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Global Markets Monthly Update - July 2020
Key Insights
- Global equity markets were mixed, as investors weighed vaccine hopes and signs of a sharp recovery in some regions against a resurgence of the coronavirus.
- Bond yields remained near record lows in most economies despite new fiscal stimulus measures.
- A further rise in U.S.-China tensions weighed on sentiment later in the month.
U.S.
Stocks recorded solid gains in July, helping push the technology-heavy Nasdaq Composite Index to record highs and lifting the S&P 500 Index into positive territory for the year. Although signs briefly emerged of a market rotation toward small-caps and value shares, large-caps and growth stocks outperformed and widened their significant lead in recent months—the large-cap Russell 1000 Growth Index ended July up over 18% on a total return basis (including dividends) for the year to date, while the small-cap Russell 2000 Value Index was down nearly 22%. Consumer discretionary shares led the gains within the S&P 500, helped by a strong performance from Amazon.com, while energy was the sole segment to record a loss, down over 5%.
Fixed income securities also performed well, as the yield on the benchmark 10-year Treasury note fell to its lowest level since early March. (Bond prices and yields move in opposite directions.) Data showing a slowdown in the economic recovery may have contributed to the rally in Treasuries. Investment-grade and high yield corporate issues outperformed, helped by strong demand and muted new issuance. Municipal bonds also performed modestly better than the broad taxable fixed income market.
Vaccine Optimism Counterbalances Resurgence Worries
The month’s coronavirus headlines were not heartening, with a resurgence of the virus in many states pushing the national number of daily new cases to new highs. Encouraging news about treatments and a possible vaccine seemed to play a lead role in supporting investor sentiment, however. The S&P 500 Index had its highest daily close on July 22, shortly after researchers released positive test results for four leading vaccine candidates, three of which are receiving emergency funding from the U.S. government’s Operation Warp Speed program designed to accelerate production.
Although its market impact may have been limited, the resurgence appeared to be leaving a larger imprint on the economy. Economic data started the month on a strong note, with June nonfarm payrolls rising 4.8 million, much more than expected. June manufacturing and service sector signals were also generally strong. As states delayed or reversed reopening measures, however, more current data surprised on the downside. Weekly unemployment claims rose for the first time since March, and the University of Michigan’s gauge of consumer sentiment fell back to near its April and May lows, which researchers attributed to renewed coronavirus fears.
China Tensions Help Stall Rally
Growing tensions with China also appeared to cause the market’s rally to stall late in the month. The S&P 500 had its worst day of the month on July 23, following news that the U.S. had ordered China to close its consulate in Houston following reports of consular officials burning documents. U.S. officials also stepped up their criticism of China and U.S. companies that do business in the country. At mid-month, U.S. Attorney General William Barr accused Disney, Apple, and other firms of “kowtowing” to the Chinese Communist Party. Investors also seemed to worry as the prospects for additional fiscal stimulus remained uncertain—despite the looming expiration of extended unemployment benefits on July 31.
July brought the release of most second-quarter earnings reports, providing the first full picture of the pandemic’s impact on corporate profitability. As the month came to an end, analysts polled by FactSet were expecting overall profits for the S&P 500 to have declined by roughly 36% from the year before—the worst drop since the financial crisis. Substantially more firms than usual were beating estimates, however, making the decline much smaller than first anticipated. The upward revision was driven in part by the tech-related giants—Apple, Microsoft, Amazon, Alphabet (parent company of Google), and Facebook—that make up roughly a quarter of the S&P 500’s market capitalization. Most of the group beat estimates as consumers grew increasingly reliant on the online economy amid the pandemic.
Europe
European shares gained in U.S. dollar terms, thanks to a 5% rally in the euro relative to the greenback. However, absent these currency effects, stocks in Europe pulled back on concerns about a resurgence of coronavirus infections and U.S.-China tensions. In local-currency terms, the STOXX Europe 600 dropped 1.1%. The major indexes were mixed, with Germany’s Xetra Dax flat, the CAC 40 in France down 3%, and the UK’s FTSE 100 giving up 4.4%.
After five days of haggling, European Union (EU) leaders agreed to a historic deal on a EUR 750 billion stimulus plan. As a result, the European Commission, the EU’s executive branch, can now raise billions of euros in capital markets on behalf of all 27 states. The fund will comprise EUR 390 billion in grants—instead of the proposed EUR 500 billion—and EUR 360 billion in low interest loans. Italy will likely be the biggest recipient. Reducing the proportion of the fund allocated to grants appeased fiscally hawkish northern countries, which also secured sizable budget rebates to lower their annual net contributions.
Eurozone Economy Shrinks at Record Rate
The eurozone’s gross domestic product (GDP) contracted in the second quarter by a record 12.1% from the preceding three months. The German economy shrank by a record amount, and France’s GDP declined sharply as well. In May, the UK’s GDP grew by a slower-than-expected 1.8% from April, when it shrank by about 20%. In the three months ended May 31, the economy contracted a little more than 19%. Bank of England Governor Andrew Bailey warned banks in a letter to be prepared for negative interest rates in the UK, The Sunday Times reported.
Signs of a rebound emerged, however. Business activity in the eurozone grew in July for the first time since February and at the fastest rate in more than two years, a survey by IHS Markit showed. The Flash Eurozone PMI Composite Output Index rose to 54.8—well above 50, the level that divides expansion from contraction, and the 48.5 reading registered in June.
The European Central Bank (ECB) left monetary policy unchanged as it entered what some have described as a “wait and see” period to assess the strength of the economic recovery before launching any new measures. ECB President Christine Lagarde said that there has been a “significant but uneven” recovery since the eurozone economy bottomed in April but noted that “exceptionally elevated uncertainty” still weighed on consumer spending and business investment. She asserted that ample monetary stimulus remained necessary to support the economic recovery and safeguard medium-term price stability.
France, UK Increase Stimulus
French President Emmanuel Macron said another EUR 100 billion would be injected into the economy to support a recovery. The sum comes on top of the EUR 460 billion already planned by the government. Finance Minister Bruno Le Maire said firms would see EUR 20 billion in tax cuts over the next two years.
In the UK, Finance Minister Rishi Sunak pledged an additional GBP 30 billion to bolster employment, on top of the GBP 133 billion in coronavirus measures he has already unveiled. Meanwhile, the Italian government will increase its latest stimulus package to EUR 32 billion, tacking on an extra EUR 7 billion as part of its effort to help the economy overcome the impact of the pandemic, Italian newspaper Il Sole 24 Ore reported. The new funds come on top of the EUR 75 billion already approved since the pandemic started.
Officials: Brexit Deal Possible in September
A comprehensive Brexit deal could be finalized in September, UK and EU officials told The Times newspaper. The EU reportedly has signaled its willingness to accept an agreement whereby the European Court of Justice would have no role in policing a deal and access to British fishing waters would change. In return, the UK has accepted that there will be a single deal, rather than separate treaties, and that the agreement will be governed under a single arbitration structure when disputes arise. The UK’s chief negotiator said that an agreement could still be reached in September but “considerable gaps” remained in the most difficult areas of fishing rights and the level playing field.
Japan
Japanese stocks posted modest losses in July and steeper losses for the year-to-date period. The yen strengthened (to JPY 105) versus the U.S. dollar, which contributed to returns for U.S. dollar-based investors in Japanese securities but has the potential to crimp profits for Japanese exporters. Within the Japanese equity market, as measured by the MSCI Japan Index, growth stocks outperformed value shares, and small-caps generally trailed large-caps. The yield of the 10-year Japanese government bond traded in a tight range and finished the month at 0.01%.
Japan’s Government Slashes Its Growth Forecast for 2020
The Japanese Cabinet Office lowered its GDP growth forecast for fiscal 2020, which ends in March 2021, to a 4.5% contraction due to the impact of the global pandemic. The latest forecast represents a steeper decline than in fiscal 2008 following the global financial crisis and represents a massive revision from the 1.4% growth forecast six months ago. The dour forecast reflects recessionary conditions and the likelihood of another round of stimulus. Looking ahead to fiscal 2021, the Cabinet Office believes that Japan’s economy will grow 3.4% if the coronavirus is contained and global economic conditions recover to a semblance of normalcy. Overall, the government forecasts are more optimistic than the projections of analysts in the private sector and the Bank of Japan (BoJ). Both expect a significantly larger contraction in fiscal 2020, which implies that the government has greater optimism about the effectiveness of the ongoing and future stimulus efforts.
At its July policy meeting, the Bank of Japan decided to keep short- and long-term rates unchanged. The board voted 8-1 to stand pat on monetary policy, as expected, although it cautioned that risks to economic activity and prices were skewed to the downside. In a statement after the meeting, BoJ Governor Haruhiko Kuroda told reporters that “there is no doubt that the economy is bottoming out and is on a recovery phase.” Analysts believe that despite myriad uncertainties and weakness in the GDP outlook, the central bank has done all that it can for now in terms of support for the economy.
Bankruptcies Surge in First Half
According to Tokyo Shoko Research, a firm that tracks Japanese bankruptcies, more than 4,000 businesses declared bankruptcy in the six-month period through June 30, 2020. The research firm said that 240 of the business failures were directly ascribed to the coronavirus pandemic, which particularly hurt the hotel and restaurant segment. Nearly 1,300 of the bankruptcies were in the accommodation and food services industries, largely due to declining tourism. Other factors cited included higher labor costs and the consumption tax increase in October 2019. The latest government data show that the number of foreign travelers to Japan fell 99.9% year over year in June to 2,600. May’s Japanese tourist tally was 1,700, the lowest figure on record since 1964.
Tokyo Governor Yuriko Koike confirmed that there were 463 new coronavirus cases in Tokyo on July 31, which was up from the prior day’s record 367 infections. The governor said that if the situation gets any worse, she will consider issuing a state of emergency for the city independent of the central government. Koike has requested that bars and karaoke parlors close early (at 10 p.m.) and offered to pay a JPY 200,000 (USD 1,900) incentive to each business adhering to the recommended virus-prevention guidelines. According to the Kyodo News, Japan’s new coronavirus cases exceeded 1,000 per day several times in the last week of July, raising concerns of a nationwide resurgence of infections. In addition to Tokyo, Kanagawa, Hyogo, Tokushima, Fukuoka, and Okinawa prefectures each reported successive daily records of new coronavirus infections.
China
Chinese stocks rallied as signs of economic recovery grew more plentiful and offset rising U.S. tensions. The blue chip CSI 300 Index rose 12.8%, while the benchmark SSE Composite Index added 10.9%. In fixed income markets, bonds sold off at the start of July but surged in subsequent weeks, with the yield on the 10-year sovereign bond ending the month below 3.0%. Late in July, China’s finance ministry ordered local governments to utilize remaining bond quotas by October, a move that analysts said could delay a drop in yields. Beijing also ordered the accelerated disbursement of funds for key infrastructure projects, a sign that fiscal stimulus this year has yet to peak. In currency trading, the yuan declined 1.3% versus the U.S. dollar.
Consulate Shutdown, Floods Weigh on Sentiment
U.S.-China ties deteriorated after the Trump administration ordered the shutdown of China’s consulate in Houston on July 22, which was followed by China’s decision to close the U.S. consulate in Chengdu. Extremely heavy rainfall in the Yangtze River basin and devastating floods across central China also weighed on investor sentiment and raised concerns about the disaster’s impact on the economy, particularly its potential to fan inflation. However, most analysts believe that the floods will likely have a muted impact on China’s gross domestic product.
China reported that its gross domestic product grew a better-than-expected 3.2% in the second quarter from a year earlier, swinging from a 6.8% contraction in the previous period. In sequential terms, the country’s economy expanded a seasonally adjusted 11.5% in the second quarter following the first quarter’s 10% drop. The eagerly awaited GDP report distinguished China as the first major global economy to return to positive growth after the coronavirus materialized in late 2019.
Domestic Demand Still Lags
Increased infrastructure spending, pandemic-driven export demand, and an unexpected rebound in the domestic property market were key drivers for China’s economy in the second quarter. Yet the durability of China’s recovery in the coming months remains uncertain, as some analysts have pointed to signs that the economy may be nearing a plateau in the current quarter. Monthly indicators for exports, industrial production, industrial profits, and manufacturing and services purchasing managers’ index gauges were generally positive. However, they showed that industry rather than consumer demand was leading China’s recovery, making the country vulnerable to flagging demand from other countries that are still mired in various states of coronavirus-related lockdowns.
Other Key Markets
Chile
Chilean stocks, as measured by MSCI, returned 10.66% in U.S. dollar terms in July. Returns to U.S. investors were boosted by strength in the Chilean peso, which surged more than 8% versus the greenback. The market outperformed the MSCI Emerging Markets Index, which returned 9.03%.
After a strong start to the month, equities were pressured in local currency terms by the unexpected progress of congressional legislation that would allow savers to withdraw up to 10% from their retirement accounts. President Sebastián Piñera and the executive branch of government were initially against the idea given the impact it would have on the pension fund system, as well as future savings, and expressed a preference to use other stimulus measures to help households.
Legislators, on the other hand, are under pressure to help their constituents, who are facing the worst economic crisis in decades. This pressure is particularly acute in advance of an important constitutional referendum later this year, as well as general elections in 2021. In fact, the bill became so popular, it prompted some citizens to demand its passage in public demonstrations. Following its passage in the Chamber of Deputies and in the Senate, Piñera signed off on the measure on July 24.
According to T. Rowe Price Emerging Markets Sovereign Analyst Aaron Gifford, the new legislation permits redemptions for up to a year, with the first round of payments being made on August 13. While the Finance Ministry suggested that outflows from the pension fund system could amount to USD 10 billion, Gifford believes it could be less, given anecdotal evidence from Peru, which recently underwent a similar event.
Turkey
Turkish stocks, as measured by MSCI, returned -8.36% in U.S. dollar terms in July, significantly lagging the positive returns of most other emerging markets. Equities generally advanced in local currency terms for part of the month while the government and the central bank continued their efforts—via regulatory oversight, as well as moral suasion over foreign exchange (FX) transactions—to limit currency volatility and keep FX flows under control. As was widely expected, central bank officials refrained from reducing short-term interest rates at their regularly scheduled policy meeting on July 23. The central bank kept its benchmark interest rate, the one-week repo rate, at 8.25%.
Toward the end of the month, shares fell sharply amid concerns that the central bank was depleting its FX reserves that are used to stabilize the lira in world currency markets. The lira also fell—it was down about 2% versus the U.S. dollar for the month—and sovereign bond yields increased in response to these concerns. The central bank’s latest projection for Turkey’s inflation rate at the end of the year—8.9% versus a previous 7.4% estimate—also weighed on Turkish assets, as it could prevent the central bank from reducing its benchmark interest rate to further stimulate the economy.
Concerns that the U.S. might impose sanctions against Turkey for last year’s purchase of Russia’s S-400 military hardware or, more recently, for its involvement in a Libyan civil war also hurt investor sentiment. In addition, investors may have turned bearish on news that the banking sector regulator penalized a few local brokerage companies that did not comply with newly established limits on FX positions.
Major Index Returns
Total returns unless noted
As of 7/31/2020
Figures shown in U.S. dollars
July | Year-to-Date | |
U.S. Equity Indexes | ||
S&P 500 | 5.64% | 2.38% |
Dow Jones Industrial Average | 2.51 | -6.14 |
Nasdaq Composite (Principal Return) | 6.82 | 19.76 |
Russell Midcap | 5.87 | ‑3.79 |
Russell 2000 | 2.77 | ‑10.57 |
Global/International Equity Indexes | ||
MSCI Europe | 3.88 | ‑9.04 |
MSCI Japan | -1.59 | -8.40 |
MSCI China | 9.50 | 13.42 |
MSCI Emerging Markets | 9.03 | -1.52 |
MSCI All-Country World | 5.33 | ‑0.98 |
Bond Indexes | ||
Bloomberg Barclays U.S. Aggregate | 1.49 | 7.72 |
Bloomberg Barclays Global Aggregate ex-USD | 4.44 | 5.08 |
Credit Suisse High Yield | 4.49 | ‑1.02 |
JP Morgan Emerging Markets Bond Global | 3.70 | 1.76 |
Past performance cannot guarantee future results.
Note: Returns are for the periods ended July 31, 2020. The returns include dividends and interest income based on data supplied by third‑party provider RIMES and compiled by T. Rowe Price, except for the Nasdaq Composite Index, whose return is principal only.
Sources: Standard & Poor’s, LSE Group, Bloomberg Barclays, MSCI, Credit Suisse, Dow Jones, and JP Morgan (see Additional Disclosures).
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