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Weekly Global Markets Update

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 shrug off volatility in oil

Equities finished the week modestly lower after a spike in oil price volatility caused by an attack on Saudi Arabian oil facilities (see below) and a widely expected interest rate cut from the Federal Reserve. Large-cap stocks outperformed small-caps. Higher-valuation growth companies held up slightly better than value stocks. Companies in the value-oriented transportation industry, which experienced steep losses as a result of the jump in oil prices, weighed on returns for the value category.

Oil spikes following attacks in Saudi Arabia

The September 14 attack on major oil facilities in Saudi Arabia knocked out about 5% of global oil production and triggered a gain of about 13% in the price of West Texas Intermediate crude, the U.S. benchmark, on Monday. The spike was the largest one-day percentage gain since 2016. Oil prices remained volatile throughout the week as Saudi Arabia adjusted its estimates for when it expects the production and processing facilities to come back online. Although oil prices moderated midweek, they still finished the week up approximately 6%.

The broad stock market showed little reaction to the attacks and the ensuing jump in oil prices. However, stocks in the transportation industry, which includes airlines, trucking companies, railroads, and other firms whose profits are particularly sensitive to commodity price swings, suffered. The Dow Jones Transportation Average finished down over 3% for the week.

Fed cuts rates as expected

Stocks also displayed little reaction to the Fed’s decision to lower its benchmark federal funds target rate range by 25 basis points (0.25 percentage points) following its September 17-18 monetary policy meeting. Market participants had widely anticipated the move, and the Fed’s statement following the meeting had no substantive language changes from the previous meeting. Fed Chairman Jerome Powell also seemed to stick closely with his script in his post-meeting press conference, giving investors little information about the central bank’s potential next move.

What is noteworthy is that three members of the Federal Open Market Committee (FOMC) dissented from the policy move, indicating that there may be little consensus among the policymakers about the direction of monetary policy. Two dissenters favored making no change in interest rates, while one thought that the FOMC should have cut rates more deeply, by 50 basis points (0.50 percentage points). The three dissenting votes from policymakers was the largest number since 2016.

Treasuries benefit from higher geopolitical risk

U.S. Treasury yields decreased as the jump in geopolitical risk in the Middle East seemed to convince some investors to move into safe-haven assets like Treasuries. (Bond prices and yields move in opposite directions.) Overnight lending rates were unusually volatile as a result of technical factors relating to the amount of bank reserves available for lending in the money markets. This caused the fed funds rate to briefly break through the upper end of its target range before the Fed stepped in to inject more reserves into the system via overnight repurchase operations. Although there were similar spikes in overnight lending rates at times during the financial crisis of 2007-2009, T. Rowe Price fixed income portfolio managers believe that the latest volatility is the result of technical, transitory factors and is not a signal of major systemic problems.

Municipal bonds lagged the rally in Treasuries, although T. Rowe Price municipal traders noted that market sentiment was more positive than the previous week. Corporate bonds from energy-related issuers, which are more prevalent in the high yield market than in the investment-grade segment, were volatile as investors digested news of the attacks in Saudi Arabia and adjustments to the Saudi government’s projections for the full resumption of oil production.

U.S. Stocks

Index Friday's Close Week's Change % Change YTD

DJIA

26,935.07

-284.45

15.47%

S&P 500

2,992.07

-15.32

19.36%

Nasdaq Composite

8,117.67

-59.04

22.34%

S&P MidCap 400

1,944.64

-19.18

16.93%

Russell 2000

1,559.75

-20.14

15.66%

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 mixed as trade, no-deal Brexit fears ease

Stock markets in Europe were largely range-bound this week, even as trade negotiations between the U.S. and China resumed after two months and hopes for a Brexit deal rose. The pan-European STOXX Europe 600 Index gained 0.4%, while the exporter-heavy German DAX and the UK’s FTSE 100 Index both declined slightly.

Hopes for a Brexit deal support the British pound

The British pound traded in a narrow range this week, buoyed by hopes for a Brexit deal but pressured by the increased likelihood that the Bank of England (BoE) will cut short-term rates. European Commission President Jean-Claude Juncker seemed to open the door to a Brexit deal when he said he was ready to scrap the Irish backstop if UK Prime Minister Boris Johnson could come up with a possible alternative.

T. Rowe Price Fixed Income Portfolio Manager Quentin Fitzsimmons still believes there is a 70% chance that the UK will leave the European Union (EU) without a deal. Fitzsimmons notes that Johnson has a strong incentive to craft an arrangement that Parliament can support. However, it may be more difficult to get Parliament to ratify a new proposal for the contentious Northern Ireland-only backstop than it was to pass former Prime Minister Theresa May’s deal, which Parliament voted down three times. Even if Johnson gets a deal, Fitzsimmons notes, the prime minister has lost his majority, and the opposition's objective now is to get into government, not give Johnson the victory of a Brexit deal, especially since their goals do not include leaving the EU.

Bank of England signals Brexit uncertainty to keep rates low

The BoE kept its main interest rate unchanged this week but signaled that persistent Brexit uncertainty will keep rates lower for longer and that a no-deal Brexit would hurt the economy, leading to slower growth, a higher rate of inflation, and a drop in the value of the pound. As a result, the bank argued that rates could move either up or down in response to Brexit. The UK unemployment rate hit a low of 3.8%, and year-over-year average weekly earnings increased 3.8% in July.

However, T. Rowe Price Economist Tomasz Wieladek said he believes the BoE should not focus on employment and wages but rather on indicators that react faster to changing conditions, such as purchasing managers’ indexes (PMIs), when making their policy decisions. If Brexit uncertainty continues beyond October 31 (either via extension and then election or via a second referendum) and PMIs remain weak, there is a very good chance that the BoE will cut rates in the near term, he explains, even if Brexit is postponed. Data released this week showed a surprise drop in UK inflation. While some of this drop was in idiosyncratic categories, such as computer games, Wieladek said there was also more broad-based weakness in price pressures, which is additional evidence of weaker economic activity and will add further impetus to ease policy if it persists.

Germany’s ZEW survey shows improved sentiment among financial experts

Easing concerns about U.S.-China trade tensions and a no-deal Brexit combined with added monetary stimulus to give a boost to expectations about the German economy, the eurozone’s largest. The ZEW survey of financial market experts showed sentiment in Germany rose in September. However, it also found that the mood about current economic conditions is at its lowest level in nine years. The ZEW institute warned that the outlook for Germany remained negative due to trade disputes and Brexit uncertainty.

Japan

In the holiday-shortened trading week (markets were closed on Monday in observance of Respect for the Aged Day), the Nikkei 225 Stock Average advanced 199 points (0.9%) and closed on Friday at 22,079.09 The widely watched Nikkei average recorded a fifth consecutive weekly gain and stands 10.3% higher for the year to date. The broader measures of the Japanese market, the large-cap TOPIX Index and the TOPIX Small Index, also posted weekly gains; they are ahead 8.2% and 6.7%, respectively, in 2019. At the close of Japanese trading on Friday, the yen was trading at ¥107.91 per U.S. dollar, little changed for the week, versus ¥108.48 at the end of 2018.

No policy changes from the BoJ

At its policy meeting for this month, the Bank of Japan (BoJ) voted 7-2 to leave short-term interest rates at -0.1% and to continue targeting a 10-year government bond yield of about 0%. Board members voted unanimously to maintain other asset purchases. The policy statement reiterated forward guidance that interest rates will remain at extremely low levels through around spring 2020 and that the policymakers would not hesitate to take additional easing measures if there is a greater possibility that momentum toward achieving their 2% inflation target is in jeopardy. The central bankers allowed that they will reexamine developments at the next meeting, when they update the outlook report.

Exports continue falling

While the government noted that the economy was recovering at a moderate pace in early September, it also acknowledged the weakness in the export sector. According to the latest Cabinet Office report, Japanese exports have declined for nine consecutive months (-8.2% year over year in August) due to weakness in the global economy and the U.S.-China trade dispute. A recent Reuters survey showed that many Japanese companies are holding off on new capital investment plans. Confidence among manufacturers fell to a multiyear low in September. Approximately 20% of companies reduced their investment plans, and about two-thirds of firms have decided not to increase spending because profits have stagnated as shipments to China, Japan’s largest trading partner, continue to fall. Overall, the most impacted export segments were autos, machinery, and manufactured goods. Imports also declined, which lowered the trade deficit in August to ¥136 billion ($1.26 billion) from ¥250 billion ($2.70 billion) in July.

Progress on a trade agreement

President Donald Trump said that the U.S. has reached an initial trade accord with Japan, which could be finalized in the coming weeks. The agreement offers U.S. farmers better access to Japan’s market in exchange for lower tariffs on various industrial goods and autos. The U.S. president also told Congress that the government will be entering an executive agreement with Tokyo on digital trade. President Trump is expected to meet with Prime Minister Shinzo Abe in New York next week.

China

Stocks decline as indicators underscore trade war’s damage

Chinese stocks retreated for the week as a batch of closely watched indicators underscored the continued toll of the U.S. trade war on the country’s economy. For the week, the benchmark Shanghai Composite Index shed 0.8% and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, fell 0.9%. The week’s declines followed a trio of indicators released last weekend showing the continued slowdown in key drivers of China’s economy. Growth in industrial output and retail sales in August missed expectations, with industrial output notching its lowest monthly gain since 2002. Fixed-asset investment slowed to 5.5% in the first eight months of the year, also slightly below forecasts.

The latest data lent support to the notion that Beijing’s recent efforts to bolster the economic slowdown aren’t sufficient to counter the risk of yet-higher U.S. tariffs on Chinese goods. On Friday, the People’s Bank of China (PBOC) trimmed the loan prime rate (LPR)—a one-year benchmark lending rate for banks—for the second month in a row, marking policymakers’ latest effort to support the economy. However, the central bank left the LPR longer than five years on hold, reflecting policymakers’ reluctance to flood the banking system with too much liquidity. Despite the unresolved U.S.-China trade battle, overseas investor interest in Chinese domestic stocks remained solid: Friday marked the 16th straight session of foreign fund net flows into Chinese yuan-denominated A shares via the Stock Connect program linking Hong Kong’s stock market with those in the mainland, according to Reuters.

Other Key Markets

Saudi equities gain despite attacks

Saudi stocks, as measured by the Tadawul All Share Index, returned about 1.2% in the five trading sessions since the close of business on Thursday, September 12. The market, which is closed on Fridays and Saturdays, started the trading week with losses but rebounded by the end of the week.

On September 14, the oil production facilities in Abqaiq and the Khurais oil field—both of which are owned by state-owned Saudi Arabian Oil Company (Saudi Aramco)—were attacked by drones and missiles that started massive fires. Abqaiq is the location of the world’s largest oil processing plant, while Khurais is the country’s second-largest oil field. Iran-allied Houthi rebels in Saudi Arabia’s southern neighbor Yemen claimed responsibility, but U.S. and Saudi officials believe the attacks are more directly tied to Iran.

Nevertheless, as a result of these attacks, approximately half of total Saudi production was halted. Because Saudi Arabia normally supplies about 10% of the world’s oil, this temporary loss of production resulted in a global oil price spike when commodity trading resumed early Monday morning in Asia. By the end of the week, oil prices had backed away from recent highs amid Saudi Aramco management expectations that production will return to 9.8 million barrels per day by late October. However, the increase in geopolitical tensions, particularly Iran’s warning of “all-out war” in the event of U.S. or Saudi retaliation, kept regional markets on edge and seemed to put a floor under oil prices in the near term.

In the fixed income market, yields on Saudi Arabian sovereign debt and Saudi Aramco bonds spiked at the beginning of the week. However, yields retraced their ascent over the course of the week, in part because buyers from the Persian Gulf region and other parts of the world took advantage of the more attractive yields.

Oil price spike drags Turkish stocks lower

Turkish stocks, as measured by the BIST 100 Index, returned about -2.75%. Investors were cautious due to Turkey’s proximity to the geopolitical tensions in the Middle East. Also, because the country is a major importer of oil, the increase in oil prices this week is a negative for the Turkish economy, which continues to struggle in the wake of severe currency weakness and significant interest rate increases last year.

The Organization for Economic Cooperation and Development (OECD), however, did acknowledge this week an improvement in the Turkish economy in 2019 by lifting its full-year growth estimate to -0.3% versus an earlier projection of -2.6%. The OECD also expects the Turkish economy to grow 1.6% in 2020, thanks in part to government and central bank stimulus efforts in recent months. However, the OECD cautioned that Turkey’s continued use of stimulus measures “may risk undermining financial and price stability.”

This material is not intended to be investment advice or a recommendation to take any particular investment action. The specific securities identified and described above do not necessarily represent securities that were purchased, sold or recommended and no assumptions should be made that the securities identified and discussed were or will be profitable.

IMPORTANT INFORMATION
This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial, and tax advice before making any investment decision. T. Rowe Price group of companies, including T. Rowe Price Associates, Inc., and/or its affiliates, receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation, or a solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.

It is not intended for distribution to retail investors in any jurisdiction.

USA—Issued in the USA by T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD, 21202, which is regulated by the U.S. Securities and Exchange Commission. For Institutional Investors only.

T. ROWE PRICE, INVEST WITH CONFIDENCE and the Bighorn Sheep design are collectively and/or apart, trademarks of T. Rowe Price Group, Inc. © 2019 T. Rowe Price. All rights reserved.

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