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.
Stocks end mixed as reopening hopes meet with evidence of economic damage
The major indexes recorded mixed returns, as investors weighed record downturns in economic data against hopes that progress in containing the coronavirus pandemic might soon result in a partial reopening of the economy. The technology-heavy Nasdaq Composite Index outperformed by a wide margin, as did growth stocks relative to value shares and large-caps relative to small-caps. Relatedly, tech shares outperformed within the S&P 500 Index, helped by strong gains from chipmakers, as well as bellwethers Microsoft and Apple. A solid gain in Amazon.com boosted consumer discretionary shares, and gains among pharmaceutical and managed care companies helped health care stocks.
Much of the week’s gains came on Tuesday, as investors reacted positively to reports of slowing coronavirus infection rates and hospitalizations in some of the nation’s hardest-hit areas. Sentiment also seemed to get a boost from reports that governors were assembling regional coordinating committees to plan for the gradual reopening of their economies. T. Rowe Price traders reported that another significant factor in the day’s rally was pressure put on traders with a short position in stocks that had been hurt the most by the pandemic. As a result of the so-called “short squeeze,” airlines, cruise lines, and hotels were among the industry groups that had outsized moves to the upside.
FactSet: Quarterly profits likely fall over 14%
Tuesday also brought the unofficial start of earnings reporting season, with some major banks reporting first-quarter profits. JPMorgan Chase and Wells Fargo reported profit declines of 70% and 89%, respectively, while Citigroup, which reported Wednesday, reported a drop of 46%. While bank earnings are feeling the pinch of lower lending margins due to falling interest rates and the prospect of rising loan defaults, analysts polled by FactSet expect other sectors to fare somewhat better, with overall earnings for the S&P 500 declining 14.5%. According to Refinitiv (formerly Thomson Reuters), 33 S&P 500 companies were expected to report results during the week.
The week’s economic data highlighted the challenges facing companies and appeared to foster a downturn on Wednesday. The Commerce Department reported that retail sales plunged 8.7% in March, the biggest decline on record and even worse than forecasts. T. Rowe Price Chief U.S. Economist Alan Levenson notes that clothing and apparel sales fell by half, while sales gains at health and personal care stores and warehouse clubs and superstores rose less than anticipated. A nearly 26% gain in food and beverage store sales roughly offset the decline in restaurant and bar receipts, however. On Thursday, the Labor Department reported that another 5.2 million Americans had filed unemployment claims, bringing the total over the previous four weeks to more than 22 million.
Treatment hopes bolster markets on Friday
Wall Street finished the week on a strong note, helped by a report that some coronavirus patients were recovering quickly after receiving treatment with Gilead Sciences’ antiviral medication, Remdesivir. News that Boeing was planning to restart production of widebody jets in Washington over the following week boosted the company’s shares and seemed to support sentiment generally.
Treasury yields edged up early in the week on news of an agreement to cut oil production (see Saudi Arabia section below) but fell back to end the week lower in response to the poor economic data. The broad municipal market produced positive returns over most of the week but underperformed Treasuries. T. Rowe Price traders noted that primary market activity improved, however, particularly regarding deals from higher-quality issuers. The state of California issued over USD $1 billion in general obligation (GO) bonds. The deal was upsized and repriced to lower yields on solid investor demand.
Overseas investors support corporate bond market
Strong demand from overseas investors bolstered the performance of the investment-grade corporate bond market, although credit spreads—the extra yield over Treasuries on risk-sensitive securities—were mixed amid the unsettled economic backdrop. The volume of issuance exceeded expectations, and the firm’s traders noted that most new deals were well received.
Meanwhile, positive flows provided technical support to the high yield market, which also witnessed solid demand for new deals. Our traders noted that most buyers were focused on higher-quality issuers and those that have recently been downgraded to below investment-grade status. OPEC’s recent announcement of major oil production cuts brought some stability to the energy segment, where credit-specific news drove much of the week’s movement.
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S&P MidCap 400
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.
European shares ended higher, clawing back earlier losses, on U.S. President Donald Trump’s plan to start reopening the U.S. economy and hopes for a treatment for COVID-19, the disease caused by the coronavirus (see above). The STOXX Europe 600 Index rose 0.61%. Other markets were mixed, with Germany’s Xetra DAX up 0.66%, France’s CAC 40 little changed, and Italy’s FTSE MIB down 2.91%. The UK’s FTSE 100 Index slipped 0.93%.
Some countries extend lockdowns, others ease restrictions
Some European countries extended their lockdowns while outlining plans to reopen economies amid signs that the coronavirus crisis was abating. France will continue its lockdown until May 11 and then open schools. Italy, which extended containment measures until May 3 last week, has reportedly begun considering how to reopen its economy. The UK said the lockdown could last at least another three weeks, with ministers split on whether to encourage people to go back to work. Meanwhile, children in Denmark are back in nurseries and primary schools, Italy opened some bookshops and small stores, Austria allowed home improvement shops to open, the Czech Republic lifted restrictions on communal sports, Germany’s automakers are set to resume production next week, and Spain allowed workers in nonessential industries to return to work.
Eurozone agrees on loan-based rescue deal
Eurogroup finance ministers agreed on a EUR 500 billion package of measures supporting businesses, workers, and sovereigns through the coronavirus crisis. Agreement was reached after the Dutch backed away from demands that lending by the bailout fund should be subject to tougher conditions. The new measures include revised pandemic credit lines from the European Stability Mechanism, a boost to the lending capacity of the European Investment Bank, and a new EUR 100 billion unemployment insurance scheme. The package is mostly reliant on loans that would add to already large debt burdens. Ministers also agreed to create a recovery fund designed to help the single-currency area bounce back after the coronavirus crisis, but Paris and Berlin are divided over how it will be financed.
On Friday, French President Emmanuel Macron warned in an interview with the Financial Times that the eurozone could collapse unless there is an agreement on a recovery fund. He said there was no choice but to set up a fund that could issue common debt with a common guarantee to finance member states according to need rather than the size of economies.
Italian and peripheral government bonds came under pressure after the Eurogroup failed to agree on how to finance a recovery fund. Italy’s 10-year yield rose to a four-week high of more than 1.8%, and yields on bonds issued by Greece, Portugal, and Spain also moved higher, as investors began to focus on the creditworthiness of individual countries.
Lagarde: ECB ready to do whatever it takes
European Central Bank (ECB) President Christine Lagarde repeated at an International Monetary Fund (IMF) meeting that the central bank is willing to do everything necessary within its mandate to help the euro area pull through the coronavirus crisis. She said the ECB is fully prepared to increase the size of its asset purchase programs and adjust their compositions by as much as necessary and for as long as needed. Lagarde also said that the central bank will explore all options and all contingencies to support the economy through this shock. The ECB is bracing for a "large contraction" of the economy and, at least initially, falling inflation, she said.
IMF: Sharp eurozone contraction in 2020
The IMF predicted that the eurozone economy will shrink by 7.5% this year before partly recovering and growing 4.7% next year. It also forecast in its April Fiscal Monitor that gross public debt will rise by around EUR 800 billion from 2019 to 2020 and reach 97.4% of gross domestic product (GDP), much higher than during the sovereign debt crisis. Greece and Italy will have the highest debt burdens this year among euro area countries, exceeding 150% of GDP. Some other states, including France, Spain, and Portugal, will have debt burdens of more than 100% of GDP.
Japanese stocks rallied for the week. The Nikkei 225 Stock Average advanced 399 points (2.0%) and closed at 19,897.26. The widely watched benchmark is down 15.9% for the year-to-date period. The large-cap TOPIX Index and the TOPIX Small Index also posted gains for the week but ended with slightly larger year-to-date losses. The yen was modestly stronger and traded in a range near JPY 108 per U.S. dollar on Friday.
Abe expands state of emergency
In response to a doubling of coronavirus infections in Japan from April 7 to April 15, Prime Minister Shinzo Abe declared a nationwide state of emergency. On Thursday, the government widened the state of emergency from Tokyo and six other prefectures to the entire country. Although not an official lockdown order, the prime minister has given authorities more power to urge businesses to close and residents to stay at home until May 6. The goal is to reduce travel during the Golden Week (four market holidays beginning with Showa Day, on April 29. Abe is urging people to remain at home, maintain social distancing measures, and not to travel across prefectures—reducing the spread of the virus to areas with low infection rates.
According to The Nikkei, Japan's Health Ministry has warned that if no immediate measures are taken to reduce human-to-human contact, the second wave of coronavirus infections could result in 850,000 seriously ill patients. The calculation was based on overseas outbreaks using the assumption that each coronavirus carrier infects roughly 2.5 people.
IMF lowers Japan’s economic growth projection
The coronavirus pandemic is having a massive impact on the global economy, according to the International Monetary Fund’s World Economic Outlook, April 2020. The growth projections from the IMF point to a 3.0% contraction in global growth in calendar year 2020, with the Japanese economy expected to contract 5.2% in 2020 and rebound to 3.0% growth in 2021. These forecasts assume that the pandemic recedes in the second half of 2020 and global fiscal and monetary policy actions are effective in preventing widespread bankruptcies and extended job losses. The IMF predicts the global downturn will be the most severe since the Great Depression of the 1930s.
For the week overall, the Shanghai Composite index rose 2.0% and the CSI 300 large-cap stock index gained 2.3%, both indexes gaining steadily over the week.
China's first-quarter GDP grim, as expected
The headline annual decline in first-quarter GDP of 6.8% was within a broad range of estimates. Financial markets were able to rise on the news, even though the majority of the monthly data that were released alongside the GDP estimate also came in below expectations. Fixed asset investments (current prices) fell 16.1%, and March retail sales fell 15.8% from a year ago. Industrial output was something of an outlier, only falling 1.1% versus a Bloomberg consensus of a 6.2% decline.
Industrial production rebounded sharply, in line with the high frequency data suggesting that large industrial enterprises had been the first to restart and recover activity levels after the coronavirus lockdown ended. Services and retail sales, in contrast, remained well below normal levels.
While a deep first-quarter GDP shock was expected, there is a strong consensus among both international and local analysts that since it was the first country to be hit by the coronavirus, China will also be the first economy to lead the way out. Earlier in the week, China's customs trade data for March were welcomed as being better than consensus. Total exports in value terms declined 6.6% year on year, much better than their 17.2% contraction during January and February.
Money and credit—the spigot finally opens
Bank lending and credit data released on April 10 showed strong signs that China's monetary policy has accelerated. To some extent, the rise in monthly new credit may represent pent up demand following the lockdown. But it is also likely to represent a stronger, more determined push to ease monetary policy by the authorities. March saw record-high corporate bond issuance of RMB 995 billion and a rebound in both household and corporate borrowing. Importantly, the growth in China's broad measure of money supply, M2, picked up significantly to 10.1% year on year, the fastest rate of increase since March 2017.
Moody's downgrades property sector outlook to negative
Coronavirus disruptions, a slowing economy, and tighter offshore funding led Moody's to downgrade the outlook for China's property sector to negative. The ratings agency expects a 5% to 10% fall in sales in 2020 combined with high inventory levels. Reduced access to offshore funding will raise refinancing risk for a number of weaker developers, as USD 92 billion in onshore and offshore Chinese property bonds are set to mature by May 2021.
Moody's switch to a negative outlook coincides with some evidence of short-term recovery, as pent-up property demand from the lockdown period materialized in March. That led to a slight increase in house prices across all city tiers, according to data for March from the National Bureau of Statistics. New house prices in March were 3.3% higher year on year, while in the secondary market prices rose 2.4% year on year. This suggests relatively limited damage to China's residential property sector from the lockdown phase of the coronavirus outbreak.
Other Key Markets
Mexican shares rally on fiscal stimulus plans
Mexican stocks, as measured by the IPC Index, returned about 0.5%, as midweek losses were offset by a brisk rally on Friday amid reports that the government would increase spending in May to help smaller businesses and bolster social programs. Other Mexican assets were under pressure for much of the week.
On Wednesday, Fitch Ratings downgraded Mexico’s sovereign long-term credit rating from BBB to BBB-, the lowest tier within investment grade, but kept its outlook at “stable.” This follows a decision by the ratings agency earlier this month to downgrade the debt-laden, state-owned energy company PEMEX by one notch to BB, well into junk territory, partly due to weakening government support. In this case, however, Fitch believed a “negative” outlook was more appropriate. On Friday, Fitch downgraded PEMEX yet again, to BB-, and changed its outlook to “stable.”
The combination of a health, economic, and oil crisis has been a perfect storm for Mexico, according to T. Rowe Price Sovereign Analyst Aaron Gifford, who is disappointed by the way the government has handled the situation thus far—including withholding support from the private sector and doubling down on President Andres Manuel Lopez Obrador’s populist agenda. A much-anticipated downgrade of PEMEX by Moody’s would lead to the largest fallen angel in history, according to Gifford.
Saudi shares fall as oil resumes its retreat
Saudi stocks, as measured by the Tadawul All Share Index, returned about -5.3% in the five trading sessions since the close of business on Thursday, April 9. The market is closed on Fridays and Saturdays.
The Saudi market surrendered the previous week’s gains, and then some, as oil prices retreated amid disappointment with oil producers’ efforts to reduce global production. On Sunday, a group of OPEC and non-OPEC oil-producing nations, collectively called OPEC+, agreed after several days of meetings to reduce global production by 9.7 million barrels per day in May and June. Smaller reductions will be required through April 2022.
The drop in oil prices suggests that, even after the production cuts, world oil markets will still have abundant supplies due to the significant reduction of global demand. Late in the week, energy ministers from Saudi Arabia and Russia issued a joint statement in which they expressed willingness “to take further measures jointly” with other oil-producing nations to help stabilize world oil markets.
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