markets & economy  |  October 16, 2020

Global Markets Weekly Update

U.S.

Early rally helps stocks build on recent gains

The large-cap benchmarks narrowly managed a third consecutive week of gains, while small-cap shares lagged slightly after a recent streak of outperformance. Within the S&P 500 Index, industrials and utilities shares outperformed, while financials recorded losses as investors gave a lukewarm reception to bank earnings reports. The small real estate sector was also weak.

The S&P 500 reached its high point for the week on Monday afternoon, guided higher by mega-cap technology stocks. Apple shares recorded solid gains ahead of the company’s unveiling of new iPhones on Tuesday, and Amazon.com shares were also strong in advance of its annual Prime Day, scheduled this year to stretch over October 13 and 14. 

Stimulus hopes diminish further

T. Rowe Price traders noted that there did not seem to be any broad catalyst behind the rally, however, especially given the lack of progress in stimulus negotiations over the previous weekend. Indeed, stocks fell back at midweek as the prospects of a relief package being passed before the election seemed to dim further. On Tuesday, Republican Senate Majority Leader Mitch McConnell stated that he was only prepared to bring a USD 500 billion package to a vote—far below the USD 2.2 trillion that House Democrats were demanding. McConnell’s offer was also well below the USD 1.8 trillion the White House was proposing, and President Donald Trump immediately criticized the Senate package as too meager. On Wednesday, however, Treasury Secretary Steven Mnuchin remarked that he and House Speaker Nancy Pelosi remained far apart on some issues.

Coronavirus worries also seemed to dampen sentiment during much of the week. Investors appeared concerned by the continued rise in cases in the U.S. and Europe, and Wednesday brought news of pauses in trials of both Johnson & Johnson’s vaccine and Eli Lilly’s antibody treatment due to possible adverse reactions. The U.S. also recorded its first confirmed case of reinfection with the virus. On Friday, however, markets appeared to get a lift from news that Pfizer was preparing to seek emergency use authorization (EUA) from the Food and Drug Administration (FDA) for its vaccine as soon as November.

The week marked the unofficial start of earnings season, with 31 S&P 500 companies expected to report third-quarter results, according to Refinitiv. Analysts polled by FactSet and Refinitiv currently expect overall third-quarter earnings for the S&P 500 to fall over 20% on a year-over-year basis.

Jobless claims hit two-month high, but retail sales jump

The week’s economic data were mixed. Core retail sales—excluding purchases at auto dealerships, gas stations, home centers, and food services suppliers—rose 1.4% in September, easily reversing a downwardly revised 0.3% drop in August. The University of Michigan’s preliminary gauge of October consumer sentiment also surprised moderately on the upside. However, weekly jobless claims disappointed, rising to 898,000, a two-month high. Continuing claims again offered a more hopeful picture, however, falling from a revised 11.2 million to 10.1 million. Core (less food and energy) consumer prices rose 0.2% in September, but much of the increase was again due to higher prices for used cars and trucks as consumers sought to avoid public transportation.

Treasury yields rose after the retail sales report but decreased through most of the week, driven in part by the Federal Reserve’s purchases of U.S. government debt, concerns surrounding vaccine trials, and softness in key components of the latest consumer price index data. (Bond prices and yields move in opposite directions.) The municipal bond market produced modestly positive returns through much of the week. Muni issuance was elevated, according to T. Rowe Price traders, and 30-day visible supply reached a 52-week high. However, new deals were generally well subscribed, and the supply of tax-exempt bonds stayed manageable, with taxable muni issuance continuing to compose a meaningful share of deal activity. 

Corporate bond markets quieted by macro concerns

Meanwhile, rising COVID-19 cases in Europe and concerns surrounding fiscal stimulus negotiations in the U.S. continued to weigh on sentiment in the investment-grade corporate bond market. Primary issuance levels contracted throughout the week and finished well below expectations. Trading volumes were somewhat light in the high yield market, as macroeconomic concerns appeared to keep many investors on the sidelines. In issuer-specific news, AMC Entertainment was reportedly weighing its options, including a potential Chapter 11 bankruptcy protection filing, amid increasing liquidity needs as moviegoers have not returned to theaters and studios have delayed movie release dates.

U.S. Stocks

Index Friday's Close Week's Change % Change YTD
DJIA 28,606.31 19.41 0.24%
S&P 500 3,483.81 6.68 7.83%
Nasdaq Composite 11,671.56 91.62 30.08%
S&P MidCap 400 1,997.33 1.80 -3.18%
Russell 2000 1,633.80 -3.17 -2.08%

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 in Europe fell on burgeoning coronavirus infections, Brexit-related uncertainty, and the dissipating prospects of U.S. fiscal stimulus before the November 3 presidential and congressional elections. A rally in German debt pushed yields on these haven securities to the lowest level since the market swoon in March. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.78% lower. Major indexes lost ground: Germany’s Xetra DAX Index slid 1.09%, Italy’s FTSE MIB dropped 1.05%, and France’s CAC 40 gave up 0.22%. The UK’s FTSE 100 Index declined 1.61%.

In the face of regional protests, European central governments imposed stricter targeted measures to contain the accelerating spread of the coronavirus and prevent a second round of economically damaging national lockdowns. France, for example, imposed a nighttime curfew in Paris and eight other cities, while Germany began to impose restrictions on socializing in areas worst hit by the virus, such as Berlin. The UK implemented a three-tiered system of localized lockdowns across England and offered business subsidies to the worst-affected areas. 

ECB’s Lane: European recovery faces “tougher phase”

European Central Bank (ECB) Chief Economist Philip Lane said in an interview with The Wall Street Journal that “the next phase is going to be tougher” for the European economic recovery. Although the pickup in business activity would continue in the fourth quarter and next year, much would depend on the extent of localized lockdowns. “The big question, and this is why there is so much uncertainty, is: how quickly can the current dynamic, with rising cases, be stabilized?” He played down expectations for fresh stimulus as soon as next month, saying policymakers will wait for information on 2021 budgets, the exchange rate, and oil prices, among other factors, before deciding on a policy response. 

UK moves closer to no-deal Brexit

UK Prime Minister Boris Johnson said the country should get ready for a no-deal exit from the European Union (EU) on December 31, in response to Brussels’ demands for more unilateral concessions. However, Johnson kept the door open for more talks, saying he would listen to proposals based on a “fundamental change of approach.” The EU said before the announcement that it was ready to continue talking. T. Rowe Price traders noted that the consensus view is that negotiations will likely continue, but we should expect some saber rattling from both sides before the two sides will likely reach an accord at the 11th hour.

Internet behemoths face tougher EU rules

The EU is drawing up a “hit list” of up to 20 big internet companies that would face tougher rules aimed at curbing their market power, the Financial Times reported, citing people familiar with the discussions. Under the plans, which could include efforts to break up some of these behemoths, the targeted companies would have to comply with new rules forcing them to share data with competitors and to be more transparent on how they gather information. The list will likely include big U.S. technology companies, the article said.

Japan

Japanese stocks retreated for the week. The Nikkei 225 Stock Average fell 209 points (0.9%) and closed at 23,410.63. The widely watched market yardstick has declined (1.0%) for the year-to-date period. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, also recorded losses. The yen strengthened modestly and traded above JPY 105 per U.S. dollar on Friday.

The Japanese government is looking into a third stimulus package to boost consumption, which has faltered during the global pandemic. Prime Minister Yoshihide Suga has asked for specific recommendations for the proposal next month, so that a draft of the package can be created by year-end and submitted to the next ordinary Diet in January. The third supplementary budget in fiscal 2020 (Japan’s fiscal year begins on April 1 and ends on March 31) is expected to include more government subsidies for domestic travel, an extension of the “Go To” program, additional spending, and tax relief for struggling businesses. Japan’s government has already passed two supplementary budgets totaling approximately JPY 57 trillion (USD 540 billion) in fiscal 2020. The government still has approximately JPY 8 trillion remaining in reserves for these initiatives. The third supplementary budget will likely be partially funded in the fiscal 2021 budget, which will be discussed in the January Diet.

Concerns grow over the eventual removal of easy monetary policies

According to Bloomberg, the Bank of Japan’s (BoJ’s) assets now total approximately 137% of Japan’s gross domestic product. The total of the BoJ’s holdings (securities, loans, and other assets) is about 10% less, in dollar terms, than the Federal Reserve’s, although the U.S. economy is about four times larger than Japan’s.

Japanese government bonds compose the bulk of the central bank’s assets, and it now owns about 70% of that market. A significant increase in short-term bill purchases, coupled with more lending, has pushed up the central bank’s stake in loans to 15% from about 8.5% at the end of 2019. Some economists warn that the eventual unwinding of these positions could cause a spike in volatility as many companies have come to rely on the current largess.

China

Chinese stocks rallied after investors returned from the national Golden Week holiday. The benchmark Shanghai Composite Index rose 2.0% and the blue chip CSI 300 Index advanced 2.4% in its third weekly gain. In fixed income markets, the yield on China’s 10-year sovereign bond rose four basis points to 3.25%, as strong September trade data reinforced hopes for a sustained recovery. Last month marked another strong month for foreign purchases of Chinese bonds, with foreign investors buying USD 20.2 billion in September. At a monthly press conference, People’s Bank of China (PBOC) officials appeared to show little appetite for cutting interest rates. The central bank injected RMB 500 billion into the financial system via its one-year medium-term lending facility, although the added liquidity was seen by market participants as not particularly generous, given upcoming tax payments.

Trade data underscore recovery

China’s exports last month beat market forecasts and grew for the fourth straight month, jumping 9.9% year-on-year in U.S. dollar terms, according to preliminary official data. Exports to regions that were lagging until recently showed signs of improvement. Imports, which have so far trailed exports in the recovery, jumped in September, offering evidence of a pickup in domestic demand. As a result, many expect China's trade surplus to shrink in the coming months. 

The International Monetary Fund raised its full-year gross domestic product (GDP) forecast for China to 1.9%, up from its June forecast of 1.0%, in its October World Economic Outlook. The upward revision makes it likely that China will be the sole G-20 country to record positive growth in 2020. Longer term, China is on track to overtake the U.S. as the world’s largest economy in 2030 in current U.S. dollars, even if the country generates slower-trend growth of 4.5% over the next decade, according to Oxford Economics.

Next week, investors will focus on China’s third-quarter GDP report and September economic indicators, which are expected to show that economic activity has broadly returned to pre-coronavirus crisis levels. Evidence of stronger domestic consumption will also be in focus after Golden Week due to its emphasis on shopping and travel, which was largely confined to China this year as the coronavirus kept millions of would-be overseas travelers home for the holiday. 

Other Key Markets

Turkey

Stocks in Turkey, as measured by the BIST-100 Index, returned about 2.3%. Shares advanced, but the lira continued sliding to new all-time lows versus the U.S. dollar amid news that Turkey had a current account deficit in August of about USD 4.6 billion. Currency weakness could make Turkish exports cheaper on world markets, which may help reduce its sizable trade deficit, but it could also boost already-elevated inflation due to an increase in import prices.

With regard to interest rates, T. Rowe Price sovereign analyst Peter Botoucharov notes that Turkey’s effective funding costs have continued to grind higher—now slightly more than 12% compared with 10.25% for the one-week repo auction rate and 11.75% for the overnight lending rate—as the central bank continues to provide lira liquidity to Turkish banks by way of more expensive liquidity channels. With a 12-month inflation rate of 11.75% in September, real (inflation-adjusted) yields are essentially around 0%.

Continued regional tensions stemming from the conflict between Azerbaijan and Armenia—with Turkey supporting the former and a Russia-brokered ceasefire failing to hold—also weighed on the lira. Also, reports that Turkey was preparing by the end of the week to test the S-400 missile defense system it acquired from Russia last year raised concerns about possible retaliatory sanctions from the U.S. or other NATO members.

South Africa

Stocks in South Africa, as measured by the FTSE/JSE All Share Index, returned about -0.25%.

Early in the week, the National Treasury requested a one-week delay (until October 28) in presenting the 2020 Medium Term Budget Policy Statement. The intention behind this report, as stated by the National Treasury in last year’s edition, is “to communicate government’s policy stance, and to encourage Parliament and the public to debate options for the economy and the public finances.”

On Thursday evening, South African President Cyril Ramaphosa presented the government’s Economic Reconstruction and Recovery Plan, which is intended to boost employment and infrastructure spending. According to T. Rowe Price sovereign bond analyst Roy Adkins, there are some interesting proposals in it, particularly the specific intentions with respect to increasing the electricity generation capacity of the economy, which has been a key structural constraint. Adkins notes that the timeline for implementation of the plan, while laudably specific, is probably not realistic.

As for the plan’s fiscal implications, Adkins does not believe that the National Treasury will succeed in maintaining the same framework and debt trajectory it outlined as its base case. While Ramaphosa stated that the implemented plan will raise growth to 3% on average over the next 10 years, it remains to be seen whether the National Treasury will allow for a higher growth rate in its framework. Adkins notes that the funding for many initiatives, and, thus, their impact on the budget, is unclear. He believes that much of the fiscal detail supporting the plan may not be available until the February presentation of the country’s 2021–2022 budget.

 

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