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Weekly Global Markets Update

November 9, 2018

Global Markets Weekly Update

T. Rowe Price

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 rally on midterm election results

Stocks were higher but gave back a portion of their gains to end the week. The large-cap indexes outperformed the technology-heavy Nasdaq Composite Index and the smaller-cap benchmarks, and slower-growing value stocks outpaced higher-valuation growth shares. Within the S&P 500 Index, health care stocks outperformed. Provider and insurer shares rose on Wednesday after the Democrats won a majority of seats in the House of Representatives, seemingly assuring a continuation of subsidies under the Affordable Care Act. Communication services stocks performed worst, held down by late declines in Netflix and video game stocks. Energy stocks were also weak, dragged lower by a sharp decline in oil prices. 

Investors appear to welcome gridlock

The midterm elections on Tuesday dominated sentiment throughout the first half of the week, according to T. Rowe Price traders. Stocks recorded modest gains on Monday and Tuesday, as polls suggested that Democrats would take the House and that Republicans would retain control of the Senate. Stocks surged on Wednesday after those results were confirmed, with the S&P 500 recording its third-best daily gain over the past year. Trading volumes during Wednesday’s rally were unimpressive, however—roughly 7% below the trend over the previous 20 trading days.

The prospect of legislative gridlock seemed to be a welcome one, and many on Wall Street may have focused on a historical pattern of gains following the midterms—stocks have rallied after every midterm election since 1946. However, T. Rowe Price managers point out that elections and other political developments are typically overshadowed by more fundamental factors, such as the direction of monetary policy and longer-term economic forces. (For additional T. Rowe Price perspectives, see “Fundamentals Outweigh Politics in Investment Outlook.”)  

Oil prices slide into bear market territory

The week’s economic data were mixed. The Institute for Supply Management’s measure of service sector activity, reported Monday, declined less than expected in October and remained just below the record peak (since the Institute began collecting data in 2008) that was reached in September. Weekly jobless claims stayed near multi-decade lows, and the University of Michigan’s gauge of consumer sentiment rose a bit. More concerning was a jump in producer price inflation, with much of the inflationary pressure coming from wholesalers and retailers.

Meanwhile, a continued slide in oil prices led some to wonder whether global demand was slowing, calling into question the overall health of the global economy. In the U.S., investors also worried about a continuing rise in oil inventories, and the price of a barrel of domestic benchmark West Texas Intermediate (WTI) crude fell into a bear market—down over 20% from a four-year high of about $76 in early October. By the end of the week, WTI had fallen back to around $60 per barrel, its lowest level in eight months.

Bonds: Mixed economic signals keep long-term yields steady

The mixed economic data and the lack of surprise in the election outcome kept longer-term Treasury yields roughly unchanged for the week. (Bond prices and yields move in opposite directions.) Municipals saw heavy investor demand early in the week, coupled with limited supply from new issuance, which led to elevated activity in the secondary market. While the issuance calendar was expected to pick up in the following week, the anticipated drop-off in supply leading into the holiday season suggested a positive technical environment leading into the end of the year.

Credit spreads—the extra yields offered by investment-grade corporate bonds over Treasuries with similar maturities—tightened throughout most of the week, supporting prices in the sector. Trade volumes were light through Election Day, however. When trading returned to normal, activity was mostly concentrated in long-term issues, as sellers took profits. New issuance for the week slightly exceeded expectations. The high yield market was mostly quiet and focused on earnings releases as investors awaited election results. Most issuers reported earnings that were either in line with or ahead of expectations. However, there were several disappointing earnings reports late in the week. High yield funds reported inflows for the week.

Index

Friday’s Close

Week’s Change

% Change YTD

       

DJIA

25,989.30

718.47

5.14%

S&P 500

2,781.01

57.95

4.02%

Nasdaq Composite

7,406.90

49.91

7.29%

S&P MidCap 400

1,885.09

23.38

-0.81%

Russell 2000

1,551.76

3.03

1.06%

 

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

Fears of rising rates and regional slowing pressure shares

The European STOXX 600 index was relatively flat for the week, pressured by fears of rising U.S. interest rates, disappointing earnings, worries about Italy’s growing rift with the European Union (EU), and continued signs that trade tensions are hurting economies throughout the region.

Italian yields rise after EU warns Italy on potential to breach spending targets

Italian debt came under added pressure after the EU warned Italy that it is poised to breach the EU’s 3% budget deficit limit in 2020 if the government proceeds with its current spending plans. In issuing the warning, the EU has ratcheted up the pressure on Italy and called its budget assumptions into question. The European Commission (EC) said that it expects Italy’s deficit to hit 2.9% in 2019 and 3.1% the following year and that the Italian economy would expand only by 1.2% in 2019—less than the 1.5% estimate that underpins Italy’s budget plan.

T. Rowe Price Sovereign Analyst Ivan Morozov believes that while the EU forecast may be conservative, the warning sends a clear message that Italy’s fiscal policy deviations are far too large to be ignored and will require large corrections, which the government is unlikely to deliver. As a result, Morozov expects the EC will initiate its excessive deficit procedure (EDP) on Italy by year-end. The EDP has limited mechanisms to penalize countries for noncompliance, however, so the EC will continue relying on markets to force the government to change its fiscal stance. While markets pushed the yield on the 10-year sovereign bond as high as 3.418% on Thursday, Morozov said he does not believe the Italian government will compromise until yields and credit spreads are much higher. 

Eurozone data point to regional slowing

Economic data continued to show signs of the slowing across the region and the toll that trade tensions are taking on exports and sentiment. T. Rowe Price Portfolio Manager Ken Orchard said that global demand has been a drag on growth, as have political uncertainty in Italy and problems in the German car manufacturing sector. The EC said that eurozone growth would slow though 2020, pressured by trade worries, high oil prices, and overall uncertainty. Eurozone composite final purchasing managers’ indexes (PMIs) fell in October to 53.1, their lowest level since September 2016, and eurozone factory activity grew at its weakest pace in more than two years, with export orders falling for the first time since 2014. 

Japan

The Nikkei 225 Stock Average was nearly unchanged for the week, closing trading at 22,250.25, which is 2.3% lower for the year to date. The broad-based TOPIX and TOPIX Small Indexes posted better gains, but their year-to-date performance remained more significantly in negative territory, down 8.0% and 10.4%, respectively. At the close of Japan’s trading session on Friday, the yen stood at ¥113.79 per U.S. dollar, slightly lower for the week but modestly higher for the year to date. 

Profit gains at the halfway point of the current earnings season…

September 30 marked midyear for Japanese companies’ 2019 fiscal year, which ends in March 2019. A recent report shows that about half of the companies in the TOPIX Index have reported their results (as of November 6). Net earnings for the 708 companies that have reported were up 8% year over year.

…but sentiment is mixed

The Reuters Tankan poll showed manufacturers’ business confidence declining in November, and sentiment is expected to deteriorate further in the coming three months. The Reuters monthly business sentiment index, which closely tracks the Bank of Japan’s quarterly Tankan index, declined to 26 in November from 28 in October. The weakest segments included precision machinery and chemical manufacturers. Managers surveyed cited higher raw materials costs and natural disasters in the June quarter. Further capital expenditure delays are expected because of global economic uncertainties and trade tensions. However, the service sector (nonmanufacturing) portion of the Reuters survey rebounded to 30 from 24 in October, paced by optimism in retailers and transport and utility companies.

Coincident index points to slower economic growth

On Wednesday, the Cabinet Office reported that Japan’s coincident economic indicators declined in September for the first time since May 2015. The government data, which measure the health of industrial output, employment, and retail sales, suggest that Japan’s economy is stalling. The leading index—a forward-looking economic measure—also fell. Slower exports were cited as the major reason for the economic slowdown. The consensus of economists recently polled by Reuters is that Japan’s economy is likely to contract in the September quarter, reversing course again after posting strong growth in the June quarter that followed a contraction in the first quarter of the year.

China

Exports to the U.S. surge in October despite U.S. tariffs

China reported a surprisingly large increase in October exports, underscoring strong global demand for the country’s goods despite the imposition of U.S. tariffs. Chinese exports climbed 15.6% in dollar terms in October from a year ago, above September’s 14.5% advance and economists’ 11% forecast. Imports also rose more than expected, though imports from the U.S. declined for the second-straight month.

October’s export surge was driven by strong demand from both developed and emerging markets, as well as from businesses rushing to place export orders before tariffs take effect. A weaker Chinese currency has also offset the impact of U.S. tariffs, notes T. Rowe Price Emerging Markets Portfolio Manager Ernest Yeung. The yuan has lost 9% of its value against the U.S. dollar in the six months ended in October and is down nearly 7% this year, making Chinese goods cheaper for overseas buyers and effectively wiping out the punitive impact of U.S. levies.

Analysts see China’s export growth slowing as demand from frontloading (i.e., buyers rushing to put in orders before tariffs take effect) fades in the coming months. On the other hand, the persistent trade imbalance with the U.S. suggests that the trade impasse between the countries won’t be resolved anytime soon. China’s trade surplus with the U.S. narrowed last month to $31.8 billion—down from September’s record $34.1 billion but still a relatively high figure that leaves China on track to post another record annual surplus with the U.S. Barring an unexpected resolution, the prospect of a years-long “cold war” between the U.S. and China in trade appears increasingly likely, believes Asian Equities Portfolio Manager Eric Moffett. 

Other key markets

Inflation weighs on Turkish assets

Turkish stocks declined—the BIST 100 Index fell about 1.7%—despite indications of improving relations between Washington and Ankara. In the wake of the Turkish government’s release of long-held U.S. pastor Andrew Brunson, the U.S. dropped sanctions against the two Turkish government officials that it had sanctioned due to their alleged role in Brunson’s detention. Also, the U.S. gave Turkey—along with seven other countries—a six-month waiver for its newly reinstated sanctions on Iran’s oil industry.

The Turkish lira was pressured by data showing that annual inflation soared to 25.24% in October, its highest level in 15 years. With headline inflation likely to increase further in the coming months and with the central bank’s policy rate at 24%, real rates remain in negative territory and are unattractive, making it is likely that the central bank will need to continue raising rates. The central bank’s last rate increase was on September 13, when it lifted its main policy rate from 17.75% to 24%. Although the U.S. Federal Reserve did not raise rates at its November 7–8 policy meeting, expectations for the Fed to do so in December—which should support a stronger U.S. dollar—also weighed on the lira.

On Friday, the Treasury and Finance Ministry announced that it was cancelling three upcoming Turkish bond auctions because of a reduction in its financing needs. While the government claims that this is a positive development, T. Rowe Price Sovereign Debt Analyst Peter Botoucharov is concerned that this could actually be a defensive move. According to Botoucharov, the government is reducing issuance of longer-dated bonds in favor of shorter-dated debt, which reduces the costs of funding but also reduces the duration of the government debt. The upcoming auctions would have raised a significant amount of capital but could have also pushed up funding costs and weakened the lira, so cancelling some of the upcoming auctions helps reduce these risks. 

Mexican stocks tumble on legislative proposal to reduce bank fees

Mexican stocks, as measured by the IPC Index, fell more than 2% for the week. Stocks were volatile, as strong gains in the first part of the week were more than wiped out by a sharp sell-off on Thursday.

Bank stocks fell sharply following news of a proposal to reduce or eliminate certain bank fees and commissions currently charged to customers. The proposed legislation, which was introduced in the Senate by Ricardo Monreal, a member of President-elect Andrés Manuel López Obrador’s Morena political party, raised concerns that banks would suffer a significant revenue hit if the legislation becomes law. Late on Friday, the market rebounded from an intra-day 2% drop after López Obrador stated that he was not planning to change the laws regarding banks. López Obrador will take office on December 1.

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. © 2018 T. Rowe Price. All rights reserved.

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