Global Markets Weekly Update: September 25, 2020
U.S.
Large-caps move into correction territory
The large-cap benchmarks endured their fourth consecutive week of declines, marking the longest such stretch in over a year and sending the S&P 500 Index briefly into correction territory, or down more than 10% from its recent peak. Consumer discretionary shares outperformed, helped by strength in Nike following its report of a rebound in summer sales. Technology stocks also proved resilient, helping the tech-heavy Nasdaq Composite Index record a gain for the week. Energy stocks suffered the biggest declines in the S&P 500 in response to falling oil and natural gas prices, while declines in regional bank stocks due to concerns over depressed lending margins put pressure on financials shares.
Supreme Court controversy dims prospects for bipartisan stimulus agreement
The week began on a down note, with the renewed rise in coronavirus cases in Europe (see below) and several other concerns weighing on sentiment. Prospects for Democrats and Republicans to agree on an additional round of stimulus seemed to diminish further following news over the weekend of the death of Supreme Court Justice Ruth Bader Ginsburg and President Donald Trump’s vow to have a replacement confirmed before the election. Allegations that major global banks had been involved in extensive money laundering operations dragged financials shares lower and seemed to be a further drag on overall sentiment. Finally, T. Rowe Price traders noted that reports of stalled negotiations to avert a government shutdown concerned investors. On Wednesday, however, the Democrat-controlled House of Representatives passed a continuing resolution to replace federal funding set to expire the following week, with passage by the Republican-led Senate expected in the coming days.
The major indexes attempted to rally periodically as the week progressed—with volatility particularly apparent in major technology and internet-related stocks—but continued coronavirus concerns and worries that the market had rebounded too far in the summer seemed to limit the gains. The S&P 500 had its biggest daily decline in two weeks on Wednesday, following testimony from Dr. Anthony Fauci, the nation’s leading infectious disease official, before the Senate. Fauci expressed dismay at the lack of adherence to coronavirus prevention guidelines and estimated that U.S. cases could escalate to 100,000 per day versus a current daily level of around 40,000.
Manufacturing and housing outpace larger services sector
The week’s economic data generally indicated a continuing, but slowing, recovery and did not appear to play a major role in pushing the markets in either direction. Thursday brought news that weekly initial jobless claims had risen slightly, to 870,000, while continuing claims had declined much less expected, from 12.7 million to 12.6 million. The manufacturing sector appeared to remain in good shape as companies restocked inventories depleted in the wake of the pandemic, but IHS Markit’s gauge of service sector activity declined for the first time since April, if only slightly (from 55.0 to 54.6, still indicating expansion). Headline durable goods orders in August missed on the downside, but core capital goods orders—which exclude defense and aircraft orders—rose a solid 1.8%, while July’s increase was revised higher, to 2.5%. Housing also remained a bright spot, with new home sales in August reaching their best level since September 2006.
The yield on the benchmark 10-year U.S. Treasury note moved slightly lower for the week. (Bond prices and yields move in opposite directions.) Amid elevated levels of new issuance, the broad municipal market was little changed through most of the week and underperformed Treasuries. T. Rowe Price traders reported growing demand for highly rated, shorter-duration bonds. Investment Company Institute (ICI) data revealed just under $1.7 billion of inflows into municipal bond funds for the week ended September 16, marking 20 consecutive weeks of positive flows.
Heavy issuance and risk aversion weigh on corporate bonds
Economic and political uncertainty, virus concerns, and equity losses contributed to risk-off sentiment and kept investment-grade corporate bond issuers on the sidelines as the week began. However, two days of heavy issuance contributed to somewhat unfavorable technical conditions and brought the volume of new deals in line with weekly expectations. Credit spreads—the additional yield offered by corporate bonds over Treasuries—drifted wider, with riskier segments seeing the greatest impact.
Heightened caution combined with technical factors to weigh on the high yield market. The firm’s traders noted that September had already become the second-busiest month of 2020 for high yield new issuance, and below investment-grade funds reported negative flows. The heavily weighted energy segment underperformed as the pandemic clouded the outlook for oil demand and stoked oversupply concerns.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
27,173.96 |
-483.46 |
-4.78% |
S&P 500 |
3,298.46 |
-21.01 |
2.09% |
Nasdaq Composite |
10,913.56 |
120.28 |
21.63% |
S&P MidCap 400 |
1,815.67 |
-54.95 |
-11.99% |
Russell 2000 |
1,474.04 |
-62.74 |
-11.65% |
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 tumbled as a surge in coronavirus infections prompted some countries to implement stricter containment measures. Signs that the economic recovery may be stalling also weighed on stocks. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 3.60% lower, while Germany’s DAX Index dropped 4.93%, France’s CAC 40 fell 4.99%, and Italy’s FTSE MIB slid 4.23%. The UK’s FTSE 100 Index lost 2.74%.
Europe seeks to stem resurgence in coronavirus cases
Europe may be facing its “last chance” to avoid a repeat of the widespread coronavirus outbreak, warned Stella Kyriakides, the European Commissioner for Health and Food Safety. She urged all European Union member states to be ready to implement containment measures. France, Spain, the UK, and the southern German state of Bavaria took additional steps aimed to curb a second wave of infections.
In the UK, government advisers warned that, without urgent action, infections could rise to 50,000 per day by mid-October and deaths could soar. In response, Prime Minister Boris Johnson decreed tighter social restrictions, advised people to work at home, and increased fines for noncompliance. The measures could last for six months, and, Johnson said, more limits would be imposed if needed. In Spain, the government recommended a lockdown of Madrid, the capital.
UK unveils new, smaller jobs-support program
As the number of COVID-19 cases climbed, Chancellor of the Exchequer Rishi Sunak announced further support for jobs, businesses, and the hospitality and tourism sectors. The new jobs support initiative is a much smaller extension of the GBP 39 billion program that is slated to end October 31. The government’s subsidy will fall to 22% from 60%, apply only to those who are working at least a third of their normal hours, and last six months. T. Rowe Price International Economist Tomasz Wieladek said the change in policy means employers are likely to shed more jobs, potentially increasing the unemployment rate to as high as 10% in the next couple of months—compared with about 4% now. Wieladek says that deterioration in employment numbers would put greater pressure on the Bank of England (BoE) to ease monetary policy.
BoE Governor Andrew Bailey said at an online talk hosted by the British Chambers of Commerce that the central bank will do everything possible to support the economy, after noting that the resurgence of the coronavirus “does reinforce the downside risk we see in our [economic] forecast.” He confirmed that policymakers had “looked hard” at the central bank’s capacity to cut interest rates and at the potential for negative rates. However, he said that these considerations did not imply that a move to negative rates was imminent.
Rebound in eurozone business activity falters
IHS Markit’s composite purchasing managers’ index (PMI) showed that the recovery in eurozone business activity lost steam in September as rising coronavirus infection rates and social distancing weakened demand in the services sector. An early estimate of the September PMI came in at 50.1, down from 50.9 in August. (A PMI reading of 50 marks the level between expansion and contraction.) The services portion of the index slipped below 50, hitting a four-month low. The manufacturing index, however, reached a 31-month high on stronger exports.
Italy’s coalition government thwarts Salvini in local polls
In regional elections, the populist right-wing League party of Matteo Salvini failed for a second time this year to break through in traditional left-wing areas, further reducing Salvini’s chances of unseating the ruling coalition while improving the prospects of Prime Minister Giuseppe Conte’s center-left Democratic Party. The yield on the 10-year Italian sovereign bond declined after the election, reflecting the reduced political uncertainty.
Japan
Stocks in Japan declined in the holiday-shortened trading week. The Japanese markets were closed on Monday and Tuesday for Respect for the Aged Day and Autumnal Equinox Day, respectively. The Nikkei 225 Stock Average declined 156 points (0.7%) and closed at 23,204.62. The market benchmark has declined (1.9%) 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.
Prime Minister Suga and BOJ governor agree to continuing pursuing Abenomics
Newly elected Prime Minister Yoshihide Suga and the long-standing Bank of Japan (BoJ) Governor Haruhiko Kuroda held their first official meeting on Thursday. Kuroda agreed to continue pursuing the monetary policy path laid out under Abenomics, and the pair agreed to communicate and work closely together in policy management. According to The Nikkei, they did not discuss Japan’s appreciating currency or the BoJ’s 2% inflation target.
Kuroda told a news conference after his meeting with Suga that the central bank intended to offer support for businesses suffering due to the global pandemic. The remarks were in line with the minutes from the July central bank policy committee meeting, which confirmed the BoJ’s priority of extending financial support to businesses hurt in the slowdown. Some analysts have speculated that Kuroda is willing to take a more relaxed approach to achieving the BoJ’s inflation goals, initially set with a two-year target. Even though prices have recently stagnated, the central bank has refrained from additional easing and is expected to shift its focus to generating employment and revitalizing the economy.
China
Stocks in China fell in tandem with the global correction, with the benchmark Shanghai Composite Index and CSI 300 Index dropping 3.6% and 3.5%, respectively, in their biggest weekly loss since mid-July. In fixed income markets, the yield on China’s sovereign 10-year bond shed three basis points to 3.13%. China’s central bank left its loan prime rate, the reference rate for new bank loans, on hold for the fifth straight month, as expected. The yuan weakened to CNY 6.82 per U.S. dollar in a risk-off week characterized by broad dollar strength.
Chinese bonds join key global index
In a week mostly devoid of economic news, China’s inclusion in a major global bond index was the biggest development. FTSE Russell said it will include Chinese government bonds (CGBs) in its widely used World Government Bond Index (WGBI) starting in October 2021, subject to confirmation at the index provider’s semiannual review in March. The widely expected decision by FTSE marks China’s third addition to global government bond indexes in recent years, following similar moves by Bloomberg Barclays and J.P. Morgan. Index inclusion is expected to take 12 months and conclude in September 2022. Afterward, CGBs are expected to constitute about 5.7% of the index.
Inclusion in the WGBI is expected to give Beijing strong incentive to continue improving market access to foreign investors. Analysts said the move could attract as much as USD 150 billion of foreign inflows into China’s domestic government bond market and help support the yuan in the medium term. The WGBI is tracked by more passive investors than the Bloomberg Barclays Global Aggregate Index (approximately 80% passive versus 20% active, according to HSBC Global Research). Last week, China’s central bank gave further details of its proposal to simplify the bond account opening process and allow greater foreign exchange trading flexibility. The new measures will likely be introduced after a public consultation period ends on October 22.
Other Key Markets
Turkey
Stocks in Turkey, as measured by the BIST 100 Index, returned about 1.1%. After a sharp drop on Monday, shares advanced over the course of the week.
On Thursday, Turkey’s central bank surprised investors with a 200-basis-point increase in its benchmark lending rate, the one-week repo auction rate, from 8.25% to 10.25%. This is the central bank’s first interest rate increase in about two years. The central bank also made a similar move to increase its overnight lending rate, from 9.75% to 11.75%, and its late liquidity window facility rate, from 11.25% to 13.25%.
In their post-meeting statement, policymakers noted that inflation has followed a “higher-than-envisaged path” due to a “fast economic recovery with strong credit momentum, and financial market developments.” Central bank officials deemed the rate hike to be a reinforcement of “the tightening steps taken since August,” which T. Rowe Price sovereign analyst Peter Botoucharov believes is a reference to the central bank’s efforts to increasingly provide lira liquidity to banks by way of more expensive liquidity channels. These efforts have helped push effective funding costs to about 10.65% during the week versus about 7.5% in mid-July. Botoucharov believes that the central bank’s actions indicate that further monetary tightening is likely.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about -1.4%. During the week, Brazil reported a solid current account surplus for the month of August. Over the last three months, T. Rowe Price sovereign analyst Richard Hall notes that Brazil's current account surplus was around 2% of the country’s gross domestic product versus a pre-pandemic deficit of about 3%. Hall notes that about half of the adjustment comes from import compression; another third comes from lower foreign direct investment (FDI) income payments.
Regarding import compression, the two biggest components are capital goods and fuel imports. Hall believes that both of those are likely to revert as economic activity recovers, but there are other, smaller manufacturing and primary goods line items where he believes import substitution is more viable. On FDI income payments, part of this reflects lower profits in Brazilian currency terms, and given Brazil’s high tax burden, companies have an incentive to exaggerate losses by moving profits offshore and keeping losses onshore. But part of it also reflects currency depreciation leading to lower profit remittances in U.S. dollar terms.
Hall concludes that most of Brazil’s current account adjustment will probably be transitory and disappear once the pandemic ends. However, if the real’s depreciation (about 25% year-to-date) is sustained—which makes Brazilian exports cheaper on world markets—he believes the post-pandemic current account deficit could be smaller than it was early this year.
Mexico
Mexican stocks, as measured by the IPC Index, returned about 1.5%. On Thursday, the Mexican central bank held its policy meeting and decided to reduce its overnight interest rate by 25 basis points, from 4.50% to 4.25%. The decision was widely expected. In their post-meeting statement, policymakers acknowledged the risks for inflation, economic activity, and financial markets but noted that the central bank’s “space” for responding with easier monetary policy is “limited.” This suggests that the central bank is close to the end of its interest rate reductions. However, central bank officials could decide to reduce rates again later this year before pausing to assess the effectiveness of their efforts to stimulate the economy.
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