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.

Leadership rotates to small-cap and value stocks

Stocks recorded a third consecutive week of solid gains as investors responded to a series of hopeful policy turns. The gains lifted the large-cap benchmarks within 1% of their all-time highs, but the small-cap Russell 2000 Index outperformed by a large margin, rising 5%. In another sign of a rotation in market leadership, slower-growing value stocks handily outperformed higher-valued growth shares. The shift into value and small-cap stocks helped narrow a yawning performance gap for the year-to-date period. As of August 31, the small-cap Russell 2000 Value Index was up 7.31% on a total return (including dividends) basis, while the large-cap Russell 1000 Growth Index was ahead 23.28%.

Correspondingly, the value-oriented materials, financials, and industrials sectors saw the strongest gains within the S&P 500 Index. Financials benefited from a jump in longer-term bond yields, which favors banks’ lending margins, while materials and industrials benefited from reduced trade tensions and hopes for improved global growth. The rise in yields weighed on dividend-heavy real estate shares, which were among the poorest performers for the week.

Conciliatory trade moves boost sentiment

Conciliatory gestures on the part of both the White House and Chinese officials helped ease tensions in the trade war and appeared to drive much of the market’s gains. On Wednesday, Chinese officials revealed a small list of U.S. products that would be exempt from new tariffs that were scheduled to take effect on September 17. President Donald Trump quickly responded by tweeting that the U.S. would postpone a 5% increase on USD $250 billion of imports from China from October 1 to October 15, citing a desire not to interfere with the People’s Republic of China’s 70th anniversary celebration on the prior date.

On Friday, China took another step toward de-escalation. The Xinhua News Agency, the government’s official press outlet, announced that the state customs bureau would exclude soybeans, pork, and other agricultural products from further tariffs, while officials would also encourage Chinese companies to buy U.S. farm products. The move may also reflect a desire to curb soaring pork prices in the country following an outbreak of African swine fever.

Taken together, the measures represented modest steps taken by both countries to improve trade relations ahead of the resumption of face-to-face talks in Washington in October. Despite the impending talks, many T. Rowe Price analysts believe that a meaningful breakthrough in the current trade impasse is unlikely ahead of the November 2020 U.S. presidential election.

Retail sales surprise on upside; inflation ticks higher

The week’s economic calendar was relatively thin, but much of the data appeared to support sentiment. On Friday, the Commerce Department reported that retail sales had risen a healthy 0.4% in August, although a rise in volatile auto sales deserved the credit. The University of Michigan’s preliminary gauge of September consumer sentiment rose more than expected, helping calm worries over a steep drop in August’s final reading. Core (excluding food and energy) consumer price inflation, reported Wednesday, rose 2.4% on a year-over-year basis, a bit more than anticipated and the most since mid-2018.

Longer-term bond yields surge, but demand for corporate bonds remains healthy

The positive data and trade signals sent the yield on the benchmark 10-year note to its highest level in over a month. (Bond prices and yields move in opposite directions.) T. Rowe Price traders note that the investment-grade corporate bond market was primarily focused on issuance, with the week’s total exceeding expectations, although most new deals were met with decent demand. U.S. dollar-denominated bonds from European banks performed particularly well after the European Central Bank (ECB) announced its new stimulus measures.

The high yield market also saw elevated new issuance. In credit-specific news, Netflix bonds traded lower after Apple announced that its TV/video subscription service will launch on November 1 and be priced at USD $5 per month, less than half that of Netflix’s standard package. The heavily weighted energy segment proved resilient despite a decline in oil prices after the International Energy Agency reduced its demand growth outlook. It projected that OPEC may need to make additional cuts to address the oversupply problem, which could be exacerbated if Iranian oil returns to the market—a prospect that seemed more likely following John Bolton’s departure on Tuesday as U.S. national security advisor.

U.S. Stocks1
Index

 

Friday's Close

Week's Change % Change YTD

DJIA

27,219.52

422.06

16.68%

S&P 500

3,007.39

28.68

19.97%

Nasdaq Composite

8,176.71

73.64

23.23%

S&P MidCap 400

1,963.82

52.46

18.09%

Russell 2000

1,579.89

74.45

17.15%

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 climb after ECB unveils fresh stimulus package

European markets rose as the European Central Bank announced a fresh wave of monetary stimulus aimed at supporting the eurozone economy and fears of a no-deal Brexit subsided. The pan-European STOXX Europe 600 Index rose about 1.3%, while the exporter-heavy German DAX gained 2.4%, and the UK’s FTSE 100 Index rose 1.2%.

ECB cuts rates, relaunches bond-buying program

The ECB cut its deposit rate by 10 basis points, from -0.4% to -0.5%, and relaunched its quantitative easing program, saying that it would purchase EUR 20 billion of securities every month beginning November 1. Departing ECB President Mario Draghi said that the bank made the move mainly because of the region’s low rate of inflation, which has remained well below the bank’s “near but just below 2%” target. He noted that ongoing global trade tensions and Brexit concerns had increased risks to the eurozone but said the risk of recession remained “small.” ECB policymakers also extended forward guidance on rates, saying that they would remain at “present or lower levels” until the rate of inflation moved more in line with the bank’s target. Last, to encourage lending, the ECB also made an adjustment to its targeted long-term refinancing operations.

Pound rises as worries of no-deal Brexit subside

The pound rose to its highest level against the U.S. dollar since July as Parliament passed a law that forces the UK government to seek from the European Union a Brexit extension and avoid a no-deal Brexit on October 31. Prime Minister Boris Johnson is scheduled to meet European Commission President Jean-Claude Juncker on October 16 to discuss potential changes to a Brexit deal. The pound also gained some strength after data showed the UK economy grew faster than expected in July.

Germany’s Ifo cuts country’s growth forecast

The German Ifo Institute cut its forecast for German growth this year to 0.5% from 0.6% and lowered its estimate for next year to 1.2% from 1.7%. The institute warned that a sharp slowdown in manufacturing could spread to the services sector and cause an increase in unemployment.

Japan

Japanese stocks rose during the week, as global sentiment improved amid hopes for productive U.S.-China trade talks in October. The Nikkei 225 Stock Average rose 3.72% for the week, and the large-cap TOPIX Index and the TOPIX Small Index fared even better, rising 4.73% and 3.79%, respectively.

Economic data disappoint

While the global outlook appeared to improve somewhat, Japanese economic data were far from encouraging. The latest reading on second-quarter gross domestic product (GDP) showed the economy grew at a 1.3% annualized pace versus a previous estimate of 1.8%. In addition, the Reuters Tankan survey of manufacturers’ business confidence fell in September for the fourth consecutive month and dipped to levels not reached in more than six years.

On Wednesday, as expected, Prime Minister Shinzo Abe announced changes to his Cabinet, with 13 new ministers brought in alongside several longtime loyalists. One of Abe’s intentions over the next few years is to make changes to the Constitution, which was put in place during the U.S.-led occupation of Japan following World War II.

Relations remained strained with South Korea

Trade relations between Japan and South Korea remained strained. During the week, Seoul made a formal complaint to the World Trade Organization (WTO) about Tokyo’s decision in July to restrict the export of certain technology-related chemicals to South Korea. Before the WTO arbitrates the dispute, the two disagreeing nations are required to attempt to reach a resolution on their own. Separately, the WTO confirmed an earlier ruling that was mostly favorable for Japan over South Korea regarding the latter’s use of anti-dumping duties on Japanese-made industrial airflow valves.

As for U.S.-Japan trade relations, negotiators from both countries are working rapidly to formalize a tentative trade agreement that was reached between U.S. President Trump and Abe in late August. As reported by Reuters, the agreement, which the leaders hope to complete later this month, should result in reduced Japanese tariffs on U.S. farm products and lower U.S. tariffs on Japanese industrial products. Abe’s government is also hoping to avoid a threatened tariff increase on Japan’s voluminous auto exports to the U.S.

China

Stocks rally on tariff exemptions, further stimulus expectations

Chinese stocks advanced in a holiday-shortened week, as China and the U.S. took incremental steps toward defusing their trade war and expectations grew that Beijing would roll out more stimulus measures to boost the economy. For the week ended Thursday, the benchmark Shanghai Composite Index rose 1.1%, to its highest level in 10 weeks, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, added 0.6%. Stock markets on the mainland were closed Friday for the Mid-Autumn Festival.

Investor sentiment picked up starting Wednesday, when China announced a range of U.S. goods that would be exempted from 25% tariffs and President Trump said the U.S. would delay a planned 5% tariff hike. Anticipation also rose that China would step up policies to get more money flowing into the slowing economy rose after the release of bearish economic data. During the week, China reported that August factory prices fell deeper into contraction, while consumer prices rose more than expected. Car sales on the mainland, a proxy for domestic consumer demand, sank for the 14th time in the past 15 months. The batch of weak data raised expectations that Beijing would do more to stimulate the economy a week after the central bank cut the required reserve ratio for all banks for the third time this year.

Other Key Markets

Turkish shares rise on rate cut hopes

Turkish stocks, as measured by the BIST 100 Index, returned about 4.1%. Equities were boosted by hopes for a substantial interest rate reduction from the Central Bank of the Republic of Turkey (CBRT). Indeed, on Thursday, the CBRT reduced the one-week repo auction rate from 19.75% to 16.5%—a 325-basis-point reduction that was generally larger than expected.

In its post-meeting statement, the CBRT’s monetary policy committee acknowledged an improvement in the outlook for inflation and characterized its monetary stance as being largely “consistent with the projected disinflation path.” Earlier this month, Turkish inflation in August was reported to be about 15% on an annualized basis, which is approximately 150 basis points below the new policy interest rate and well below the 25% inflation rate recorded in October 2018.

Argentina attempts to clamp down on currency speculation

Argentine stocks, as measured by the Merval Index, rose about 9%. The equity market continued to recover from deep losses in August, helped by favorable global investor sentiment. During the week, the central bank implemented a new foreign exchange restriction, adding to the currency control measures that took effect at the beginning of September. According to Reuters, the newest restriction requires individuals who wish to buy non-Argentine currencies to make a “sworn oath” that they will wait at least five days before using those currencies to purchase bonds. This measure is an apparent attempt to prevent speculators from taking advantage of currency exchange rates to make profitable bond trades in very short periods. 

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