Market Review

Global Markets Weekly Update

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 lag in light trading ahead of holiday weekend

The major indexes were mixed for the week, with the smaller-cap benchmarks lagging the large-cap indexes and the technology-heavy Nasdaq Composite Index. Despite the release of a new round of major quarterly earnings reports, trading was relatively subdued. The number of shares exchanging hands reached a new year-to-date low on Monday, and the Cboe Volatility Index (VIX) hit an eight-month low on Wednesday. The relative calm on Wall Street may have been due in part to the holiday-shortened trading week. Markets were closed on Friday in observance of Good Friday, which also coincided with the start of Passover.

Health care stocks struggle under policy worries

Within the S&P 500 Index, industrials shares outperformed, helped by better-than-expected earnings reports from Union Pacific and Honeywell on Friday. Health care stocks lagged substantially and recorded steep losses as investors worried about possible policy headwinds. On Monday night, audience members at a Fox News-sponsored town hall appeared to give an enthusiastic response to Democratic presidential candidate Bernie Sanders’ call for a “Medicare for all” system, perhaps suggesting broader-than-expected support for a single-payer system. Insurer stocks fell in subsequent trading sessions, and UnitedHealth Group’s CEO voiced criticism of the plan.

Other segments of the health care sector also face policy hazards. Worries have grown about a White House-backed challenge to the constitutionality of the Affordable Care Act, which would threaten subsidies to hospitals and other providers, while scrutiny of drug price increases has weighed on pharmaceutical stocks. Better-than-expected earnings reports on Tuesday from Johnson & Johnson and UnitedHealth Group may have helped contain losses in the sector, however.

Consumer remains in solid shape

Most of the week’s major economic reports came later in the week and surprised to the upside. March retail sales, reported Thursday, bounced back more than expected from a small February decline and indicated strength across almost all categories. In another sign of consumer strength, jobless claims defied expectations and fell to a new five-decade low for the second consecutive week. On the negative side, IHS Markit’s gauge of U.S. service sector activity fell more than expected, although it still suggests moderate expansion.

The week also saw President Donald Trump resume his criticism of Federal Reserve policy. On Monday, the president tweeted that “if the Fed had done its job properly…the [Dow] would have been up 5[,]000 to 10,000 additional points, and GDP would have been well over 4% instead of 3%...with almost no inflation.” T. Rowe Price traders noted that the remarks provoked a new round of concerns in the press about the independence of the central bank, which seemed to weigh on equity market sentiment.

Ten-year Treasury yield hits one-month high

The president’s tweet seemed to have little impact on the bond market, but the positive economic signals fostered a moderate rise in longer-term bond yields, with the benchmark 10-year Treasury note yield touching a one-month high on Wednesday. (Bond prices and yields move in opposite directions.) Municipals saw light new issuance ahead of the holiday weekend.

Conversely, trading volumes in the investment-grade corporate bond market increased after a slow start to the abbreviated trading week, with generally balanced buying and selling activity. Qualcomm bonds outperformed following the announcement that its patent dispute with Apple had been settled, ending all litigation between the companies. New issuance for the week exceeded somewhat modest expectations.

Sprint bonds fall on merger worries

Meanwhile, the high yield market was very quiet, but overall sentiment remained firm, with buyers more active in the market than sellers, according to T. Rowe Price traders. The health care segment experienced some weakness amid concerns about policy changes, however. Sprint bonds also traded lower due to reports that the company’s merger with T-Mobile could be in jeopardy. Primary market issuance was light, and below investment-grade funds reported positive flows.

U.S. Stocks1
Index

 

Friday's Close

Week's Change % Change YTD

DJIA

26,559.54

147.24

13.86%

S&P 500

2,905.03

-2.38

15.88%

Nasdaq Composite

7,998.06

13.90

20.54%

S&P MidCap 400

1,952.59

-12.83

17.41%

Russell 2000

1,564.23

-20.58

15.99%

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 rose, buoyed by positive economic Chinese data and the UK’s six-month Brexit extension. Germany’s DAX rose 1.8% despite reports indicating that the German economy is poised for further slowing. The French CAC 40 Index rose 1.4%, and the UK’s FTSE 100 Index gained 0.44%. Most European markets were closed Friday and the following Monday for the Easter holiday.

Solid earnings season overshadowed by macro woes

First-quarter earnings season kicked off during the week. T. Rowe Price traders observed that earnings reports seemed to indicate stronger economic environment on the Continent, with many companies reporting strong first-quarter organic growth. The firm’s traders noted that companies reporting thus far have largely beat or met lowered expectations.

Weak manufacturing PMIs foreshadow more slowing

Poor economic data seemed to continue to restrain sentiment, however. Weaker-than-expected purchasing managers’ index (PMI) data showed that the French and German manufacturing sectors remained in contraction. According to the IHS Markit PMI, the German manufacturing sector contracted for the fourth month in a row, with the April reading coming in at 44.5—below the 50.0 mark that separates growth from contraction. Meanwhile, the French manufacturing sector fell to 49.6. For the eurozone overall, however, the index rose slightly to 47.8.

The German and French services sectors also appear to be in healthier shape. Germany’s services PMI moved to 55.6 and France’s rose into expansion territory with a 50.5 reading. Services in the region as a whole slipped, however.

Japan

The Nikkei 225 Stock Average gained 220 points (1.0%) for the week through Thursday, reaching 22090.12, its highest level since early December. The index is up 10.37% in 2019. Japanese economic data were uninspiring, but Asian markets were supported by a positive Chinese gross domestic product (GDP) report and optimism over trade talks. The broader measures of the Japanese market, the large-cap TOPIX Index and the TOPIX Small Index, posted modest gains through the first four days of the week. At the close on Thursday, the yen stood at ¥111.91 per U.S. dollar, slightly stronger for the week, versus ¥109.69 at the end of 2018.

Exports drop but Japan maintains trade surplus with U.S.

As U.S. and Japanese negotiators met in Washington in an initial round of trade talks, Japan’s Finance Ministry reported that the country’s trade surplus with the U.S. increased 9.8% for the annual period through March. The Finance Ministry also said that Japanese exports declined 2.4% year over year in March, amid weakening demand from China. It was the fourth straight month that exports had declined and followed a 1.2% drop in February; however, March’s amount was slightly smaller than the 2.7% decline forecast by economists polled by Reuters.

Exports to China dipped about 9%, which was partially offset by an approximately 4% increase to the U.S. Japan continued to maintain an overall trade surplus with its global trading partners, but the surplus has dropped by about a third over the past year.

Industrial production mixed; JGB yield remains negative

Japanese manufacturing data were mixed. Industrial production grew 0.7% in February, bouncing back from a 2.5% drop in January, but the data showed a 1.1% decline for the year-over-year period.

The yield of the 10-year Japanese government bond (JGB) rose for the week to -0.026% on Thursday. The 10-year bond has had a negative yield since early March.

China

Economy rebounds in first quarter, easing global growth fears

China’s GDP grew more than expected in the first quarter, allaying concerns that trade strife with the U.S. was hurting its economy and weighing on global growth. China’s GDP rose 6.4% from January to March from a year earlier, even with the prior quarter’s expansion and beating the Reuters consensus 6.3% pace forecast by economists. Industrial production surged, while other gauges of fixed asset investment and retail sales showed solid growth, according to China’s state statistics bureau.

The stronger-than-expected data were seen as improving China’s stance in trade talks with the U.S., given the willingness of the Trump administration to use weak economic data in China as leverage in negotiations. But though the data eased concerns that China was stuck in a deep downturn, they also highlighted the role of government stimulus in supporting growth—something that Beijing has been trying to dial back as it tries to reduce the country’s high debt levels. A day before China’s GDP release, the Organization for Economic Cooperation and Development (OECD) issued a lengthy report on China warning of the risks of prolonged stimulus. “Infrastructure stimulus could lift growth over the projection horizon,” the OECD stated, “but it could lead to a further build-up of imbalances and capital misallocation, and thereby weaker growth in the medium term.” Debt racked up by Chinese state-owned enterprises has reached “unsustainable” levels, which imply financial risks, the OECD added.

Other Key Markets

Turkish shares gain on hopes U.S. will accept missile system purchase

As measured by the BIST-100 Index, Turkish shares returned about 0.9% through the close of business on Thursday. Stocks rose amid hopes that Turkey’s plans to purchase a Russian S-400 missile defense system would not deepen the rift with the U.S. or lead to sanctions. Reuters reported that President Trump, in discussions with Turkish Treasury and Finance Minister Berat Albayrak, took a “reasonable” stance regarding Turkey’s planned purchase of the Russian military hardware. Some analysts, as well as Turkish government officials, believe that the Trump administration may grant a sanctions waiver to Turkey for purchasing military equipment from Russia.

While geopolitical concerns seemed to ease, at least for the time being, Turkey’s domestic situation—characterized by recession and political concerns—remains challenging for investors. The Turkish government released data indicating that the country’s unemployment rate rose to 14.7% around the start of 2019—Turkey’s highest unemployment rate in about 10 years. Meanwhile, President Recep Tayyip Erdogan’s ruling AK Party is planning to make an extraordinary appeal to the High Electoral Committee to have the recent elections in Istanbul annulled due to alleged irregularities. If the election results in Istanbul are canceled and if a new election is held, Turkey may face rule of law concerns and diplomatic tensions with the EU and the U.S.

Brazilian shares overcome concerns about stalling pension reform efforts

Stocks in Brazil, as measured by the Bovespa Index, returned about 1.7% through Thursday. Shares struggled somewhat early in the week amid reports that pension reform legislation—widely considered necessary to help bring government debt under control—was hung up in the legislature. An important committee vote that was expected to take place earlier in the week was delayed. There were also reports that some centrist parties were demanding changes to the text of the pension bill and threatening to vote against it if their changes are not included. T. Rowe Price sovereign analyst Richard Hall remains concerned that the absence of a strong coalition allied with President Jair Bolsonaro in the legislature means that pension reform could be “watered down” as it goes through the legislative process.

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