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Weekly Global Markets Update

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.

Equities lose momentum later in the week

Stocks kicked off the week with strong performance on Monday on news of a deal between the U.S. and Mexico to avert tariffs before losing some momentum later in the week. The large-cap S&P 500 Index and the Dow Jones Industrial Average finished the week with modest gains. The Russell 2000 Index of small-cap companies slightly outperformed larger-cap indexes.

Information technology stocks mirrored the broader market, posting strong gains on Monday before flattening out as the week progressed. According to T. Rowe Price traders, the technology sector benefited from a mergers and acquisitions tailwind early in the week after Salesforce.com, a leading customer relationship software company, announced that it would acquire data analytics provider Tableau Software. Salesforce will pay over $15 billion for Tableau in an all-stock deal, demonstrating the strong market demand for data analysis software. Outside the technology sector, industrial conglomerate United Technologies said that it will buy defense contractor Raytheon in another all-stock deal to create an aerospace giant with more than $70 billion in annual revenue.

Volatile energy sector

Energy stocks were volatile. The price of West Texas Intermediate crude oil, the U.S. benchmark, plummeted about 4% on Wednesday after a government report showed a large increase in U.S. crude oil inventories for the second consecutive week. However, on Thursday morning, news that two oil tankers had been attacked in the Gulf of Oman triggered a sharp rally in oil that recovered some of the losses from earlier in the week.

While the attacks ratcheted up the tensions in the Middle East, stocks seemed to shrug off the uptick in geopolitical risk. Investors may still be counting on a rate cut from the Federal Reserve in the coming months to support the market. Adding to the case for a rate cut, government data showed that the consumer price index rose only 0.1% in May, down from a 0.3% increase in April. Muted inflation may give the Fed more room to make monetary policy more accommodative by cutting interest rates.

Weak inflation boosts Treasuries

The weak inflation data helped push Treasury yields lower, with the yield on the 10-year Treasury note falling below 2.10% in Friday trading. (Bond prices and yields move in opposite directions.) Treasuries also benefited from the building geopolitical tensions in the Middle East and the continuing uncertainty about the trade war between the U.S. and China, both of which encouraged investors to move into safe-haven assets.

Municipal bonds underperformed Treasuries, as new muni issuance was higher than average for 2019. In one of the more notable new deals, Pennsylvania sold almost $900 million of general obligation debt. In a positive sign for the fiscal condition of states, the National Association of State Budget Officers announced that states’ “rainy day” fund balances, as a share of general fund expenditures, are on pace to reach the highest average level since the organization began tracking data in 1988.

Energy sector high yield bonds lag

The investment-grade corporate bond market appeared to focus on a higher-than-expected level of new issuance. T. Rowe Price traders said that the market easily absorbed the week’s new deals. In the high yield bond market, energy sector bonds lagged on oil price weakness despite a partial rebound after the tanker attacks in the Gulf of Oman.

U.S. Stocks

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

DJIA

26,089.61

105.67

11.84%

S&P 500

2,886.98

13.64

15.16%

Nasdaq Composite

7,796.66

54.56

17.50%

S&P MidCap 400

1,899.92

7.32

14.24%

Russell 2000

1,522.50

7.25

12.90%

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 buoyed by late-week rise in oil prices

European stock markets ended the week higher, buoyed by the rise in oil prices stemming from the tanker incident in the Gulf of Oman, but still under pressure from U.S.-China trade tensions and weak Chinese industrial data. The pan-European STOXX Europe 600, the UK’s FTSE 100 Index, the exporter-heavy German DAX index, and Italy’s FTSE MIB Index all gained.

Wieladek: U.S.-EU beef deal may help avert car tariffs

The European Union (EU) and the U.S. brokered a beef-import deal that could bring an end to a decade-long dispute over a restriction of beef imports into the European market. The deal, says T. Rowe Price Economist Tomasz Wieladek, reaffirms Brussels’ determination to improve trade relations with the U.S. and may increase the likelihood that car tariffs, which the U.S. has threatened to impose, can be avoided.

U.S. farmers will now have access to 80% of the annual EU quota on hormone-free beef over seven years. The deal was reached after the EU persuaded Australia, Argentina, and Uruguay to give up chunks of the quota. EU Agriculture Commissioner Phil Hogan said the deal reaffirms the EU’s commitment to bringing about a new phase in its relationship with the U.S. that is in line with an agreement reached between European Commission President Jean-Claude Junker and U.S. President Donald Trump in July 2018. The agreement resulted in a de-escalation of tensions that had threatened to spiral out of control and into an all-out trade war.

Johnson wins first round of UK Conservative Party’s poll to replace May

In the UK, former Foreign Secretary and London Mayor Boris Johnson finished ahead of rivals in the Conservative Party’s first round of voting to choose a leader to replace outgoing Prime Minister Theresa May. Johnson, who this week reiterated his pledge to take the UK out of the EU by October 31, won 114 of 313 votes cast by Conservative lawmakers. His closest competitor, Jeremy Hunt, the current foreign secretary, had 42. There could be two more ballots before the final two candidates are announced next week.

Pound under pressure from UK political uncertainty, economic contraction

The British pound lost about 1% against the U.S. dollar this week amid the political uncertainty and on news that the UK’s economy contracted sharply in April, when it had the largest decline in car production on record. Manufacturers have reported that they have been unable to reverse automotive factory closures planned to coincide with the country’s expected EU departure in March. According to the Society of Motor Manufacturers and Traders, UK car production was cut in April by nearly one half.

Japan

Japanese stocks gained for the week. The Nikkei 225 Stock Average advanced 232 points (1.1%) and closed on Friday at 21,116.89. The Japanese stock market yardstick is up 5.5% for the year to date. The broader measures of the Japanese market, the large-cap TOPIX Index and the TOPIX Small Index, posted more modest weekly gains and have smaller 3.5% year-to-date returns. At the close on Friday, the yen stood at ¥108.38 per U.S. dollar, little changed for the week and modestly stronger for the year to date.

Japan’s economic growth revised higher

For the quarter ended in March, Japan’s gross domestic product annualized growth rate was increased to 2.2% from the 2.1% estimate a month ago due to upwardly revised capital spending data, according to the Cabinet Office. Although the improved growth estimate is welcome news, it may prove to be temporary. The world’s third-largest economy, which is largely reliant on exports, is being choked by slackening global demand for its goods and services as a result of the U.S.-China trade dispute. Most analysts believe that if foreign demand continues to weaken, it will dent corporate and consumer sentiment and curb domestic spending.

Japanese exports fell for a fifth consecutive month in April, in part because of a fall-off in shipments of semiconductor chip manufacturing equipment to China. The results of a private survey in May suggest that manufacturing activity in Japan contracted and export orders declined at the quickest pace in four months.

More stimulus

Bank of Japan (BoJ) Governor Haruhiko Kuroda affirmed that the central bank can and will provide more stimulus as necessary if the momentum to achieve its 2% inflation goal wanes. While the BoJ governor stated that he stands ready to ease monetary policy further, he does not believe additional easing is necessary right now given Japan’s healthy economy. Kuroda said that, if necessary, he’d be willing to reduce the target for 10-year Japanese government bond yields (currently trading in a range near 0%), lower the overnight lending rate (currently at -0.1%), or increase asset purchases and the monetary base.

China

Equities rebound from near four-month lows on stimulus hopes

Chinese stocks rebounded as traders grew more confident that Beijing would step up stimulus measures to cushion the economy from the impact of U.S. tariffs. The benchmark Shanghai Composite Index ended up 1.9%, its best showing in eight weeks, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, added 2.5%. The latest gains came a week after both indexes closed at their lowest levels in almost four months. 

Data released on Friday by China’s statistics bureau confirmed the extent of the country’s slowdown: Industrial output in May rose 5% from a year ago, its weakest pace since 2002, while fixed-asset investment increased 5.6% in the first five months of 2019. Both figures slowed from April and lagged economists’ forecasts. On the other hand, retail sales rose a surprisingly strong 8.6% last month but were likely driven by a longer May Day holiday that spurred domestic spending. May’s trio of indicators were the latest evidence of weakening demand in China as the country grapples with the impact of the escalating U.S. trade battle. Signs of slowing economic growth, in turn, have raised expectations that Beijing will roll out targeted stimulus measures to spur domestic consumption. On Monday, China’s finance ministry said that special bonds sold by local governments would be allowed to finance construction of key projects, a move that is expected to boost infrastructure investment this year.

Meanwhile, investors in the U.S. and China appeared to resign themselves to the possibility that the U.S. and China have entered a long and costly trade battle. President Trump has repeatedly threatened to hike tariffs on Chinese imports if China’s President Xi Jinping does not meet with him at the Group of 20 (G20) meeting on June 28–29 in Japan. But on Thursday, China’s state-run People’s Daily made no mention of a meeting at the G20 summit and said that the U.S. picked the “wrong rival at the wrong time.” The paper also noted that Washington’s efforts to punish China were backfiring by costing American jobs and damaging the U.S. economy.

Other Key Markets

Stocks decline in Turkey

Turkish stocks, as measured by the BIST-100 Index, returned about -3.2%. A late-week increase in oil prices following the oil tanker attacks near Iran weighed on stocks in Turkey, which is a major oil importer. Tensions between NATO allies Turkey and the U.S. over the former’s purchase of Russian military hardware also hurt investor sentiment.

Early in the week, the U.S. House of Representatives unanimously passed a nonbinding resolution that expressed concern over the U.S.-Turkey alliance and called upon Turkey not to acquire the Russian S-400 defense system, which is scheduled to be delivered to Ankara in July. The Turkish government rejected the resolution and remained determined to proceed with the transaction; in fact, President Recep Tayyip Erdogan reportedly declared that the purchase was complete. According to T. Rowe Price Sovereign Analyst Peter Botoucharov, the actual delivery of the S-400 defense system is likely to trigger U.S. sanctions under the Countering America’s Adversaries Through Sanctions Act (CAATSA) and the Magnitsky Act.

Mexico reaches agreement with U.S. to avoid tariffs

Mexican stocks, as measured by the IPC Index, returned about -0.4%. A late-week sell-off erased earlier gains. 

Mexican assets rallied early in the week in response to Mexico’s immigration-related agreement with the U.S., which was reached late last week, to avoid new tariffs. While terms of the agreement are not widely known, Mexico has reportedly agreed to step up its efforts to stop Central American migrants from traversing the country en route to the U.S. This apparently includes fortifying its southern border with Guatemala as a first step. If, after 45 days, Mexico has been unable to meaningfully stem the migration, Mexico may need to take additional measures.

Expectations for savings from pension reform support Brazilian stocks

Stocks in Brazil, as measured by the Bovespa Index, were little changed for the week. Equities advanced for much of the week as Brazilian officials presented a report indicating that pension reform—if passed by the legislature and signed into law—will produce savings of about 913 million reals over the next 10 years, better than expectations for savings of 800 million reals. However, the market retreated on Friday as Economy Minister Paulo Guedes expressed discontent with the report and questioned whether the legislature was truly interested in changing the pension system.

Although this is less than the 1.2 trillion reals in savings projected by Economy Minister Paulo Guedes when he rolled out the original pension reform proposal, and while there could yet be some “watering down” of the reform legislation that reduces the overall savings, T. Rowe Price Sovereign Analyst Richard Hall is fairly optimistic that a decent reform will be enacted. Hall reasons that the country’s political leadership is entirely on board with pushing through the reform. He cautions, however, that the passage of pension reform may not necessarily lead to a broad rally in Brazilian assets, as expectations for the enactment of reforms are already high.

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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