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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.

Dow hits new record

The Dow Jones Industrial Average joined the S&P 500 and Nasdaq Composite Indexes in record territory, as optimism grew about a “phase one” trade deal between the U.S. and China. A sharp increase in longer-term bond yields and the continued release of third-quarter corporate earnings reports also drove markets. T. Rowe Price traders noted Monday that the dispersion of the returns among stocks in the S&P 500 was at historically high levels, suggesting that individual company fundamentals, rather than cash flows into and out of stocks in aggregate, were playing the primary role in the market’s moves. On a sector basis, financials outperformed as rising long-term interest rates favored banks’ lending margins. Increasing bond yields weighed heavily on real estate and utilities shares, however, as their typically above-average dividends became less appealing in comparison.

Investors anticipate phase one trade deal

The week began on a positive note, as investors continued to bask in the glow of President Donald Trump’s announcement the previous Friday that the U.S. and China would soon sign an initial trade agreement. News over the weekend that more waivers were coming for U.S. companies to do business with Chinese telecommunications giant Huawei Technologies also appeared to support sentiment. Stocks turned briefly but sharply lower on Wednesday, however, on reports that disagreements over where to sign the deal would delay it until at least December.

On Thursday, shares rose again after Chinese officials stated that the two sides had agreed to roll back tariffs proportionately as part of the phase one deal—a claim later disputed by Peter Navarro, the White House’s chief trade adviser. Stocks pulled back briefly again in early trading Friday after President Trump told reporters that he had not agreed to reduce any tariffs, despite the wishes of Chinese officials.

Recession fears seem to be diminishing despite conflicting signals

The week’s economic data offered some conflicting signals. Weekly jobless claims fell more than expected, and the University of Michigan’s preliminary gauge of consumer sentiment in November rose a bit. On Tuesday, the Institute for Supply Management reported that its gauge of U.S. service sector activity rose sharply in October. In contrast, IHS Markit’s rival service sector index declined and reached its lowest level since early 2016, while its composite index stood just barely in expansion territory. Nevertheless, T. Rowe Price traders and others noted a general decline in recession fears as one factor driving the market’s gains.

Bond yields hit highest level since July

Recession worries also receded notably in the bond market. The yield on the benchmark 10-year Treasury note surged for the second week in a row, bringing it to its highest level since the end of July. (Bond prices and yields move in opposite directions.) T. Rowe Price analysts noted that hopes for a trade deal and technical factors appeared to be behind the surge in yields.

While weighing on Treasury bond prices, trade optimism supported the investment-grade corporate bond market, which saw a contraction in credit spreads, or the extra yield offered over similar-maturity Treasuries—an inverse measure of the sector’s relative appeal. Sentiment in the high yield market also benefited, and the heavily represented energy sector got a further boost from higher oil and natural gas prices following predictions for a cold winter in much of the country. However, somewhat mixed corporate earnings reports later sparked volatility in the sector.

Municipal bonds continue to see healthy demand

The increase in Treasury yields weighed on municipal bond prices, but the asset class continued to draw significant interest from investors. According to the Investment Company Institute, municipal bond funds have enjoyed positive inflows every month to date in 2019. As further evidence of healthy demand, the sale of $750 million of Illinois general obligation bonds drew aggressive bidding from broker-dealers, enticed by wide credit spreads versus the BBB benchmark. Illinois is among the most fiscally challenged municipal issuers in the U.S.

U.S. Stocks

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

DJIA

27,681.24

333.88

18.66%

S&P 500

3,093.08

26.17

23.39%

Nasdaq Composite

8,475.31

88.91

27.73%

S&P MidCap 400

1,997.13

15.24

20.09%

Russell 2000

1,597.75

9.16

18.48%

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 follow Wall Street higher

Equity markets in Europe were mostly higher, buoyed by a rally on Wall Street, optimism about a U.S.-China trade deal, and generally solid corporate earnings reports. The pan-European STOXX Europe 600 Index rose for the fifth week in a row, gaining about 1.4%. The exporter-heavy German DAX rose about 2%, while the UK’s FTSE 100 Index gained about 0.8%.

European earnings season sees 50% of companies topping expectations

As earnings season winds down, T. Rowe Price European Equities Trader Evan Canwell notes that of the 80% of the STOXX 600 that have reported numbers, in aggregate, 50% of companies have surpassed consensus estimates on both the topline and bottom line, the highest level in the last six quarters. The health care and basic materials sectors have beaten the most on earnings per share so far, while utilities and consumer goods have trailed.

IMF cuts eurozone growth forecast

The International Monetary Fund (IMF) announced that the eurozone is likely to grow less than expected in 2019 and that the recession in the manufacturing sector could spill into the services sector. The IMF forecast that the eurozone would grow by 1.2%, down from its April estimate of 1.3%. That comes after a 1.96% expansion in 2018. The IMF largely attributed the slowdown to slow growth in Germany, the eurozone’s largest economy, and stagnation in Italy, the region’s third-largest economy. The IMF also revised lower its growth forecast for Germany to 0.5%. To alleviate the slowing, the IMF has called on eurozone governments to respond with fiscal measures.

German exports rise more than expected

In Germany, exports rose a higher-than-expected 1.5% in September after adjusting for seasonal and calendar effects, according to the Federal Statistics Office. Factory orders moved 1.3% higher compared with the previous month, after falling for two months.

Japan

Japanese markets were closed on Monday for the Culture Day holiday. In the holiday-shortened trading week, the Nikkei 225 Stock Average rose 2.4%, while the broader measures of the Japanese market, the large-cap TOPIX Index and the TOPIX Small Index, also advanced but slightly lagged the Nikkei 225. For the year-to-date period, the Nikkei advanced about 16.9% versus about 14.0% for the TOPIX Index and 13.9% for the TOPIX Small Index. Around midday on Friday in the U.S., the yen was trading around ¥109.15 per U.S. dollar.

Equities advanced amid signs of improving U.S.-China trade relations and hopes that their trade representatives would soon finalize the phase one partial trade deal. Other Japanese assets weakened early in the week, however, but there were some positive side effects. As reported by Reuters, the yen declined—which is favorable for Japanese export businesses—as bullish investor sentiment reduced demand for safe-haven assets and currencies, and longer-term Japanese government bond yields climbed, which is supportive for banks that need longer-term interest rates to be higher than short-term rates so that they can make more profitable loans.

While there is growing optimism that a U.S.-China trade deal and this year’s interest rate cuts from various global central banks could have a favorable impact on global growth next year, economic data in Japan remain discouraging. As reported by the Financial Times, the Japanese services sector—as measured by the Jibun Bank Japan Services Purchasing Managers’ Index—contracted in October for the first time in about three years. One of the main factors behind the contraction was the October 1 increase in the consumption tax, from 8% to 10%. On Thursday, the Reuters Tankan survey of Japanese manufacturers in November showed that sentiment in the sector was at its lowest level in more than six years.

China

Equities rise amid reported tariff rollback, MSCI index changes

Chinese stocks advanced for the week, as hopes rose for a comprehensive U.S.-China trade agreement following news that both sides agreed to roll back tariffs on each other’s goods as part of a so-called phase one trade deal. For the week, the benchmark Shanghai Composite Index edged up 0.2%, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, rose 0.5%. Both indexes fell Friday, however, as Beijing and Washington sent mixed messages about the likelihood of an imminent breakthrough and reports surfaced of fierce internal opposition within the White House to any tariff rollback. Nevertheless, news of a plan to remove tariffs in stages boosted sentiment, as investors viewed it as a sign of de-escalation in the U.S.-China trade war that is increasingly dragging on the global economy.

Buying ahead of a widely expected announcement from MSCI to boost the weighting of mainland Chinese stocks in its influential Emerging Markets Index also supported Chinese stocks. On Thursday, MSCI said that A shares—yuan-denominated shares of companies that trade on China’s domestic exchanges—would rise to a weight of 4.1% in its widely used Emerging Markets Index from a current 2.6% weight. The increase marked the third step of a previously announced plan by MSCI to increase the weighting of Chinese A shares in its various emerging markets indexes and was among several changes announced by the index compiler as part of its November semiannual review.

Other Key Markets

South African bonds escape junk status for now

Stocks in South Africa, as measured by the FTSE/JSE All Share Index, returned about -0.1%, as a Friday sell-off negated earlier gains. Equities experienced a relief rally early in the week following credit rating agency Moody’s decision late on Friday, November 1, not to downgrade South African sovereign debt into below investment-grade territory. While Moody’s is the only one of the three major credit rating agencies that currently assigns South Africa an investment-grade credit rating, Moody’s did, however, reduce its outlook from “stable” to “negative,” which could be a precursor to a future downgrade. According to Moody’s, the outlook change reflects “the material risk that the government will not succeed in arresting the deterioration of its finances through a revival in economic growth and fiscal consolidation measures.”

Overnight Thursday into early Friday morning, the heavily indebted, state-owned utility Eskom, which provides electricity to most of South Africa, started a new round of “load-shedding,” or intentionally cutting power to customers, to preserve its emergency reserves. Eskom also warned customers about a high probability of more blackouts for the latter part of Friday. These new blackouts, which are taking place just weeks after a mid-October episode of load-shedding, once again raised concerns among investors about the vulnerability of electricity generation and the risk it poses to the South African economy.

Brazilian shares rise despite poorly received energy auction

Stocks in Brazil, as measured by the Bovespa Index, returned -0.6%. Following a solid October—during which equities and the real were lifted, in part, by the passage of pension reform legislation and a late-month central bank interest rate cut—equities were supported by optimism that U.S.-China trade relations were improving. During the week, the Brazilian government auctioned rights to companies that were interested in offshore oil exploration and production. Due to low interest from major global energy companies, investors generally considered the auctions to be disappointing, but the auctions did not seem to have a significant negative impact on the equity market. The poor auction results did weigh on the real, however.

Following its recent success with convincing Congress to pass pension reform, the Bolsonaro administration turned its attention to the promotion of an ambitious “More Brazil” fiscal reform plan that T. Rowe Price Sovereign Analyst Richard Hall believes would—if enacted—change the role of the government in Brazil. Hall notes that the plan proposes the creation of a nationwide Fiscal Responsibility Council that will monitor the financial situation of all government entities, including the federal government, states, municipalities, and independent entities. Another proposal is to give the government the ability to declare a fiscal emergency when Congress authorizes a budget in which net financing needs exceed capital spending. The government would be able to increase investment spending and reduce mandatory spending by cutting public sector wages and working hours.

A third goal would be to reduce the number of public funds—currently close to 300—that hold public resources earmarked for a specific purpose. According to the proposal, those that are not either specified constitutionally or earmarked for health and education expenditures would be eliminated over two years, with the balances to be used to reduce government debt.

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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