s trade balance totaled roughly USD 58.9 billion in August. Exports to the U.S. surged 20%, presenting a potential thorn in upcoming trade negotiations. China’s bilateral surplus with the U.S. totaled USD 34.2 billion, accounting for 58% of its overall trade surplus in August.
Other Key Markets
Mexican shares fall as government plans further austerity
Stocks in Mexico, as measured by the IPC Index, returned about -0.3%.
During the week, Finance Minister Arturo Herrera presented the government’s proposed 2021 budget to Congress. As expected, and consistent with the fiscal intentions of President Andres Manuel Lopez Obrador (AMLO), the proposed budget keeps austerity in place, with spending falling 0.3% year over year in real terms, notwithstanding the current economic and health crisis.
According to T. Rowe Price Emerging Markets Sovereign Analyst Aaron Gifford, the fiscal deficit next year is expected to be a meager -2.8% of GDP (versus -2.9% expected this year), with public sector borrowing requirements—the broadest measure—at 3.4% of GDP compared with 4.7% in 2020. The debt-to-GDP ratio is expected to increase until peaking at around 55%. Macro assumptions are going in the right direction, though Gifford thinks they are a bit optimistic. For example, GDP growth is seen at -8% year over year this year and +4.6% next year, while consensus expects a 10% contraction and a much shallower recovery in 2021.
Within the budget numbers, Gifford sees additional important details, such as a reorientation of spending away from several government bodies and states and toward AMLO’s pet projects. Meanwhile, important savings—rainy day funds and cash held in public trusts—look like they will be nearly depleted by next year. In any case, AMLO’s austerity drive makes Mexican government finances appear rock solid in a world with eye-watering budget deficits. The downside of holding back public spending is weaker GDP growth, but AMLO’s strategy has been to keep the economy open during the pandemic and to ride the coattails of the U.S. economic recovery. Gifford believes that time will tell if this strategy is effective.
South African shares claw back part of steep recent losses
Stocks in South Africa, as measured by the FTSE/JSE All Share Index, returned about 4.1% for the week. The market is, however, among the worst-performing emerging markets in the year-to-date period through the end of August. As measured by MSCI, the South African equity market is down more than 20% in U.S. dollar terms through August 31; much of that reflects the rand falling more than 17% versus the greenback.
During the week, the government reported that the country’s gross domestic product contracted at an annualized rate of 51% in the second quarter. The decline can be attributed to a fairly tight pandemic lockdown that started at the end of March and was enforced by police and the military, as reported by Bloomberg. Despite the lockdown, the country has been among those hit hardest by COVID-19 in the emerging markets universe. According to data from Johns Hopkins University, South Africa has had almost 645,000 confirmed cases of the coronavirus and more than 15,000 fatalities.
Contributing to South Africa’s economic woes is the unreliability of electricity availability due to poorly maintained equipment operated by Eskom, the state-owned utility that is responsible for delivering electricity to most of the country. Eskom, which has substantial debt and depends heavily on fiscal support from the government, is occasionally forced to cut power (locally called “load-shedding”) to various parts of the country—sometimes with little or no warning—and often asks consumers to limit their use of electricity to reduce stress on the power grid.
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