Markets & Economy

Global Markets Weekly Update

May 22, 2020


Vaccine hopes propel stocks to two-month highs

Stocks rose for the week, with the S&P 500 Index touching its highest level since March 6 on Wednesday before falling back somewhat. Small- and mid-cap stocks saw the strongest gains, and slower-growing value shares outperformed higher-valuation growth shares. However, energy, financials, and other value-oriented stocks remained far behind their growth counterparts in the wake of the pandemic—the Russell 1000 Value Index ended the week down around 20% since the start of the year, while the Russell 1000 Growth Index finished up over 2%. Vaccine hopes fostered strong gains in the shares of cruise lines and other travel-related stocks in the consumer discretionary sector, while a solid rise in Facebook boosted communication services shares. Health care stocks lagged.

Stocks started the week strong, helped by news of encouraging early test results for a possible coronavirus vaccine. Moderna Therapeutics announced that its vaccine candidate that uses pioneering mRNA technology had produced abundant antibodies in a small group of volunteers in a first-stage clinical trial, which began in March. Stocks fell back modestly on Tuesday, however, which T. Rowe Price traders attributed in part to a press report questioning whether Moderna’s early trials had produced enough data to support evidence for the vaccine’s effectiveness. Separately, the U.S. Department of Health and Human Services announced Thursday that the U.S. government, as part of its “Operation Warp Speed” to develop a vaccine, had pledged $1.2 billion to begin production of another candidate under development by scientists at Oxford University working with pharmaceutical giant AstraZeneca.

Powell: “No limit to what we can do”

Optimism about a possible new round of monetary and fiscal stimulus also seemed to support sentiment. On Sunday night, Federal Reserve Chair Jerome Powell stated that the central bank had other tools available to counteract the slowdown, telling an interviewer on 60 Minutes that “there is really no limit to what we can do.” On Thursday, Treasury Secretary Steven Mnuchin told reporters that the White House preferred to wait to see how the economy was responding to existing fiscal stimulus measures, although he acknowledged that there was a “strong likelihood” that more support would be needed.

The week’s economic data confirmed the view that the labor market, in particular, had yet to turn the corner. Thursday’s jobless claims report showed that an additional 2.4 million Americans had filed for benefits in the previous week, bringing the trailing nine-week total to nearly 39 million. T. Rowe Price Chief U.S. Economist Alan Levenson believes it is possible that millions of displaced workers will be rehired in the summer months as the economy reopens, although he cautions that many other expected temporary layoffs could turn into permanent job losses. Most restaurants are likely to reopen at 50% capacity, for example, and numerous retail jobs may never return due to the accelerated shift to online purchases.

Other economic reports released later in the week were more encouraging, with IHS Markit’s gauge of May services sector activity surprising handily on the upside. Existing home sales in April were also modestly stronger than expected, while mortgage applications jumped in May off a five-year low. Stocks gave up some of their gains on Thursday, however, with the turn in sentiment seemingly due, in part, to rising tensions in U.S.-China relations (see China section below). 

Munis benefit from Fed support

Treasury yields increased sharply at the start of the week, as investors reacted to reports of encouraging vaccine trial results but then retraced most of the rise amid growing U.S.-China tensions. (Bond prices and yields move in opposite directions.) The broad municipal market produced positive returns for much of the week and outperformed Treasuries. Short-term tax-exempt yields moved toward all-time lows amid continued support from the Fed’s Municipal Liquidity Facility and growing demand from “crossover buyers” who typically invest in taxable bonds. T. Rowe Price traders reported solid demand for new deals from fiscally stressed issuers, including Connecticut, Illinois, and the New York Metropolitan Transportation Authority.

The modest improvement in the economic backdrop and stronger demand from overseas investors bolstered the performance of investment-grade corporate bonds. Positive flows, lighter dealer inventories, and moderate issuance also contributed to favorable technical conditions, according to the firm’s traders, as riskier segments outperformed. Meanwhile, renewed optimism around a coronavirus vaccine supported the high yield market, with energy issues outperforming amid data showing that demand in China has nearly returned to pre-virus levels.

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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.


Equities ended the week higher on hopes of an economic recovery as countries began to emerge from lockdowns, but renewed U.S.-China tensions curbed the gains. The pan-European STOXX Europe 600 Index rose 3.63%. Among major European country stock indexes, Germany’s Xetra DAX Index climbed 6.10%, France’s CAC 40 gained 4.34%, and Italy’s FTSE MIB Index added 2.79%. The UK’s FTSE 100 Index advanced 3.45%.

France, Germany Back Recovery Fund

Germany and France proposed a EUR 500 billion European Union (EU) recovery fund, giving impetus to a coordinated European fiscal response to the coronavirus pandemic. The proposal would be linked to the EU’s next seven-year budget cycle from 2021–2027, and the funds would not be available until then. The European Commission would raise the money in the capital markets and use it to support EU spending rather than loans to national governments. However, Austria, the Netherlands, Denmark, and Sweden oppose the plan, saying they would only accept a rescue fund that gave out loans. 

Lagarde says ECB to continue QE undeterred

In an interview conducted with European newspapers, European Central Bank (ECB) President Christine Lagarde said on the ruling on quantitative easing (QE) handed down by Germany’s Constitutional Court that the EU’s top court had ruled that the ECB’s bond purchases were consistent with its mandate and EU law. She said that the ECB would continue undeterred in delivering its price stability objective and that the new pandemic program was not affected by the judgment.

She noted that inflation was projected to remain below target in the coming years and that the ECB must ensure as much accommodation as needed to stabilize inflation and the economy. She added that the central bank will act whenever a risk of a tightening in financial conditions emerges, and for this purpose, it must ensure policy is being transmitted properly. That is the whole point of the pandemic emergency program, she stressed.

BoE’s Bailey signals U-turn on negative rates

Bank of England (BoE) Governor Andrew Bailey told a parliamentary committee that negative interest rates were now under “active review” to bolster an economic recovery, although he added that policymakers would need time to consider the implications of such a move. Last week, he said the central bank was neither planning nor contemplating negative rates, although he declined to rule them out altogether.

Just before Bailey’s testimony, the Debt Management Office sold GBP 3.75 billion of three-year gilts at an average interest rate of -0.003%, the first time that sovereign debt has been sold at a negative rate in the UK. Two-year yields had already sunk to a record low of -0.051% the week before amid speculation that negative interest rates were being considered. The BoE cut its key interest rate to 0.1% in March. UK inflation slowed to an annual rate of 0.8% in April—the lowest since August 2016—from 1.5% in March.

Fall in eurozone business activity slows

Eurozone business activity in May bounced off the historic lows plumbed in April as coronavirus lockdowns were relaxed, although the bloc is still headed for a historic contraction in the second quarter, a survey of purchasing managers by IHS Markit showed. The composite index, an average of the service and manufacturing sectors, rose to 30.5 from the previous 13.6. However, the result was still below 50, the level that separates growth from contraction.

Italy, Spain, and Greece said they would restart tourism in June. Their decisions came as EU tourism ministers agreed to do “whatever it takes for the quick and full recovery of European tourism." Eleven countries, including Germany, Greece, Italy, Portugal, and Spain, agreed on a set of rules aimed at allowing cross-border travel while minimizing the risk of coronavirus infections. They also agreed that tourists would not be placed under quarantine in foreign member states and could safely return home.


Stocks in Japan posted gains for the week. The Nikkei 225 Stock Average advanced 351 points (1.8%) and closed at 20,388.16. The widely watched Japanese stock market yardstick is 13.8% lower since the start of the year. The broader large-cap TOPIX Index and the TOPIX Small Index recorded similar-sized weekly returns and have returned -14% and -15%, respectively, for the year to date. The yen was little changed versus the U.S. dollar for the week.

Unscheduled BoJ policy meeting

On Tuesday, May 19, Katsunori Mikuniya, the chairman of the policy board of the Bank of Japan (BoJ), announced an unscheduled monetary policy meeting, which was held on Friday, May 22. The purpose of the meeting was to address additional avenues for funding small and medium-sized companies that face insolvency due to the coronavirus pandemic. According to a Reuters poll, approximately 20% of Japanese companies are worried that they won’t have the capital to survive if the current severe market conditions persist.

On Friday, the BoJ announced a second lending program totaling JPY 30 trillion (USD 286 billion) that is similar to the Federal Reserve’s Main Street Lending Facility for small businesses. The loans, which will be extended for up to one year against pooled collateral at 0% interest, will be available starting June 2020 through March 2021. The BoJ will pay 0.1% interest to commercial banks that fund small business loans under the new program. As expected, the central bank made no other changes to its interest rate targets or purchase programs. 

Japanese business confidence falls in May amid recessionary conditions

The Reuters Tankan manufacturers’ sentiment index for May fell to -44 from -30 in April, which is the lowest level since June 2009. The decline reflects the dour mood across a swath of businesses following news that Japan’s economy had officially slipped into a recession in the first quarter of 2020. The government reported that Japan’s first-quarter annualized gross domestic product (GDP) contracted 3.4% versus the same quarter in 2019. Fourth-quarter annualized GDP was revised to -7.3%. The decline in private consumption had the largest negative impact on the economy in the first quarter, followed by steep drops in exports and imports, residential investment, and capital spending. Forecasters expect Japan’s economy to contract more than 20% in the current quarter.

The services sector Tankan Index also declined to -36 from -23 in April. Companies in both the manufacturing and services sectors expect even worse business conditions in the coming months—the sentiment gauges are forecast to fall to -51 and -48, respectively, in August. The worsening readings reflect an ongoing negative impact to economy and business conditions from the global pandemic.


The week brought no key data releases but plenty of political issues for markets to digest. The week saw a further deterioration in U.S.-China relations as the White House stepped up pressure on China, while Beijing announced plans to impose national security legislation on Hong Kong. Asian markets weakened on Friday, with Hong Kong’s Hang Seng Index plunging 5.6% to close 3.6% lower week on week. Mainland A-shares also fell on Friday, with the large-cap CSI 300 Index down 2.2% from the previous week.

U.S.-China relations face more challenges

China-U.S. relations came under further pressure over several potentially troublesome issues. On Wednesday, the White House announced tighter restrictions on the ability of Chinese telecommunications giant Huawei Technologies to use U.S. technology or software design in the manufacture of its semiconductors outside the U.S. The same day, the U.S. Senate passed a bill that could lead to the exit of some Chinese companies that are listed in the U.S. via American Depositary Receipts (ADRs). The U.S. Senate on Wednesday passed the “Holding Foreign Companies Accountable Act,” which could disqualify Chinese companies from listing their shares on U.S. stock exchanges by requiring companies to prove that they are not owned or controlled by a foreign government. While an obvious potential beneficiary would be the Hong Kong exchange—as more Chinese ADRs would likely seek a Hong Kong listing instead—the relative lack of response in the domestic A-share market may suggest Chinese investors regard the recent tensions as mostly U.S. election campaign rhetoric.

News on Thursday that mainland authorities will use Annex 3 of the Basic Law to force national security legislation on Hong Kong quickly drew strong disapproval from Washington. Such a step had been talked about, but the speed with which Chinese President Xi Jinping appears willing to move ahead and intervene in Hong Kong took investors by surprise. The decision suggested to many observers that Beijing has little desire to compromise on or dial down potential disagreements with the U.S.

No macro policy surprises at NPC

China's annual "parliament," the National People's Congress, opened in Beijing on Friday. While key policy announcements typically appear on the first day in the annual economic work report of China's premier, Li Keqiang, Friday brought few surprises. On account of the uncertain economic outlook, the report contained no official growth target for the first time since 1994—giving policymakers more flexibility in the reopening phase without the need to worry about meeting a target that is a "man-made" construct, in the words of Li Keqiang.

Instead, the priority for Beijing in 2020 is labor market stabilization together with poverty reduction. To this end, the target for urban unemployment is 6%, implying no increase from the current level. Private forecasters project China's current unemployment rate at a much higher level by year-end, anywhere from 10% to 20% after allowing for migrant workers who are largely excluded from the official measure.

The central government budget deficit is earmarked to increase moderately from 2.8% in 2019 to 3.6% this year. China's broader fiscal deficit—including off-budget items, notably local and central government special purpose bonds to finance infrastructure—is set to rise from around 5% of GDP last year to around 8% in 2020. Other features of Li Keqiang's speech were a commitment to keep China's currency, the renminbi, stable at a reasonable level, and to strive to fulfill the terms of the Phase 1 trade deal agreed upon in February with the U.S.

Other Key Markets

Botoucharov: Turkey seeks to be self-financing

Turkish stocks, as measured by the BIST-100 Index, returned almost 3.3%. The market was closed on Tuesday for a holiday.

It was an active week for Turkey’s central bank. On Thursday, policymakers decided to reduce the country’s key interest rate, the one-week repo rate, to 8.25% from 8.75%. The move was widely expected. Earlier in the week, the central bank reached an agreement with Qatar’s monetary authorities to triple the size of their existing foreign exchange swap line, to USD 15 billion from USD 5 billion. Turkey’s central bank is believed to be in negotiations with other major central banks to establish similar swap lines. The government, meanwhile, has been strongly encouraging domestic banks and corporations to buy Turkish government bonds and to minimize exchanges of lira for other currencies.

According to T. Rowe Price Sovereign Analyst Peter Botoucharov, Turkey’s intention is to become self-financing as much as possible through these efforts to control interest rates, stabilize the lira, and reduce capital outflows. While these efforts could reduce some interest rate and lira volatility, they do not change Turkey’s poor macroeconomic fundamentals, including large funding needs and negative real (inflation adjusted) interest rates.

Brazilian shares rise on hopes for currency intervention

Stocks in Brazil, as measured by the Bovespa Index, returned about 6.0%. The market was bolstered by a stronger currency following hawkish comments from central bank president Roberto Campos Neto about the real. Campos Neto acknowledged that the central bank had recently increased its interventions to support the real—which has weakened significantly this year versus the U.S. dollar—and expressed a willingness to continue using the central bank’s foreign exchange reserves if needed to stabilize it. These hawkish comments would seem to be a noteworthy departure from his previous stance that currency weakness was not a concern.

The stock market stayed open throughout the week despite an unusual decision by the governor of the state of Sao Paulo and the mayor of the capital city with the same name to move several holidays from later this year to Wednesday and Thursday of this week, plus Monday, May 25. As reported by Reuters, individual employers were given the option of observing a holiday on Friday. Because Brazil’s coronavirus outbreak has intensified—the country now has the third-highest number of confirmed cases in the world, behind only the U.S. and Russia—and President Jair Bolsonaro continues to downplay the need for quarantine measures, these political leaders intend to create a period for citizens to observe social distancing without imposing a full lockdown in hopes of reducing the infection rate.

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