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.

Benchmarks rise in unison for first time since early September

Reports on progress in U.S.-China trade negotiations sent stocks higher for the week. Within the S&P 500, hopes for a trade deal boosted the export-sensitive technology, industrials, and materials sectors. Utilities lagged as rising interest bond yields made their relatively high dividends less attractive in comparison. Pacific Gas & Electric (PG&E) shares fell sharply Thursday, as the California utility cut power to hundreds of thousands of customers to prevent a recurrence of the wildfires sparked by power lines last fall.

Trade seizes spotlight back from growth concerns

Trade developments appeared to seize the spotlight back from economic worries as the major driver of sentiment during the week. According to T. Rowe Price traders, stocks rose early Monday on reports that Chinese officials were willing to accept a partial trade deal but gave up gains after another report that intellectual property protections for foreign firms in China were not on the table. On Tuesday, sentiment soured further on a Reuters report that the Commerce Department was planning to add 28 Chinese firms to a “blacklist,” banning them from buying components from U.S. firms. Asked about the report, a Chinese official said the U.S. should “stay tuned” for retaliation. Rumors that the White House was considering limiting investments in China by U.S. government pension funds also weighed on sentiment.

The start of official trade talks in Washington on Thursday sparked a major turnaround in markets. Before the start of trading, futures fell sharply on rumors the previous evening that the Chinese delegation would cut its trip short. Shares rallied, however, on a report in The New York Times that the U.S. was preparing to license new sales of goods to Chinese telecommunications giant Huawei Technologies. Bloomberg then reported that U.S. negotiators were open to a partial deal that would include a currency pact first discussed in February. Investors were also relieved by a tweet from President Donald Trump confirming plans to meet the next day with Chinese Vice Premier Liu He.

Trump announces “phase one” deal in trade talks

Signs of progress in a negotiations Friday helped the S&P 500 to its best daily gain in two months. Stocks rallied in morning trading after President Trump tweeted “Good things are happening at China Trade Talk Meeting.” Just before markets closed to end the week, he announced that the two sides had in fact reached a “phase one” deal in which the U.S. would suspend planned tariff increases on October 15 in return for increased agricultural purchases from China, along with agreements on protection of intellectual property, access for financial services firms, and currency pledges. In a potential example of “buy on the rumor, sell on the news,” however, the major indexes surrendered a portion of their gains in the final minutes of trading.

The market’s end-of-week gains may have also owed something to reassuring data on the U.S. consumer. Initial jobless claims, reported Thursday, broke a streak of three weekly increases and fell back to the lowest level in a month. On Friday, the University of Michigan’s initial gauge of consumer sentiment in October increased for the second month in a row, defying consensus expectations for a slight decline.

Bond yields jump on trade hopes

Good news for equity markets was bad news for bond prices, as the yield on the benchmark 10-year Treasury note jumped by roughly 23 basis points (0.23 percentage points) over the week. (Bond prices and yields move in opposite directions.) The broad municipal market held up better than Treasuries by a wide margin. The streak of consecutive weekly flows into muni bond funds advanced to 40 weeks, according to Investment Company Institute data.

The investment-grade corporate bond market saw muted trade volumes, with most sectors retracing earlier selling pressure as the week progressed. In credit-related news, the General Motors (GM) strike extended to a fourth week, and news that negotiations had taken a step backward last weekend weighed on investor sentiment toward GM bonds. New issuance volume was below expectations.

According to T. Rowe Price traders, the high yield market mostly followed the tone of the equity market, with encouraging news about U.S.-China trade negotiations buoying sentiment toward riskier asset classes. The energy sector underperformed the broad high yield market early in the week. However, oil prices rose Friday morning, as reports of an attack on an Iranian oil tanker in the Red Sea stoked concerns about Middle East tensions. Below investment-grade funds reported outflows.

U.S. Stocks1
Index

 

Friday's Close

Week's Change % Change YTD

DJIA

26,816.59

242.87

14.96%

S&P 500

2,970.27

18.26

18.49%

Nasdaq Composite

8,057.04

74.57

21.43%

S&P MidCap 400

1,916.55

13.05

15.24%

Russell 2000

1,511.90

11.66

12.11%

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 rally amid signs of progress on trade, Brexit talks

Equity markets in Europe rallied amid fresh signs of progress on U.S.-China trade talks and Brexit negotiations. The pan-European STOXX Europe 600 Index gained 2.7%, while the exporter-heavy German DAX was up 4.2%, and UK’s FTSE 100 Index gained more than 1%.

UK pound gains as Brexit talks advance

The pound jumped almost 3% against the U.S. dollar, as hopes rose that a Brexit deal could be achieved after the prime ministers of the UK and Ireland reported that they could envision “a pathway to a possible deal.” UK Prime Minister Boris Johnson and Leo Varadkar, Ireland’s taoiseach (or prime minister), made the statement after three hours of talks.

Further fueling optimism, the European Commission said the European Union (EU) and UK have “agreed to intensive negotiations in the coming days.” The commission said that the EU insists that a deal must avoid “a hard border on the island of Ireland, protect the all-island economy and the Good Friday agreement, and safeguard the integrity of the single market.” The Good Friday Agreement, ratified in 1998, was a peace agreement between the British and Irish governments and called for devolved government in Northern Ireland, in which Unionists and Nationalists would share power.

Fitzsimmons: Even chances of deal and no-deal Brexit

T. Rowe Price Fixed Income Portfolio Manager Quentin Fitzsimmons believes it will still be a problem to get the deal through Parliament. Two-thirds of the members of Parliament don’t want to leave the EU, and any deal that appears to be surrendering some part of the sovereignty of Northern Ireland will be unacceptable to Northern Ireland. He now expects there is a 45% chance that the UK will leave with a deal this year, a 45% chance that it will leave without a deal on October 31, and a 10% chance of a meaningful delay.

German data show further economic weakening

In August, German exports fell 1.8%, more than expected, as slowing global growth, trade tensions, and Brexit continued to take a toll on Europe’s largest economy. Other data released during the week showed German industrial production fell more than expected in August as a result of weaker domestic demand. The German magazine Der Spiegel reported that the German government will cut its 2020 growth forecast to 1.1% from 1.5%, which it projected in April. It added that the government expected the economy to grow 0.5% this year, thus narrowly avoiding a recession.

Japan

The Nikkei 225 Stock Average advanced 1.8% for the week. For the year to date, the Nikkei 225 ended the week ahead 8.9%, while the large-cap TOPIX Index and the TOPIX Small Index, which also posted gains for the week, were ahead roughly 7% and 6%, respectively. The yen weakened modestly and closed near ¥108 per U.S. dollar on Friday.

The government downgrades estimate of the economy to “worsening”

The Cabinet Office reported that business conditions were “worsening” after its coincident index of business conditions declined to 99.3 in August. The government’s latest reading suggests that the Japanese economy may be slipping toward recession, a reversal from the last monthly assessment that the economy was recovering at a moderate pace. Japan, the world’s fourth-largest exporter, is clearly struggling with the slowdown in its biggest trading partners and export markets. The October 1 consumption tax increase may have dinged consumer confidence.

Unemployment remains at a 26-year low                                                                           

The Internal Affairs and Communications Ministry reported on Tuesday that Japan’s labor market is close to full employment. The August unemployment reading was unchanged at 2.2% from the previous month, matching the 26-year low. The Ministry of Health, Labor and Welfare stated that the job availability ratio, at 1.59, remained excellent. There were 159 job openings for every 100 applicants.

Typhoon Hagibis to shutter Tokyo                                                                               

More than 1,000 flights in Japan have been canceled and train services were set to be halted across Tokyo, as the country braced for a powerful typhoon the coming weekend. Typhoon Hagibis, which is expected to bring heavy rain and violent winds, also forced many factories and shops to close. The typhoon, currently located south of Tokyo, was predicted to make landfall in central or eastern Japan near Tokyo on Saturday.

China

Equities advance on hopes for trade battle resolution

Chinese stocks surged following numerous reports of tentative progress in high-level trade talks that concluded Friday in Washington. For the week, the benchmark Shanghai Composite Index gained 2.4%, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, climbed 2.5%. Both gauges rose to their highest levels of the week on Friday, a day after President Trump told reporters that U.S. and Chinese officials “had a very, very good negotiation.”

The head of the International Monetary Fund warned during the week that the U.S.’s trade war could cost the global economy about $700 billion by 2020, an amount roughly the size of Switzerland’s entire economy. Resolving the U.S.-China trade dispute is likely to continue to create bouts of market volatility, as evidenced by events during the week. However, investors appear to be generally skeptical that a comprehensive trade deal—one that includes resolution of intellectual property and market-liberalization differences and nearer-term balance of trade and market access issues—will be struck soon, said Ray Mills, an international equity portfolio manager at T. Rowe Price.

Other Key Markets

Turkish stocks fall as attacks begin in Syria

Stocks in Turkey, as measured by the BIST 100 Index, returned about -4.3%. Turkish assets weakened as U.S. President Trump announced at the beginning of the week a withdrawal of U.S. forces from northern Syria in order to be out of the way of a Turkish military incursion that started on Wednesday. The potential for U.S. sanctions, which seems to have bipartisan support in Congress, also weighed on the Turkish market.

Brazilian shares rise on hopes for continued rate cuts

Stocks in Brazil, as measured by the Bovespa Index, returned about 1.2%. The market fell early in the week amid uncertainty about U.S.-China trade negotiations—which generally weighed on emerging markets—but shares rebounded in the second half of the week due, in part, to favorable inflation data. As reported by MercoPress, consumer price inflation in September was measured at -0.04%. Contributing to the overall drop in prices was a 0.43% month-over-month decline in food and beverage prices. This deflationary trend, albeit mild and rather rare for Brazil, could enable the central bank to continue reducing the Selic overnight lending rate, which is currently 5.50%, an all-time low. The central bank’s next policy-setting meeting is October 29–30.

T. Rowe Price Sovereign Analyst Richard Hall believes that the central bank may be able to reduce the Selic rate to 4.75%, or even 4.5%, during this easing cycle. However, any major price shock, such as a spike in food prices, or a sudden upswing in economic activity would likely prevent the central bank from cutting the Selic rate that deeply.

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