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Global Markets Weekly Update

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Review the performance of global stock and bond markets over the past week, along with relevant insights from T. Rowe Price economists and investment professionals.

 

U.S.

Small-caps hit new 52-week lows

The major benchmarks ended lower for the week. The technology-heavy Nasdaq Composite Index held up best and was the sole benchmark to emerge from the week in positive territory for the year-to-date period. Smaller-cap shares performed worst, with both the S&P MidCap 400 Index and the Russell 2000 Index hitting new 52-week lows. Within the S&P 500 Index, utilties shares performed best, while financial shares were notably weak because of concerns over tighter lending margins due to declines in longer-term Treasury yields.

Global economic fears weigh on sentiment

Fears of slowdown in the global economy seemed to be a major factor weighing on sentiment during the week. According to T. Rowe Price traders, news that Chinese exports had slowed were partly responsible for a sharp decline as trading opened Monday morning, although stocks managed to climb back into positive territory by the end of the day. Further disappointing data from China on Friday morning seemed to contribute to another downturn, and investors also worried about negative economic signals from Germany and France (see below).

The ongoing U.S. trade dispute with China also weighed on sentiment early in the week, although some positive later developments seemed to boost markets. Over the previous weekend, the Chinese vice foreign minister summoned the U.S. and Canadian ambassadors to protest the “lawless” arrest in Vancouver of a prominent executive of Chinese telecom company Huawei the previous week—an action taken at the request of U.S. officials in response to Huawei’s alleged violation of U.S. sanctions targeting Iran. The controversy appeared to grow more tense following the detention of two Canadian citizens in China in an apparent retaliation. On Wednesday, President Trump may have defused the situation somewhat while also provoking controversy by telling Reuters that he would consider intervening in the case in order to help achieve a trade deal.

China resumes U.S. soybean purchases as trade talks seem to make progress

Evidence of more tangible progress in U.S.-China negotiations also arrived Wednesday and seemed to give markets a boost. The Wall Street Journal reported that China was again buying U.S. soybeans, having cut off purchases several months earlier in response to new U.S. tariffs—news that was confirmed by the U.S. Department of Agriculture on Thursday. The Journal also reported that Chinese officials were redrafting their “Made in China 2025” plan—a set of measures to assure China’s global dominance in emerging technologies that has drawn condemnation from U.S. officials—while also considering lowering tariffs on U.S. autos.

Veiel: U.S. consumers, not politics, are driving the economy

“The political situation in the U.S. is currently creating a lot of fodder for television, but it’s not the primary driver of the U.S. economy,” T. Rowe Price Head of U.S. Equity Eric Veiel told the UK’s FE Trustnet on Thursday. “The main driver is the U.S. consumer, who is doing pretty well given recent wage growth and tax cuts.” Indeed, the week brought some encouraging data following a string of recent disappointments. Weekly jobless claims, which had edged up over the past two months, fell sharply back to near five-decade lows. November retail sales also rose at a solid pace when taking falling gas prices into account, and robust October sales were revised even higher.

Longer-term Treasury yields ended the week slightly higher. (Bond prices and yields move in opposite directions.) The municipal market continued to see fund outflows, even as yields dropped along with Treasury rates. Tax-loss selling and insurance company repositioning also weighed on the sector. Buyers appeared to be waiting for anticipated new issuance coming in the last weeks of 2018, while much of the selling was concentrated in longer-term issues. Muni issuance is widely expected to decline in January.

Corporate bond issuance on hold

The investment-grade corporate bond market traded with a firmer but somewhat defensive tone throughout the week. Bonds in the technology/media and telecommunications segment and those issued by some overseas banks were notable outperformers as credit spreads—the additional yield offered by riskier bonds over comparable-maturity Treasuries—tightened. Issuance was modest due to recent volatility.

High yield bonds mostly tracked equities, as technical conditions helped insulate the sector from major swings. No new deals have come to the market in December, and the dearth of supply has helped offset the impact of flows out of the asset class. T. Rowe Price analysts note that 2018 is shaping up to be the third year out of the past 10 in which the total volume of calls, tenders, and maturities in the high yield market has exceeded gross issuance.

U.S. Stocks1
Index

 

Friday's Close

Week's Change % Change YTD

DJIA

24,100.51

-288.44

-2.50%

S&P 500

2,599.95

-33.13

-2.76%

Nasdaq Composite

6,910.67

-58.58

0.11%

S&P MidCap 400

1,732.79

-48.11

-8.83%

Russell 2000

1,410.82

-37.25

-8.12%

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 rise, euro falls as ECB announces end of stimulus program

The pan-European STOXX Europe 600 Index rose, but the euro lost ground against the U.S. dollar, as the European Central Bank (ECB) ended its monthly bond-buying program and left its key lending rates unchanged. The bank said that it expects policy to stay at current levels at least through the summer of 2019 and affirmed that, at the end of December, it will end four years of monthly purchases of new government and corporate bonds that were intended to suppress eurozone bond yields. ECB President Mario Draghi admitted that the change comes as eurozone risks are moving to the downside because of trade tensions, geopolitical turbulence, and volatility in financial markets.

Early in the week, the Centre for European Economic Research reported that German economic expectations rose more than expected, while in France, markets received a boost after President Emmanuel Macron announced plans to cut taxes and lift wages for workers in a bid to quell the “yellow vest” social unrest that has gripped the country in recent weeks. News later in the week was not as upbeat, however. The IHS Markit purchasing managers’ index showed that the German and French private sectors slowed sharply in November.

UK stocks rise after May survives leadership challenge

The UK’s FTSE 100 Index rose, and the British pound fell against the U.S. dollar, as British Prime Minister Theresa May survived a leadership challenge. However, with 117 of her own party’s members of parliament (MPs) voting against her (while 200 voted in her favor), it has become very clear that she does not have the political clout needed to push her Brexit deal through the rest of parliament, according to T. Rowe Price Fixed Income Portfolio Manager Quentin Fitzsimmons.

Following the leadership challenge, May suffered a further setback when EU leaders rejected her request for a formal renegotiation of the deal with respect to applying a hard time limit to the so-called “Irish backstop”—a provision designed to keep the border between Northern Ireland and the Republic of Ireland open if no comprehensive deal is reached. The backstop would keep Northern Ireland following some EU rules, potentially result in customs checks in the flow of goods between Northern Ireland and the rest of the UK, and is viewed by many in May’s Conservative Party as a threat to British sovereignty. Therefore, said Fitzsimmons, May is being forced by the EU to stick to a plan for which she will be unable to get the parliament’s backing.

Italian bond yields fall after government agrees to some EU budget demands

Italian 10-year government bond yields fell below 3% after Italy’s government partially gave in to EU demands and lowered its budget deficit target for next year to 2.04% instead of the 2.4% originally suggested. The concessions may not be enough to prevent the EU from pursuing its excessive deficit procedure (EDP), according to T. Rowe Price Sovereign Analyst Ivan Morozov. While the move appears to be an about-face for the government, which had vowed to stick to its initial spending plans despite EU warnings, Italy’s move appears to be a delaying tactic. Structurally, the deficit will still widen by about the same amount, but it will do so a few months later than planned, Morozov observes, adding that the EU will still have to initiate its EDP, according to its fiscal rules.

Japan

The Nikkei 225 Stock Average fell 1.4% for the week and closed trading 6.1% lower for the year-to-date period. The broad-based, large-cap TOPIX Index and the TOPIX Small Index recorded steeper losses for the week, and year-to-date, they have declined 12.4% and 16.3%, respectively. At the close of Japan’s trading session on Friday, the yen stood at ¥113.62 per U.S. dollar, modestly weaker for the week and versus ¥112.70 at the start of 2018.

GDP contracts 2.5% in third quarter

Revised data from the Cabinet Office showed that Japan’s economy contracted more than twice as much as reported in its first estimate. Floundering consumer demand and weakness in corporate investment caused the economy to contract at a 2.5% annualized rate in the third quarter of 2018, a much larger decline than the 1.2% initially reported. Weather-related disasters contributed to the significant shortfall, and most economists believe that the overall trend of Japan’s economic growth remains intact. However, the latest setback for the world’s third-largest economy adds to signs that U.S.-China trade concerns are having a negative impact on growth worldwide.

The Bank of Japan (BoJ) said in July that it might increase or decrease its purchases of exchange-traded funds (ETFs) based on market conditions—a comment that led investors to think that the BoJ might begin to cut back on its ETF buying. Conversely, on Thursday, the central bank surpassed the previous years’ total in an effort to offset selling by overseas investors. Unlike bonds, which must be redeemed at maturity, ETFs can remain on the bank’s balance sheet indefinitely.

EU-Japan trade pact set for February 2019

The Japanese and European Union parliaments ratified the Economic Partnership Agreement (EPA), which will create an open trading zone covering 635 million people and almost one-third of the world’s total gross domestic product. The EPA, which may be in force as early as February, removes tariffs on Japanese cars and auto parts, as well as EU beef, chocolate, cheese, and wines. It also opens markets for financial, telecom, e-commerce, and transport services.

China

Stocks post mixed week after disappointing data outweigh thaw in trade tensions

Markets in mainland China advanced for the week, as signs of a potential thaw in U.S.-China trade relations were outweighed by data showing that China’s economic slowdown deepened last month. For the week, the Shanghai Composite Index added 0.35%, while the large-cap CSI 300 Index posted a gain of 1.35%. Both indexes advanced early in the week on news that China’s cabinet would consider slashing tariffs on U.S. car imports and that a Canadian court freed on bail a prominent telecommunications executive whose recent arrest at the U.S.’s request had threatened to spark a diplomatic crisis. Chinese stocks slumped on Friday, however, after Beijing reported that industrial output and retail sales weakened more than expected in November. Industrial production slowed to its lowest point since early 2016, while retail sales fell to its lowest growth level in more than 15 years.

Kushlis: Trade tensions only one factor in slowdown

Though a statistics bureau spokesman said that China is still on track to meet its full-year economic growth target of 6.5%, Friday’s data underscored how U.S. trade tensions—combined with Beijing’s ongoing campaign to deleverage its financial system—were taking a toll on domestic demand. Trade tensions with the U.S. are only one factor hurting sentiment in China, points out T. Rowe Price Sovereign Credit Analyst Chris Kushlis. Looking ahead, China is still stuck in a weak data stretch that will likely see more headwinds as building construction slows and recently strong export growth starts to fade. In the meantime, the slowing growth backdrop will likely lead to more tax cuts and other targeted stimulus measures from Beijing, which is anxious to preserve a floor under economic growth, according to T. Rowe Price’s Asia-based portfolio managers.

Other Key Markets

Turkish markets hit by growth concerns

Turkish stocks, as measured by the BIST 100 Index, fell about 3.4%. The equity market and the lira were hurt by data showing a significant decrease in the country’s economic growth rate. In the third quarter, Turkish GDP expanded at an annualized rate of only 1.6% versus 5.3% in the second quarter and more than 7% in the first quarter. Sharply higher interest rates this year, significant lira weakness that boosts import costs, and rising oil prices through early October are among the factors that have been weighing on the economy. On the plus side, lira weakness this year—down about 28% versus the U.S. dollar through the end of November—has made Turkish exports more competitive; in fact, the country reported that it had a current account surplus in October for the third-consecutive month.

The potential for U.S.-Turkey relations to go sour again added to poor sentiment toward Turkish assets. On Wednesday, President Erdogan announced that there would be a new Turkish military action in war-torn Syria “in a few days.” The military’s objective is to go after Kurdish militants who Turkey considers to be terrorists but who are backed by the U.S.

T. Rowe Price Emerging Markets Equity Analyst and Portfolio Manager Ulle Adamson sees significant challenges ahead for Turkey. Although the government is taking measures aimed at stabilizing the currency, and although the central bank raised interest rates significantly in September, the lira remains vulnerable due to a continued high inflation outlook and a possibility of policy mistakes ahead of the local elections in Turkey next March. In addition, Adamson acknowledges that the country still needs to go through a difficult process of rebalancing and deleveraging its economy in order to return to a sustainable growth path.

Kushlis: Tensions rising between India’s central bank and government

Indian stocks were volatile but rose last week. The Sensex Index returned 0.8%. The market started the week on a sour note, as central bank governor Urjit Patel unexpectedly resigned for personal reasons. Some believe, however, that the resignation stemmed from signs that Prime Minister Narendra Modi’s government is increasingly pressuring the Reserve Bank of India (RBI) to stimulate the economy—thus reducing central bank independence—and take other actions prior to national elections to be held in the spring of 2019. Adding to the market’s woes were concerns that the ruling BJP party would not perform well in municipal elections in several Indian states and that the election results—which were favorable for the opposition Indian National Congress party—would be a harbinger for next year’s elections.

On Wednesday, however, the market rallied sharply after the Modi government quickly appointed former finance minister Shaktikanta Das as the new head of the central bank. Das, in his first press conference, tried to reassure investors that he would uphold “the autonomy and core values of the central bank” and emphasized that the RBI’s efforts to target inflation are important. Gains extended into Thursday and Friday, as below-target retail inflation data for November raised hopes that the central bank would be more inclined to reduce interest rates. On Friday, the RBI held a meeting of central board members—many of whom have been appointed by the government—to discuss economic and governance matters. The central board does not set monetary policy; the monetary policy committee recently met on December 5 and is not scheduled to meet again until early-February 2019.

According to T. Rowe Price’s Kushlis, the tensions between the Indian government and the RBI involve more than economic matters. Other issues causing dissension include central bank profit transfers to the government, whether the RBI should provide more liquidity to the market in the wake of stress on nonbank financial institutions, and whether the RBI should relax some of the restrictions it has placed on undercapitalized state-owned banks.

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