Markets & Economy

Global Markets Weekly Update

December 6, 2019

U.S.

Late rally leaves benchmarks mixed for the week

The major benchmarks ended mixed for the week after a strong jobs report helped compensate for worrisome signals on the trade front. The smaller-cap benchmarks fared best for a second consecutive week. Within the S&P 500 Index, the consumer staples sector outperformed, helped by a rise in Procter & Gamble shares. Industrial stocks lagged, weighed down by a decline in Boeing as the plane-maker continued to lose sales to Airbus amid uncertainties over the troubled 737 Max airliner. The transportation segment was generally weak, with UPS, FedEx, and United Airlines shares all recording losses.

White House’s return to a more aggressive trade stance weighs on sentiment

The week began on a decidedly down note, with the S&P 500 suffering its worst two-day loss in nearly two months on Monday and Tuesday. President Donald Trump’s decision Monday to reinstate steel and aluminum tariffs on Brazil and Argentina seemed to receive part of the blame. Although not substantial in terms of U.S. dollar volume (see below), the move signaled to some a return to a more aggressive trade stance on the part of the White House.

Indeed, stocks fell sharply again on Tuesday after the president suggested that it might be better to wait until after the 2020 elections to strike a trade deal with China. Meanwhile, Commerce Secretary Wilbur Ross reiterated that the administration was prepared to go through with raising tariffs on Chinese goods on December 15 absent progress in negotiations. For his part, U.S. Trade Representative Robert Lighthizer threatened to slap tariffs of up to 100% on French goods in retaliation for a new digital services tax on U.S. technology companies. On Wednesday, however, President Trump asserted that trade talks with China were “going very well,” helping markets recover some of their losses.

Manufacturing continues to struggle, but labor market stays strong

Worrisome economic data early in the week also weighed on sentiment. The Institute for Supply Management’s gauge of manufacturing activity weakened unexpectedly in November and indicated that the sector had contracted for the fourth month in a row. Construction spending also surprised analysts by falling for the second consecutive month in October.

The economic picture brightened considerably later in the week, however. Weekly jobless claims, reported Thursday, fell back to 203,000, nearly a five-decade low. Futures markets jumped on Friday morning after the Labor Department reported that employers had added 266,000 jobs in November, well above expectations and the best showing since January. The unemployment rate also fell back to 3.5%, the five-decade low it touched in September. The strong job market also seemed to bode well for the holiday shopping season. The University of Michigan’s gauge of consumer sentiment rose to its highest level since May.

Overseas demand supports investment-grade corporate bond market

The jobs data fostered an increase in longer-term bond yields, which ended higher for the week after reversing a sharp decline on Tuesday. (Bond prices and yields move inversely.) T. Rowe Price traders noted that investors in the investment-grade corporate bond market seemed somewhat risk averse early in the week due to the renewed trade tensions and equity market weakness. However, sentiment later improved amid positive trade headlines and a pickup in demand from overseas investors. New issuance for the week exceeded expectations.

The high yield segment saw muted activity through Wednesday. However, reports that a trade agreement could potentially be reached by December 15 lifted investor sentiment later in the week and sparked increased buying activity, according to T. Rowe Price traders. There was a high volume of new deals, and the primary calendar was expected to remain active as dealers make a final issuance push before year-end.

U.S. Stocks

 

Index

Friday’s Close

Week’s Change

% Change YTD

DJIA

28,015.06

-36.35

20.09%

S&P 500

3,145.91

4.93

25.49%

Nasdaq Composite

8,656.53

-8.94

30.46%

S&P MidCap 400

2,022.01

11.85

21.59%

Russell 2000

1,633.84

9.44

21.15%

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. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell indexes. Russell® is a trademark of Russell Investment Group.

Europe

Renewed trade optimism helps trim equity losses

European stocks ended the week flat, recouping earlier losses sparked by fears that a U.S.-China trade deal might be delayed until after the U.S. 2020 election. Stocks rose Friday after President Trump reassured markets by saying trade talks were “moving right along,” and a stronger-than-expected U.S. jobs report eased fears of a global economic slowdown. The pan-European STOXX Europe 600 Index ended the week flat, Germany’s exporter-heavy DAX index fell 0.5%, and the UK’s FTSE 100 Index dropped 1.6%. UK stocks tend to decline when the pound rises because many index companies are multinationals with overseas revenues.

UK pound rises as Conservatives maintain poll lead; Fitzsimmons still cautious

The UK pound rose to a seven-month peak against the U.S. dollar and the euro, marking its highest level under Prime Minister Boris Johnson. The pound’s recovery came as opinion polls showed the ruling Conservative Party was maintaining a comfortable lead ahead of the December 12 general election. T. Rowe Price Fixed Income Portfolio Manager Quentin Fitzsimmons cautions that even a 10% poll lead may not extrapolate as expected. Tactical voting—where voters support a candidate other than their first choice in order prevent an undesirable outcome—and a surge in new voter registrations made the election difficult to predict. The youth vote could be very powerful, as housing and climate change are more important to many than Brexit.

European political risks resurface in Germany and France

Germany and France, the two largest eurozone powers, were beset by political instability. Germany’s Social Democratic Party (SPD) elected left-wing leaders who are critical of the party’s coalition with the conservatives and who have a different fiscal policy agenda. T. Rowe Price International Economist Tomasz Wieladek notes that while their ascendancy raises the possibility of a snap election, polls show the SPD might slip to the number four position in the Bundestag. It is more likely that the SPD will want to renegotiate current policies to stay in the coalition, although this would mean a greater fiscal expansion. Any prospective rise in German government bond issuance would likely lead to a sell-off, in our view. In France, the government’s planned pension reforms triggered the largest public sector strike since 1995. Wieladek believes President Emmanuel Macron faces an unenviable choice. If he chooses not to yield to protesters, prolonged disruption could weaken the French economy. But if he postpones the reforms, markets may punish the weaker commitment to fiscal sustainability.

Eurozone inflation picks up more than expected

Eurozone inflation accelerated in November, ending a series of monthly declines. Consumer prices increased 1% from a year earlier, slightly higher than the 0.9% expected by economists surveyed by Reuters. In September, the European Central Bank said falling inflation was the main reason it cut interest rates and restarted its bond purchase program. November’s data adds to signals that the region’s economy may have begun to stabilize.

Japan

Japan’s markets posted gains for the week. The Nikkei 225 Stock Average advanced 60 points and closed on Friday at 23,354.40. For the year to date, the Nikkei 225 is ahead about 17%, while the large-cap TOPIX Index and the TOPIX Small Index are ahead approximately 15% and 17%, respectively. The yen was modestly stronger for the week and closed at ¥108.67 per U.S. dollar on Friday. The currency is little changed from where it started the year at ¥109.69 per U.S. dollar.

New stimulus package to promote growth

Shinzo Abe, Japan’s prime minister, recently unveiled a ¥13 trillion (about $120 billion) fiscal stimulus package to boost the economy due to fallout from the recent sales tax increase, declining exports, and natural disasters. Although Japan’s economy has continued to grow this year, most economists view the gains as tenuous due to the uncertainty surrounding the U.S-China trade talks, Brexit, and tensions in the Middle East, which have all contributed to a worldwide economic growth slowdown.

Abe said that he wanted “a strong policy package…based on three pillars of ensuring disaster rebuilding and safety, providing intensive support to overcome downside economic risks, and sustaining economic vitality after the Tokyo Olympics.” The total stimulus package (approximately ¥26 trillion), also including government loans, private-sector spending, and credit guarantees, is expected to boost gross domestic product by 1.4% through fiscal 2021. The prime minister asserted that, “The current situation calls for all possible steps to prevent overseas risks from curbing not only exports but capital spending and private consumption.”

Foreigners buy Japanese stocks eight weeks in a row

Reuters reports that Japanese stock exchanges have benefited from eight consecutive weeks of foreigners buying Japanese stocks. The thinking is that there will be progress in the U.S.-China trade dispute that would turn equity markets higher in addition to fiscal stimulus that will benefit the domestic economy. In the week ended November 29, stock exchange data showed net purchases, including cash equities and futures, totaled ¥364 billion ($3.4 billion). The Nikkei and TOPIX indexes recorded better than an 8% gain during the eight-week span.

China

Chinese stocks surge as optimism grows over partial trade deal

Chinese stocks advanced, snapping three straight weeks of losses, as investors sensed that an interim U.S.-China trade deal was close at hand. For the week, the benchmark Shanghai Composite Index rose 1.4%, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, added 1.9%. Friday capped the largest weekly gains for both gauges since the week of October 11, according to Reuters. On Friday, China said it has started to waive retaliatory tariffs on U.S. pork and soy imports by domestic companies, Bloomberg reported, citing a statement on the Finance Ministry’s website. The Finance Ministry is working to waive the tariffs resulting from the trade war after domestic companies bought a certain amount of U.S. farm products, Bloomberg reported. Traders seized upon Friday’s statement as a sign that the U.S. and China were drawing closer to a so-called phase one trade deal announced in October that is supposed to pave the way toward a broader agreement.

Manufacturing data improve

On the economic front, China’s factory activity picked up in November from October in its fastest expansion since December 2016, according to the Caixin/Markit Manufacturing Purchasers’ Index, an influential private survey. The Caixin PMI reading came after official data revealed that factory activity in November unexpectedly returned to growth for the first time in seven months. Taken together, both readings showed the effects of government support as Beijing stepped up easing measures to bolster the economy.

Other Key Markets

Brazilian shares rally despite new U.S. tariffs

Shares in Brazil, as measured by the Bovespa index, rallied approximately 2.8% for the week. The market was largely unaffected by U.S. President Trump’s threat to reimpose steel tariffs on Brazil (and Argentina) in response to their “massive” currency devaluations, as Brazil’s steel exports to the U.S. represent only about 0.1% of its gross domestic product (GDP). Supporting the market was news that Brazil’s industrial production increased 0.8% in October. As reported by Reuters, this represented the third consecutive positive month for industrial production following a sharp decline earlier in 2019.

T. Rowe Price Sovereign Analyst Richard Hall notes that industrial production has lagged in the consumption-driven cyclical recovery, as it was significantly impacted by new regulations and curtailed mining activity following a dam collapse and mining disaster that killed nearly 300 people at the beginning of 2019. Hall believes that the recent overall improvement in industrial production was mostly a recovery in mining following the disaster, but he now sees a clearer upward trend in manufacturing. 

Chilean stocks surge on stimulus news

Stocks in Chile, as measured by the IPSA Index, rose about 4.1% for the week. Shares rebounded from early weakness as the Finance Ministry—following the release of data showing that Chile’s economy contracted 3.4% year-over-year in October—announced an economic stimulus package worth about USD $5.5 billion.

According to T. Rowe Price Sovereign Analyst Aaron Gifford, the intention of the stimulus is to create jobs in conjunction with the government's new social agenda. With this move, government spending will rise nearly 10% next year, leading to an overall fiscal deficit of -4.4% of GDP. Over the next few years, the country’s debt-to-GDP ratio is likely to rise from about 25% currently to about 38% by 2024, driven by a combination of greater public spending, weak growth, and a sharply weaker exchange rate.

Gifford believes that the government is making a large effort to normalize the situation in Chile. However, he also thinks that it is important for investors and for Chileans to adapt to the country's new reality as well, which means lower growth and higher fiscal spending in the wake of deeply rooted public discontent and uncertainty related to a new constitution.

Saudi oil company offers shares in world’s largest IPO

The state-controlled Saudi Arabian Oil Company, commonly known as Aramco, raised $25.6 billion late in the week in the world’s largest initial public offering (IPO). Local demand for shares appeared to be strong, but many international investors were skeptical of the high price that the company set for the offering relative to its oil industry peers.

The size of the IPO, which represented 1.5% of Aramco’s shares, broke the record set by Chinese internet company Alibaba in 2014. The offering valued the integrated oil and gas company at $1.7 trillion—more than either Apple or Microsoft.

Next Steps: