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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 close out year of solid gains

The major indexes hit all-time highs but ended the week mixed, with small-caps recording losses. Stocks closed out a year of solid gains led by the technology-heavy Nasdaq Composite Index, which notched its best annual performance since 2009. Health care shares outperformed within the S&P 500 Index, and consumer discretionary shares were also strong, helped by gains in a new arrival to the index, electric vehicle maker Tesla. Energy stocks lagged, and the large technology sector was also weak. Trading was relatively light ahead of the market’s closure on Friday in observance of the New Year’s Day holiday.

Trump signs coronavirus relief bill

Stocks began the week on a positive note, helped by President Donald Trump’s signature of a USD 900 billion coronavirus relief bill on Sunday night. The president’s signature came after his repeated complaints that the bill’s USD 600 direct payments to many Americans were insufficient, as well as his demand that the bill also include new regulations on social media companies. House Democrats, with a small amount of Republican support, quickly passed legislation on Monday evening to raise direct payments to USD 2,000, as President Trump had requested, but Senate Majority Leader Mitch McConnell objected to the measure being put up for approval by unanimous consent in the Republican-controlled Senate. McConnell also said the Senate would soon bring some of the president's priorities “into focus,” though no replacement bill emerged in the Senate by the end of the trading week.

Optimism over the rollout of new coronavirus vaccines also seemed to support sentiment. On Wednesday, the UK became the first country to approve the use of the vaccine developed by AstraZeneca and Oxford University, and hopes grew that U.S. regulators would soon follow. Slower-than-expected distribution of the currently authorized Pfizer/BioNTech and Moderna vaccines may have dampened enthusiasm somewhat, however, as may have the discovery on Tuesday of the first domestic case of an apparently more infectious strain of the virus. Case growth in the U.S. continued to moderate after the post-Thanksgiving spike, but the ongoing increase in hospitalizations raised further concerns about intensive care unit capacity in some parts of the country.

The week’s light economic calendar was highlighted by housing data. Home prices rose at a faster pace than predicted in October, but November pending home sales unexpectedly fell 2.6%, reflecting constrained inventories. Weekly jobless claims defied expectations for an increase and fell to 787,000, the lowest level in almost a month. The last-minute passage of extended unemployment benefits in the coronavirus relief bill threatened an interruption in some payments in the final week of the year, however.

Longer-term Treasury yields pull back

The fading likelihood of larger stimulus payments due to roadblocks in the Senate, along with month-end buying activity, pushed the yield on the benchmark 10-year U.S. Treasury note modestly lower as the week progressed. (Bond prices and yields move in opposite directions.) Meanwhile, the broad municipal bond market recorded modest positive returns through mid-week, outpacing Treasuries. Solid cash flows into muni bond funds continued to support the asset class, and T. Rowe Price traders noted that municipal-to-Treasury yield ratios remained lower than their historical averages.

Investment-grade corporate bond spreads—the additional yield offered over Treasuries and an inverse measure of the sector’s relative appeal—tightened throughout the week. Trading volumes were light, however, and no new deals reached the market. Meanwhile, improved investor sentiment supported the performance of high yield bonds. Our traders reported fairly light trade volumes ahead of the holiday, although exchange-traded funds were active buyers, and credit spreads tightened across all rating tiers.

U.S. Stocks

Index

Thursday’s Close

Week’s Change

% Change YTD

DJIA

30,606.48

406.61

7.25%

S&P 500

3,756.07

53.01

16.26%

Nasdaq Composite

12,888.28

83.55

43.64%

S&P MidCap 400

2,309.64

-0.90

11.95%

Russell 2000

1,977.04

-26.91

18.49%

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

Shares in Europe rose, lifted by the UK-European Union (EU) trade accord and the approval of a U.S. fiscal stimulus package. The UK’s FTSE 100 Index recorded modest losses, partly due to the stronger British pound, which reached USD 1.3675, its highest level in a year. UK stocks tend to fall when the pound rises because many companies that are part of the index are multinationals with overseas revenues. Most European markets closed early due to the New Year’s Day holiday.

Finland’s Central Bank Governor Olli Rehn said that the European Central Bank was monitoring the euro exchange rate very closely. The euro climbed to its highest level in 2020, to around USD 1.2300, partly due to underlying weakness in the greenback and the post-Brexit trade deal.

UK extends severe lockdown restrictions, EU distributes vaccines

The UK government extended its strictest restrictions to additional areas, seeking to curb a surge in infections, hospitalizations, and deaths caused, in large part, by a new variant of the coronavirus. Three-quarters of the country is now in a de facto lockdown. After regulatory approval, the authorities began deploying a second vaccine, one produced by AstraZeneca and Oxford University, enabling the government to accelerate its inoculation program. EU countries began to distribute the Pfizer/BioNTech vaccine to those most at risk. The EU also exercised its option to buy another 100 million doses of the vaccine.

UK exits EU after trade accord ratified

The UK was set to exit the EU at 23:00 GMT on December 31 after UK Prime Minister Boris Johnson and EU leaders agreed to a post-Brexit trade agreement. The treaty came into UK law after Parliament voted overwhelmingly in favor of the deal.

EU and China agree on investment treaty

The EU and China agreed on an investment treaty after seven years of talks. EU Trade Commissioner Valdis Dombrovskis said the EU would gain improved access to the Chinese market for automotive, private health care, cloud computing, and air transport services industries, among others. The EU would also receive similar benefits in the insurance and asset management industries to the ones secured by the U.S. in its “Phase 1” trade deal with China. The two sides have yet to ratify the treaty. The EU hopes it will come into effect in 2022.

Japan

Japanese stocks rallied in the holiday-shortened trading week through Wednesday. Japanese equity markets were closed on December 31 for the New Year’s Eve holiday and remained closed for New Year’s Day. The Nikkei 225 Stock Average advanced 3.0% (788 points) and closed at 27,444.17, just off the 30-year closing high set on Tuesday. For the year, the benchmark gained 16.0%. Neither the large-cap TOPIX Index nor the TOPIX Small Index, broader measures of the Japanese stock market, performed as well. In 2020, the TOPIX gained 4.8% and the TOPIX Small Index recorded a -2.2% return. The yen was modestly stronger versus the U.S. dollar and closed the year near JPY 103, about 5.0% stronger versus the U.S. dollar.

Factory output stalls after five consecutive monthly gains

Government data released this week showed that Japan’s industrial output growth was flat in November, well below economists’ 1.2% growth forecast. This reflects the weakness of the global economic recovery and a resurgence in the number of new coronavirus infections worldwide, which has crimped demand. October’s 4.0% growth rate marked five consecutive monthly gains, as demand for cars, manufactured goods, and machinery appeared to be on an upward trend. But November’s reading underscored the fragile state of Japan’s economy. The Ministry of Economy, Trade, and Industry’s latest survey showed that manufacturers expect a further output decline in December and a sharp 7.1% rebound in January. Separately, the government reported that Japan’s nationwide retail sales contracted in November, and consumer prices declined in Tokyo at their fastest pace in a decade.

No opposition to Suga’s budget proposal

Given the weak economic conditions, Prime Minister Yoshihide Suga’s government and the ruling Liberal Democratic Party (LDP) concurred on the need for further aggressive stimulus measures. At December’s meeting of the General Council, which is the ruling party’s highest decision-making body, even the most hawkish fiscal conservatives voiced only modest concerns about the record JPY 106 trillion (USD 1 trillion) proposed budget for 2021. Long-standing LDP fiscal conservatives appear to agree with the doves that spending reform and achieving a primary budget surplus in fiscal 2025 were secondary to reviving the economy amid the latest surge in coronavirus infections. Aggressive spending measures are also expected to bolster public sentiment for Suga’s administration—public approval of the administration’s effectiveness during the pandemic has steadily deteriorated—and could help secure a party victory in next year’s general election.

Coronavirus infections surge to record levels

Tokyo’s government reported 1,337 coronavirus infections on Thursday (a record high), bringing the monthly total to more than 19,000. Tokyo Governor Yuriko Koike said that holiday shopping was the apparent cause for the recent increase, and she reiterated her request that people stay home and avoid large gatherings. The city’s pandemic response experts warned that the capitol could run out of hospital beds if the pace of new cases persists. Tokyo raised its alert level to the highest of four in mid-December due to the stress on the medical system and the discovery of new more transmittable strains.

China

Chinese stocks finished a holiday-shortened week at multiyear highs as investors anticipated stronger growth in 2021. The country’s benchmark SSEC Index rallied Friday to its highest close since February 5, 2018, while the blue chip CSI300 Index recorded its highest close since June 15, 2015, according to Reuters. For the year, the SSEC Index advanced 14% and the CSI300 Index rallied 27%, buoyed by signs of an accelerating economy as China became the first major world economy to successfully contain the coronavirus.

In a week devoid of major economic releases, Ant Group stayed in the spotlight as the Chinese financial technology giant remained the target of a growing regulatory crackdown. The People’s Bank of China (PBOC) is considering plans to force Ant Group to shed equity investments in some financial companies, a move that would curb its influence over the sector, Bloomberg reported Thursday, citing unnamed individuals. Over the previous weekend, the PBOC summoned Ant executives and told them to “rectify” violations in the company’s lending, insurance, and wealth management businesses, though the central bank stopped short of calling for a widely feared breakup of the company. In response to the regulatory demands, Ant Group is considering a holding company structure to house its various businesses—a change that would make Ant’s businesses, which range from microlending to wealth management—subject to more capital restrictions, Bloomberg reported. The recent regulatory actions targeting Ant Group, an affiliate of Chinese e-commerce leader Alibaba, signal the Chinese government’s determination to control the country’s fast-growing and increasingly influential internet sector.

Other Key Markets

Mexico

Mexican stocks, as measured by the IPC Index, returned about 1.5% through Thursday.

Sentiment toward Mexican assets benefited from news that U.S. President Trump signed into law a bill that provides for federal government funding through September 2021 and provides fiscal relief for various parties hurt by the pandemic and business closures. A stronger U.S. economy is in Mexico’s interest, as President Andrés Manuel López Obrador’s strategy has been to keep the Mexican economy open during the pandemic and to benefit from its northern neighbor’s economic recovery.

Mexico’s energy sector was in focus this week, as the government issued new regulations last weekend—as reported by Reuters—that are expected to limit private companies’ ability to import and export oil. Many believe that these new regulations could provide an unfair advantage to the heavily indebted, state-owned energy firm Petróleos Mexicanos (PEMEX), whose poor financial situation contributed to its credit rating decline into the junk bond universe earlier this year.

Turkey

Turkish stocks, as measured by the BIST-100 Index, returned about 3.6% through the close of business on Thursday.

Investor sentiment was buoyed in part by U.S. President Trump’s recent veto of a military spending bill that would have also forced him to impose sanctions on Turkey for acquiring the S-400 missile defense system from Russia. While the House of Representatives overrode President Trump’s veto earlier this week, the Senate has yet to act, but it only has until Sunday, January 3, 2021, when the new Congress is seated.

Investor sentiment and the lira currency also benefited from the central bank’s recent action on interest rates. Following the December 24 monetary policy meeting—at which policymakers decided to raise all three major lending rates by 200 basis points—officials indicated that a tight monetary policy “will be decisively sustained” until there are indications that there will be a “permanent fall in inflation.”

T. Rowe Price sovereign analyst Peter Botoucharov notes that the interest rate increases were larger than expected and believes that policymakers are sending a clearer signal that the central bank is serious about getting inflation under control. He also believes that monetary tightening will remain in place for about four to six months, but he acknowledges that inflation is likely to remain elevated in 2021 amid talks about a 20% increase in the minimum wage and in the absence of tighter fiscal measures to match the restrictive monetary stance.

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
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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.

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