Global Markets Weekly Update: September 18, 2020
U.S.
Stocks end mixed as value outperforms
Equities were mixed for the week, with merger news and some renewed COVID-19 vaccine optimism seemingly offset by worries that the Federal Reserve’s monetary policy was becoming less effective in supporting the recovery. Value stocks and small-caps outperformed, as investors continued to reduce bets on some of the internet and information technology giants that have led the market in recent months. Energy stocks led the gains within the S&P 500 Index, helped by a large and unexpected drawdown in domestic oil inventories and Saudi Arabia’s efforts to force production cuts by other major oil exporters. Communication services stocks were among the worst performers, dragged down by Facebook shares following reports that the Federal Trade Commission was preparing antitrust action against the company. Trading volatility was heightened Friday by the quarterly phenomenon known as “quadruple witching,” when four types of stock options and futures expire simultaneously.
Merger and vaccine news support early gains
The week started off on a strong note, helped by news on Monday of Gilead Sciences’ USD 21 billion acquisition of Immunomedics and chipmaker Nvidia’s USD 40 billion purchase of ARM Holdings. Shares in software giant Oracle rose Tuesday following reports that it had reached an agreement to operate Chinese-owned TikTok in the U.S., although exactly how much control it would have over the social media application remained unclear. Indeed, Oracle shares fell back late in the week on reports that the Trump administration would reject the deal and was planning on banning downloads of the application in the U.S.
Some encouraging COVID-19 vaccine news also seemed to boost sentiment. Over the previous weekend, Pfizer’s CEO said in an interview that the company could begin distributing a vaccine in the U.S. before the end of the year, while AstraZeneca announced that it was resuming trials of its leading vaccine candidate in the UK. Robert Redfield, the head of the Centers for Disease Control and Prevention, told a congressional panel on Wednesday that a vaccine would not be widely available until the middle of next year, but Mark Meadows, the White House chief of staff, insisted on Thursday that roughly one-third of the population could be vaccinated starting as soon as October.
Investors worry Fed’s ability to drive recovery is waning
The Fed’s two-day policy meeting, which concluded Wednesday, seemed to weigh on sentiment and may have drained the week’s gains. The post-meeting statement and economic projections revealed that policymakers expect official short-term rates to remain near 0% through 2023, while they tempered their expectations for the size of the economic contraction in 2020 from 6.5% to 3.7%. According to T. Rowe Price traders, however, investors seemed disappointed by the lack of details in the Fed’s updated rate guidance and the fact that the central bank made no changes to its quantitative easing (QE) program. Lingering fears that the Fed’s extreme monetary accommodation had reached the limits of its influence appeared to weigh on the market. Indeed, Fed Chair Jerome Powell repeated his call for a stronger fiscal response to help the recovery.
The week’s economic data came in mixed. Core retail sales (which exclude purchases at gas stations, auto dealers, building supply stores, and food services suppliers) fell 0.1% in August, while July’s robust gain was revised lower (to 0.9% from 1.4%)—offering evidence to some that the expiration of extended unemployment benefits was threatening the recovery. Weekly continuing and initial jobless claims hit new pandemic lows but remained elevated, at 12.6 million and 860,000, respectively. Overall housing starts in August missed expectations, but starts of single-family homes remained robust, and building permit data were encouraging.
The yield on the benchmark 10-year U.S. Treasury note ended modestly higher for the week, which T. Rowe Price traders attributed in part to the Fed’s failure to provide guidance about the average duration of its asset purchases as part of its QE program. (Bond prices and yields move in opposite directions. Duration measures a bond’s sensitivity to changes in interest rates.)
The broad municipal bond market posted modest gains through most of the week. High-grade muni yields were little changed amid elevated levels of issuance and a range-bound Treasury market. Muni investors appeared to remain sensitive to signs of relative value, however, with longer-term airport bonds seeing a slew of buying activity following a recent widening of credit spreads (the yield differences between higher- and lower-quality bonds of similar maturity).
Issuers remain active in corporate bond market
Our traders reported that it was an active week for investment-grade corporate bond primary issuance, with strong demand for new deals. California utilities experienced weakness and spread widening due to the risks posed by wildfires. Credit spreads narrowed across most market segments, and the volume of new deals was broadly in line with expectations.
Meanwhile, sellers raising cash to fund purchases of new issues supported balanced trading activity in the high yield market. Overall market sentiment seemed to improve as the Fed’s statement was viewed as supportive for the high yield asset class due to the prolonged outlook for low interest rates. Credit spreads narrowed marginally, and below investment-grade funds industrywide reported positive flows.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
27,657.42 |
-8.22 |
-3.09% |
S&P 500 |
3,319.47 |
-21.50 |
2.75% |
Nasdaq Composite |
10,793.28 |
-60.26 |
20.29% |
S&P MidCap 400 |
1,870.62 |
15.33 |
-9.33% |
Russell 2000 |
1,536.78 |
39.01 |
-7.89% |
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
The pan-European STOXX Europe 600 Index overcame concerns about a resurgence in the number of coronavirus cases to eke out a 0.22% gain. However, the major European indexes lost ground: Germany’s Xetra DAX Index slipped 0.66%, Italy’s FTSE MIB tumbled 1.49%, France’s CAC 40 pulled back 1.11%, and the UK’s FTSE 100 Index gave up 0.42%.
The STOXX Europe 50, STOXX Europe 600, FTSE 100, DAX, and Spain’s IBEX were set to rebalance on Friday, with additions and deletions going into effect after the European close.
Coronavirus cases on the rise
Hans Kluge, the World Health Organization's European director, warned that Europe was facing a "very serious" situation as the number of new coronavirus cases reported weekly in Europe hit 300,000 for the first time. Kluge noted that in the past two weeks, more than half of European countries had registered a greater than 10% increase in coronavirus infections. He advised against "even a slight reduction in the length of the quarantine."
France reported the highest number of daily coronavirus cases since May. In the UK, the number of new infections almost doubled to 6,000 per day, prompting top scientists to advise the government to consider a two-week national lockdown at the end of October to coincide with schools’ half-term holidays. The government limited socializing in England’s north-east and said that it would tighten restrictions further in the central and northern regions next week.
BoE warns coronavirus, hard Brexit could slow recovery
The Bank of England (BoE) left its key policy measures unchanged, as expected. However, monetary policymakers indicated that the central bank was ready to take further action if needed, highlighting the risks posed to the stronger-than-expected economic recovery by a resurgence in coronavirus cases, the ending of the government’s job support program, and a chaotic end to the Brexit transition period. The BoE also said it would “begin structured engagement on the operational considerations” of negative interest rates with the Prudential Regulation Authority.
T. Rowe Price International Economist Tomasz Wieladek believes that if these risks materialize and cause the UK economy to stagnate in the second half, then the BoE could start pushing interest rates significantly into negative territory—possibly by as much as a full percentage point over the course of a year—to establish an effective lower bound for policy.
Investor sentiment improves in Germany; cutting carbon emissions a priority in EU
The ZEW economic research institute’s gauge of investor sentiment rose to 77.4 from 71.5 in August. ZEW President Achim Wambach said the improvement signaled that investors expect the economic recovery to continue, despite stalled Brexit talks and rising coronavirus infections.
European Commission President Ursula von der Leyen said in her annual State of the Union address that the European Union should aim to cut greenhouse gas emissions by 55% from 1990 levels during this decade—more than the current target of a 40% reduction. She said 30% of the EUR 750 billion recovery package should be raised through green bonds, and 37% should be devoted to helping industries decarbonize.
Japan
Japanese stocks posted mixed returns for the week. The Nikkei 225 Stock Average declined 46 points (0.2%) and closed at 23,360.30. The market benchmark has declined (1.3%) for the year-to-date period. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, recorded gains. The yen strengthened for the week and traded below JPY 105 per U.S. dollar on Friday.
Prime Minister Suga takes the reins from Abe
As was widely expected, Yoshihide Suga was voted in as Japan’s prime minister by both houses of parliament on Wednesday, September 16. He replaces Shinzo Abe, who is leaving his post due to illness. Suga, who is 71 years old, will fill the remainder of Abe’s term, until September 2021.
While the press had intimated that Suga would make wholesale cabinet changes, the new prime minister only added five new members, while key members, including Finance Minister Taro Aso and Foreign Minister Toshimitsu Motegi, retained their posts. Suga has stated that his top priorities are managing the coronavirus pandemic and the deteriorating economy. He said that he intends to pursue the monetary and fiscal policies established under Abenomics, which helped ease investor concerns, and that he would not dissolve the lower house for a snap election at this time.
The new prime minister is widely expected to apply pressure on the Bank of Japan (BoJ) to be more responsive to employment conditions. A Reuters report noted that analysts believe the BoJ will cooperate, although employment is not part of the central bank’s mandate. The bank’s support is important for several of Suga’s initiatives, as providing liquidity and a looser credit environment should help Japanese companies and workers deal with business closures and job losses caused by the pandemic. BoJ Governor Haruhiko Kuroda affirmed that the central bank would work closely with the Suga administration and that he intended to serve out his second five-year term, which expires at the end of April 2023.
Central bank leaves rates unchanged and upgrades its economic forecast
The Policy Board of the BoJ voted 8-1 to keep short- and long-term rates unchanged at its September 17 committee meeting. The policy-setting members agreed to stay the course for as long as needed to achieve the central bank’s 2% target inflation rate. The board upgraded its assessment of Japan’s economy, stating that it is improving gradually, although it remained in a “severe condition” because of the impact of the coronavirus at home and abroad. Although exports and industrial production are showing signs of improvement, corporate revenues, income, and business sentiment reflected deteriorating trends. The core consumer price index (all items less fresh food) in August weakened year over year—primarily due to the decline in crude oil prices—but climbed 0.4% versus July.
China
Chinese stocks rallied as a batch of indicators highlighted the country’s economic momentum, and investors hoped for more fiscal stimulus to boost the coronavirus-hit economy. The benchmark Shanghai Composite Index and blue chip CSI 300 Index each rose 2.4% for the week after two straight weeks of losses. In fixed income markets, the yield on China’s sovereign 10-year bond was broadly flat for the week as of Friday morning despite signs of the improving economy. The yuan strengthened against the U.S. dollar for the eighth consecutive week.
Only China’s economy will grow this year, says OECD
A trio of economic readings offered more evidence of a strong recovery unfolding in China, the first country to successfully control the coronavirus. Retail sales rose 0.5% in August from a year ago, the first year-over-year growth since the pandemic began. Industrial production, seen as the best proxy for gross domestic product, rose a better-than-expected 5.6% in August from a year earlier. Fixed-asset investment in the first eight months of 2020 declined slightly from a year ago, narrowing the 1.6% decline from January to July and in line with forecasts.
Taken together, the data underscored how China’s economy is recovering faster than expected by many economists. On Wednesday, the Organization for Economic Cooperation and Development (OECD) raised its 2020 growth outlook for China to 1.8% from a 3.7% contraction it projected in June, crediting the country’s rapid control of the coronavirus. China is the only country expected to see positive economic growth this year, while all G-20 countries will have suffered recession, the OECD said in its latest economic outlook on Wednesday.
U.S.-China investment plunges to nine-year low
China’s weekly stock market gains occurred before the U.S. announced restrictions on the Chinese-owned WeChat and TikTok apps on Friday. However, trade tensions with the U.S. are expected to weigh on investor sentiment toward China in the coming months. Two-way capital flows between the U.S. and China sank to a nine-year low in the first half of 2020 as bilateral relations worsened and the coronavirus curbed investment in both countries, according to a research report by the Rhodium Group. The Trump administration’s move to ban TikTok from U.S. app stores could mark the start of a trend of forced divestitures by governments in both countries, the report said. “Numerous other companies—both Chinese firms operating in the U.S. and U.S. firms with a presence in China—could face pressure to divest,” the report warned.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned about 0.8%. Late the previous week, Moody’s Investors Service downgraded Turkey’s sovereign credit rating to B2 from B1; it is now several notches below investment grade. Moody’s also maintained its “negative” outlook for Turkey, which means that another downgrade in the medium term is possible. Moody’s identified three “key drivers” for the downgrade: (1) Turkey’s external vulnerabilities could lead to a balance of payments crisis; (2) institutions are increasingly unable or unwilling to deal with the reasons for Turkey’s declining credit profile; and (3) Turkey’s fiscal buffers are deteriorating.
South Africa
South African stocks, as measured by the FTSE/JSE All Share Index, returned -2.5% through the close of business on Thursday. Equity investors were disappointed that the central bank chose not to reduce interest rates. On Thursday, the South African Reserve Bank (SARB) decided to leave its benchmark lending rate, the repurchase rate, at 3.50%. The SARB’s last rate cut was on July 24, when it reduced the repurchase rate by 25 basis points, from 3.75% to 3.50%.
In their post-meeting statement, central bank officials reduced their previous projection for full-year 2020 gross domestic product from -7.3% to -8.2%. They also expect the economy to expand 3.9% in 2021 and 2.6% in 2022. Regarding inflation, the SARB deemed the overall risks to be “balanced,” with consumer price inflation projected to be 3.3% this year. Policymakers did rachet down their inflation projections for 2021 (4.0%) and for 2022 (4.4%).
Brazil
Brazilian stocks, as measured by the Bovespa Index, were little changed for the week. On Wednesday, Brazil’s central bank decided to keep its Selic benchmark lending rate at 2%, which was generally expected. Also, forward guidance regarding interest rates and inflation were the same as they were following policymakers’ August 4–5 meeting. The central bank does not intend to raise rates until inflation projections and expectations are closer to the 3.75% inflation target—assuming no change in current fiscal policies that leads to a breach of the statutory spending cap.
According to T. Rowe Price Sovereign Analyst Richard Hall, central bank officials are acknowledging that inflation will accelerate a bit in the short term due to an increase in food prices, but they don't seem particularly concerned. While year-over-year headline inflation is only a bit above 2.5%, and while the average core inflation measure is below 2%, Hall notes that there has been a sequential acceleration of inflation amid higher fuel and protein prices.
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