Global Markets Monthly Update

The major benchmarks endured their first monthly losses since March, pulling the S&P 500 Index and the Nasdaq Composite Index temporarily into correction territory, or down more than 10% from their late‑August peaks. As investors shunned some of the information technology and internet giants that have led recent gains, large‑cap value stocks fared better than their growth counterparts, although the opposite was true among mid‑ and small‑caps. Within the S&P 500, energy stocks performed worst by far as oil prices retreated, falling roughly 15% on a total return (including dividends) basis. The much larger communication services and technology sectors were also especially weak, falling about 6.5% and 5%, respectively. The small materials and utilities sectors managed modest gains.

A slight decrease in longer‑term yields resulted in positive returns for Treasury bonds, but corporate bonds recorded modest losses. High yield issues fared worst, pressured by equity weakness and heavy issuance. Elevated issuance also weighed somewhat on the investment‑grade and municipal markets. August inflation readings surprised on the upside, with core (excluding food and energy) consumer prices rising 1.7% on a year‑over‑year basis, the fastest pace since March. The Federal Reserve announced late in August that it would allow inflation to drift above its 2% target as part of an “inflation averaging” program designed to boost the
labor market.

Stimulus Hopes Fade

Equities began the month on a down note, which T. Rowe Price traders attributed in part to profit taking and a general sense that August’s rally had gone too far. The continued gridlock in Washington over another round of stimulus also weighed on sentiment. Negotiations over the size and scope of a relief package showed few signs of progress, and the controversy over replacing Supreme Court Justice Ruth Bader Ginsburg deepened worries that the two parties would fail to come to an agreement. Investors appeared particularly concerned about the lack of additional aid for fiscally strained states and municipalities.

News related to the coronavirus seemed to remain an important driver of sentiment. The S&P 500 had its second‑worst day of the month on September 8, after AstraZeneca announced that it was halting trials of its leading vaccine candidate because of a potential serious side effect in a participant. Stocks bounced back the next week, however, after the company resumed its trials in the UK, while Pfizer’s CEO stated that his company might have a vaccine ready for distribution by the end of the year. Fears over a second wave of the virus in Europe as well as an uptick in cases in the U.S. seemed to weigh on markets again late in the month. (News of President Donald Trump’s diagnosis and treatment for COVID‑19 arrived shortly after the month ended.)

Home Sales Hit New Multiyear High, Retail Sales Pull Back

The month’s economic data generally pointed to a continuing but slowing recovery and may not have pushed markets solidly in either direction. Declines in weekly jobless claims stalled, although gauges of consumer confidence rose sharply. Manufacturing data generally came in better than expected as firms sought to build up inventories depleted in the spring, but the service sector continued to struggle due to cautious consumers, and core retail sales (which exclude purchases at gas stations, auto dealers, building supply stores, and food services suppliers) fell 0.1% in August. Housing remained the bright spot in the economy, with new home sales reaching their highest level since September 2006.

European shares fell after a volatile month. Concerns that a second wave of coronavirus infections could derail a nascent economic recovery and worries about a post‑Brexit deal eroded initial gains. Signs that the next round of U.S. fiscal stimulus could be delayed until after the election also weighed on sentiment. In local‑currency terms, the STOXX Europe 600 ended 1.48% lower, with major country indexes posting losses. Germany’s Xetra DAX fell 1.43%, the CAC 40 in France slid 2.91%, Italy’s FTSE MIB lost 3.15%, and the UK’s FTSE 100 dropped 1.63%.

Governments Clamp Down to Contain Surging Coronavirus

Several countries—including France, Spain, and the UK—tightened restrictions on social gatherings and imposed local lockdowns to curb a surge in coronavirus infections. These governments drew back from reimposing national lockdowns, in part because fatality rates have been much lower. Spain, the Czech Republic, and Montenegro experienced the fastest increases in new infections, with the acceleration in cases approaching similar levels in France and the UK. Accordingly, market optimism about a V‑shaped economic recovery waned, and concerns rose about the possibility of a prolonged recession.

As the number of COVID‑19 cases climbed, UK Chancellor of the Exchequer Rishi Sunak announced further support for jobs, businesses, and the hospitality and tourism sectors. The new jobs initiative involves a much smaller extension of the GBP 39 billion program that is slated to end October 31. The government’s subsidy will fall to 22% from 60%, apply only to those who are working at least a third of their normal hours, and last six months. T. Rowe Price International Economist Tomasz Wieladek said the change in policy means employers are likely to shed more jobs, potentially increasing the unemployment rate to as high as 10% in the next couple of months—compared with about 4% now. Wieladek says that deterioration in employment numbers would put greater pressure on the Bank of England to ease monetary policy.

Rebound in Eurozone Business Activity Falters

IHS Markit’s composite purchasing managers’ index (PMI) showed that the recovery in eurozone business activity lost steam in September as rising coronavirus infection rates and social distancing weakened demand
in the services sector. An early estimate of the September PMI came in at 50.1, down from 50.9 in August. (A PMI reading of 50 marks the level between expansion and contraction.) The services portion of the index slipped below 50, hitting a four‑month low. The manufacturing index, however, reached a 31‑month high on stronger exports.

Tensions flared as the UK and European Union began a new round of talks to flesh out their post‑Brexit relationship. The UK published a draft law to create an internal market after December 31, but some elements overwrote sections of the withdrawal accord that the two sides agreed to last year. The UK government conceded that some clauses would breach international law, prompting the European Commission to threaten legal action and to advise member states to prepare for a no‑deal Brexit.

Stocks in Japan were volatile during the month but ended September with a modest gain. Within the Japanese equity market, as measured by the MSCI Japan Index, growth stocks outperformed value shares, and small‑caps outperformed large‑caps. The yen strengthened slightly versus the U.S. dollar—making it one of few global currencies not to lose ground against the greenback—and closed the period above JPY 105. The yield on 10‑year Japanese government bonds drifted lower over the month and ended the period near 0.01%. Central bank Governor Haruhiko Kuroda said that despite the latest uptick in Japan’s economy, he will not hesitate to take additional easing measures, as necessary, if downside risks emerge.

Prime Minister Suga Takes the Reins From Abe

As was widely expected, Yoshihide Suga was voted in as Japan’s prime minister by both houses of parliament on Wednesday, September 16. He replaces Shinzō Abe, who is leaving his post due to illness. Suga, who is 71 years old, will fill the remainder of Abe’s term, until September 2021. While the press had intimated that Suga would make wholesale cabinet changes, the new prime minister only added five new members, while key members, including Finance Minister Tarō Asō and Foreign Affairs Minister Toshimitsu Motegi, retained their posts. Suga has stated that his top priorities are managing the coronavirus pandemic and the deteriorating economy. He said that he intends to pursue the monetary and fiscal policies established under Abenomics, which helped ease investor concerns, and that he would not dissolve the lower house for a snap election at this time.

Japanese Economic Growth Revised Lower

Japan’s gross domestic product (GDP) growth was revised in September to an annualized pace of ‑28.1% in the first fiscal quarter ended June 30, 2020. The contraction was steeper than the first estimate of ‑27.8% but not as severe as economists’ consensus estimates of ‑28.5%. The further downgrade was caused by additional weakness in public demand and private nonresidential investment following the results of a Ministry of Finance corporate capital expenditures survey.

According to Goushi Kataoka, the most dovish board member of the Bank of Japan’s (BoJ) policy‑setting committee, the central bank needs to enact more aggressive monetary policy easing measures to stave off the effects of deflation and the faltering outlook for consumption and capital spending. In his assessment, the BoJ should be buying government bonds more aggressively and needs to forcefully assert that it is willing to lower interest rates to reduce the strains on businesses and consumers. In a speech to business leaders, Kataoka said, “There’s no change to what needs to be done even under a new administration, which is to use fiscal and monetary tools to spur demand, provide liquidity, and take various steps to help people who are suffering.”

China A‑shares fell in September, joining the global correction at the start of the month. 

The People’s Bank of China maintained a neutral monetary policy stance and left its key lending rate unchanged. Bond yields continued to trend gradually higher, with the yield on the 10‑year sovereign bond rising 13 basis points to 3.17%. The renminbi appreciated in the first half of September against the U.S. dollar, later giving back some of its gains to finish at 6.79 per dollar, a rise of 0.9%. Late in the month, index compiler FTSE Russell said that it would include Chinese sovereign bonds in its widely used World Government Bond Index (WGBI), marking a milestone in China’s efforts to open its capital markets to foreign investors. The decision is expected to draw assets into Chinese government bonds and help support the renminbi.

Trade Tensions With U.S. Likely to Persist

Trade tensions with the U.S. remained on low boil in September as bilateral relations continued to worsen. Two‑way capital flows between the U.S. and China sank to a nine‑year low in the first half of 2020 as tensions stayed high and the coronavirus curbed foreign investment in both countries, according to a research report by the Rhodium Group. Reuters reported that 3,500 U.S. companies, including the likes of Tesla, Ford, and Home Depot, are suing the Trump administration over the earlier imposition of tariffs on imports from China. In late September, the U.S. confirmed plans to impose restrictions on SMIC, China’s largest chip manufacturer. The strike against SMIC raised fears of retaliation from Beijing and an acceleration of the decoupling between the world’s two largest economies.

China Still Leads the Post‑COVID Recovery

Monthly economic data releases for August were robust and well received by markets. Retail sales rose 0.5% in August from a year ago, the first year‑over‑year growth since the pandemic began. Industrial production, seen as the best proxy for GDP, rose a better‑than‑expected 5.6% year‑on‑year. China is the only major economy expected to post positive economic growth this year, according to the Organization for Economic Co‑operation and Development, which raised its growth forecast for China to +1.8% from the ‑3.7% projected in June, crediting the country’s rapid control of the coronavirus.

China’s PMIs for September, released at month‑end, also beat expectations. While the data underscored that the country’s economic recovery was on track, they also dampened expectations that Beijing would implement fresh fiscal and monetary stimulus measures anytime soon.

Turkey

Turkish stocks, as measured by MSCI, returned 0.48% in U.S. dollar terms versus ‑1.58% for the MSCI Emerging Markets Index. Although the market outperformed the emerging markets universe, a 4.5% drop in the lira versus the dollar reduced larger local returns to U.S. investors.

During the month, Moody’s Investors Service downgraded Turkey’s sovereign credit rating to B2 from B1; it is now several notches below investment grade. According to T. Rowe Price sovereign analyst Peter Botoucharov, Moody’s identified three “key drivers” for the downgrade: Turkey’s external vulnerabilities could lead to a balance‑of‑payments crisis, institutions are increasingly unable or unwilling to deal with the reasons for Turkey’s declining credit profile, and Turkey’s fiscal buffers are deteriorating.

Toward the end of the month, Turkey’s central bank surprised investors with a 200‑basis‑point increase in its benchmark lending rate, the one‑week repo auction rate, from 8.25% to 10.25%. This was the central bank’s first interest rate increase in about two years. The central bank also made a similar move to increase its overnight lending rate from 9.75% to 11.75% and its late liquidity window facility rate from 11.25% to 13.25%. Botoucharov believes that further monetary tightening is likely.

Brazil Holds Rates Steady

Stocks in Brazil, as measured by MSCI, returned ‑7.06%. The market underperformed the MSCI Emerging Markets Index, which returned ‑1.58%, as the real slipped more than 2.6% versus the U.S. dollar.

At its regularly scheduled two‑day policy meeting on September 15–16, Brazil’s central bank decided to keep its Selic benchmark lending rate at 2%. Also, T. Rowe Price sovereign analyst Richard Hall noted that forward guidance regarding interest rates and inflation were the same as they were following policymakers’ August 4–5 meeting. The central bank does not intend to raise rates until inflation projections and expectations are closer
to the 3.75% inflation target—assuming no change in current fiscal policies that leads to a breach of the
spending cap.

According to Hall, central bank officials are acknowledging that inflation will accelerate a bit in the short term due to an increase in food prices, but they don’t seem particularly concerned. While year‑over‑year headline inflation is only a bit above 2.5% and the average core inflation measure is below 2%, Hall notes that there has been a sequential acceleration of inflation amid higher fuel and protein prices.

Unreliable Electricity Worsens Contraction in South Africa

South African stocks, as measured by MSCI, returned ‑0.88% in September versus ‑1.58% for the MSCI Emerging Markets Index. The rand appreciated about 1.5% versus the U.S. dollar, lifting returns in dollar terms.

During the month, the government reported that the country’s GDP contracted at an annualized rate of 51% in the second quarter. Contributing to South Africa’s economic woes is the unreliability of electricity due to poorly maintained equipment operated by Eskom, the state‑owned utility that is responsible for delivering electricity to most of the country.

Another entity requiring significant government support is the state‑owned South Africa Airways. Toward the end of the month, there were indications that President Cyril Ramaphosa’s administration would pursue a costly bailout of the airline—which is contrary to Finance Minister Tito Mboweni’s belief that the airline should be liquidated. Speculation is growing that Mboweni may resign due to the apparent lack of support from Ramaphosa. According to T. Rowe Price credit analyst Roy Adkins, the battle over the airline’s fate is, in many ways, a microcosm of the larger policy battles that are paralyzing South Africa as a whole.

Total returns unless noted
As of 9/30/2020
Figures shown in U.S. dollars