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.

Stocks fall on growth and trade worries

Stocks recorded a third week of losses as trade and growth worries unsettled investors. The bulk of the week’s declines came Wednesday, with the major benchmarks suffering one of their worst daily pullbacks to date in 2019. The smaller-cap benchmarks underperformed, and the S&P Midcap 400 Index briefly joined the small-cap Russell 2000 Index in correction territory, or down over 10% from the highs it reached in late August 2018. The Cboe Volatility Index (VIX) remained elevated but stayed somewhat below the eight-month peak it reached the previous week. With many investors on summer holidays, trading volumes were somewhat thin, which may have accentuated the market’s moves.

The typically defensive consumer staples and utilities sectors performed best within the S&P 500 Index, with the former given a boost from an earnings and revenue beat from Walmart. Energy stocks underperformed as oil prices surrendered a Tuesday rally.

Levenson and Wieladek: Recession signal may be unreliable

A plunge in long-term bond yields and the negative signal it seemed to send about the health of the global economy appeared to be the largest factor weighing on sentiment. On Wednesday, the yield of the 10-year Treasury note fell below that of the two-year note, an inversion that has preceded the past several U.S. economic recessions. Short-lived inversions have not always been followed by a recession, however, and the time lag between an inversion and the onset of a recession has been as prolonged as two years. By Thursday, the yield curve had resumed a slightly positive slope.

T. Rowe Price Economists Alan Levenson and Tomasz Wieladek recently explored several factors that may be making the yield curve a less reliable recession indicator in the current environment. The bond market consequences of large central bank holdings of government debt make yield curve inversions a less reliable indicator of recessions. In addition, past inversions have typically resulted from short-term rates rising faster than long-term rates, which has restrained growth in two ways: Higher borrowing rates have reduced loan demand, and the flatter yield spread has squeezed lending margins, reducing the supply of credit.

In recent months, in contrast, both the 2- and 10-year yields have been falling, lowering borrowing costs. Indeed, data released Wednesday by the Mortgage Bankers Association showed mortgage applications surging nearly 22% in the previous week as homeowners rushed to refinance. Average fixed 30-year mortgage rates fell below 4% and hit their lowest level since 2016.

Conflicting signals on trade dispute

Developments in the U.S.-China trade dispute also loomed large over sentiment. On Tuesday, stocks rallied after President Donald Trump announced that some of the 10% tariffs set to be imposed on Chinese goods on September 1 would be delayed until mid-December so as not to hurt the holiday shopping season—marking his first acknowledgment, many observers noted, that U.S. consumers are bearing part of the tariff burden.

The response of Chinese officials appeared mixed. Stocks pulled back Thursday morning after officials in China’s tariff office stated that the new tariffs “severely violated” an agreement between Presidents Xi and Trump reached at the G-20 summit. Stocks moved higher in later trading, after a Chinese Foreign Ministry spokesman stated that China hoped to “meet the U.S. halfway” on trade issues.

U.S. consumer proves resilient

Another factor helping the market recover some of its losses late in the week was good news on the American consumer. The Commerce Department reported that retail sales, excluding autos, jumped 1% in July, the best showing in four months, helping build on optimism over healthy sales at Walmart. On Friday, however, the University Michigan reported that its preliminary reading on consumer sentiment fell more than expected and hit its lowest level since January. Weekly jobless claims also rose more than expected and hit their highest level since late June. Meanwhile, poor data out of China and Germany confirmed a substantial slowdown in global manufacturing, with rising trade barriers seemingly to blame. Investors also worried about political turmoil in Hong Kong and elections in Argentina (see below).

Bonds: Treasury yields move to record lows, but credit spreads remain contained

As investors rushed to the perceived safe haven of the Treasury market, the yield on the benchmark 10-year note fell as low as 1.48%, just above the record low it reached in the summer of 2016. (Bond prices and yields move in opposite directions.) Meanwhile, the yield on the 30-year bond fell below 2% for the first time.

Credit spreads, or the additional yield offered by investment-grade bonds, widened but remained well below levels typically associated with recession fears. T. Rowe Price analysts noted that lower-quality credits in the technology/media and telecommunications, energy, and automotive segments underperformed, however.

Economic and political turmoil in Hong Kong and Argentina, equity losses, and energy sector declines weighed on the performance of high yield bonds. The market partly recovered amid improved sentiment after President Trump decided to delay previously announced tariffs on China until mid-December. T. Rowe Price traders reported that investors showed a preference for higher-quality issues, partly due to commodities weakness amid global growth concerns.

U.S. Stocks1
Index

 

Friday's Close

Week's Change % Change YTD

DJIA

25,886.01

-401.43

10.97%

S&P 500

2,888.68

-29.97

15.23%

Nasdaq Composite

7,895.99

-63.15

19.00%

S&P MidCap 400

1,873.22

-28.10

12.64%

Russell 2000

1,493.65

-19.36

10.76%

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 pressured by trade tensions, recession fears

Stock markets in Europe came under pressure throughout the week from fresh U.S.-China trade tensions and growing signs of recession. The pan-European STOXX Europe 600 Index lost about 0.5%, the UK’s FTSE 100 Index dropped 1.8%, and the exporter-heavy German DAX index dropped about 1.3%.

Eurozone economies barely grow in second quarter

Eurostat reported that the eurozone economy barely grew in the second quarter of 2019, expanding just 0.2%, as economies across the bloc lost steam. The region’s largest economy, Germany, shrank by 0.1% in the second quarter, according to Destatis, the statistics agency. The gross domestic product flash estimates numbers, including year-on-year growth of 1.1% from the second quarter of 2019, were in line with economists' forecasts. The report showed that Spain’s economy grew 0.5%, France’s expanded 0.2%, and Italy’s economic growth was flat for the same period. Other signs of slowing were seen in the 1.6% June downturn in eurozone industrial production.

Eurozone trade hit by U.S.-China trade dispute

Trade between countries of the eurozone fell in June at the fastest pace in more than six years as the China-U.S. trade dispute begins to hit European exports. The value of intra-eurozone trade dropped 6.6% in June compared with the same month last year. Eurozone exports to the rest of the world fell 4.7%, and European exports to China contracted 3.4% for the same period.

Japan

Japanese stocks declined for a third consecutive week. The Nikkei 225 Stock Average fell 266 points (1.3%) and closed on Friday at 20,418.81 in the holiday-shortened, extremely volatile trading week. (The Japanese stock markets were closed on Monday in observance of Mountain Day.) The Nikkei is up 2.0% for the year to date. The broader measures of the Japanese stock market, the large-cap TOPIX Index and the TOPIX Small Index, also posted weekly losses.

Yen holds on to its perceived safe-haven status

As Japan’s benchmark 10-year bond yield dropped further out of the central bank’s targeted range of plus or minus 0.20%, closing Friday at -0.23%. The move furthered speculation on when the Bank of Japan (BoJ) would step in and what course it would take. At stake is its credibility, as an attempt to defend yield levels when rates are sinking globally may be viewed as hawkish by some investors and add impetus to the yen rally. At the close on Friday, the yen stood a bit above ¥106 per U.S. dollar, little changed for the week but significantly stronger than ¥112 four months ago. At the same time, the central bank also wants to loosen its grip on the debt market after keeping yields artificially low for years.

Meanwhile, FT.com reported that Japanese holdings of U.S. Treasuries at the end of June climbed to the highest level in two-and-a-half years. China had been the largest holder of U.S. government bonds for much of the past handful of years, but it systematically reduced its Treasury holdings in the first half of 2019. The U.S. Treasury Department’s June report, released on Thursday, showed that Japan’s stake in U.S. government bonds stood at $1.12 trillion (16.9% of outstanding Treasuries), modestly edging out China as the largest holder.

Recession concerns becoming worrisome

Worries have grown that the Japanese economy does not appear strong enough to weather the value-added tax hike scheduled for October 1. Producer prices are weakening, overseas machine orders are slowing due to trade uncertainty, and growth in domestic and private consumption remains tepid. Economic growth has been hampered by geopolitics and domestic headwinds, leading some economists to fear a potential recession may be on the horizon.

China

Stocks advance as government plans to boost consumption

Chinese stocks posted a weekly gain after Beijing pledged to roll out measures to boost disposable incomes for the next two years to offset the slowing economy. For the week, the benchmark Shanghai Composite Index added 1.77%, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, rose 2.11%.

Most of the weekly advance occurred on Friday, after Beijing announced that it would roll out a plan to boost disposable income this year and in 2020 to spur private consumption, Reuters reported. The statement from the National Development and Reform Commission, China’s state planning agency, included few details, yet raised hopes that China’s government would step up efforts to stimulate domestic demand. A spate of solid earnings reports from some of China’s biggest companies also lifted sentiment.

New signs of economic weakness

News of Beijing’s consumption increase plan helped offset worries related to the U.S.-China trade dispute. More evidence of the trade war’s toll on China’s economy arrived after the government released a trio of indicators that lagged expectations. July industrial output and retail sales rose less than forecast, with industrial output recording its weakest monthly growth since 2002. Meanwhile, fixed-asset investment in the first seven months of 2019 also grew less than expected. Though the data underscored the slowdown in China’s economy, it also increased expectations that the government would roll out more stimulus to cushion the trade war’s impact. Chinese officials are sticking to their plan to visit Washington for face-to-face meetings in September, though they are not optimistic of any imminent progress, according to Bloomberg.

Other Key Markets

Argentine voters reject economic reforms

Setting the tone for a tumultuous week of trading in emerging markets, Argentine politics took the spotlight on Monday when the Frente de Todos coalition presidential candidate Alberto Fernández and his running mate, former Argentine president Cristina Fernández de Kirchner won the primary round of the election with 48% of the vote, making him the overwhelming favorite to win the presidency. Current President Mauricio Macri received 32% of the votes, having angered voters with austerity measures that have led to a deep recession and soaring inflation. Argentina’s October 27 presidential election could be determined in the first round of voting—if a candidate receives 40% of the vote and no opponent is within 10 percentage points, or if a candidate gets at least 45% of the votes. Following Sunday’s primary polling, Macri announced a package of tax cuts and subsidies for lower-income workers to ease economic pains stemming from austerity measures, but it may be a case of too little, too late for many voters.

Argentine markets suffer second-worst sell-off in modern history

Argentina’s equity market reacted violently to the election news, with the local index falling 48% in U.S. dollar terms—the second-biggest plunge in any global market in 70 years, according to Bloomberg. Domestic stocks fared worst, with the market quickly pricing in bear-market multiples for the banks. Credit-default swaps showed that traders are pricing in an 80% chance that Argentina will suspend debt payments in the next five years, up from just 49% a week earlier. Argentina’s dollar-denominated government bonds lost roughly 25% on average, pushing down prices to as low as 55 cents on the dollar. Yields on shorter-maturity notes soared past 35%.

The market's decline reflected fears that a Fernández‑Kirchner victory would see a return to a Peronist government characterized by populist policies, currency and capital controls, and debt defaults. T. Rowe Price Portfolio Specialists Ben Robins (fixed income) and Leigh Innes (equity) believe the key question is whether Fernández will take more concrete steps to outlining an economic program consistent with a new International Monetary Fund program and reestablishing market access. Fernández comes from a more moderate strain of Peronism than Kirchner and has made some market‑friendly overtures as the campaign has progressed. Nevertheless, until he can establish some degree of trust with markets, capital outflows could intensify, and the macroeconomic situation may deteriorate.

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