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.
Trade tensions take toll on tech stocks
Stocks ended lower for the week, with the technology-heavy Nasdaq Composite Index falling the most as investors worried about the impact of rising U.S.-China trade tensions on global supply chains. Several news reports noted that the narrowly focused Dow Jones Industrial Average had suffered five weekly declines, marking the longest losing stretch since 2011. The broader major indexes recorded only their third weekly drop, however.
Energy stocks performed worst within the S&P 500 Index, as oil prices suffered their sharpest weekly declines of the year. The typically defensive utilities sector recorded gains, and health care shares also outperformed as Humana, Anthem, and UnitedHealth Group made up some of the ground lost in recent months due to worries about a possible “Medicare for All” system promoted by presidential candidate and U.S. Senator Bernie Sanders. Trading volumes were muted through much of the week but spiked somewhat Thursday, when the indexes sold off in the morning. Volatility, as measured by the Cboe Volatility Index (VIX), also jumped to its highest level in two weeks.
A technological cold war?
The deepening trade conflict with China continued to weigh on sentiment. Investors seemed especially worried about the prospect of an emerging technological “cold war.” Stocks fell Monday on news that large U.S. technology companies were halting sales to Chinese telecommunications giant Huawei following a new set of export restrictions announced by the White House the previous week. On Tuesday, the major indexes recovered their losses after the Trump administration granted temporary exemptions to firms doing business with Huawei. Stocks fell back again on Wednesday, however, following news that the White House was reportedly considering blacklisting more Chinese tech companies.
T. Rowe Price traders noted that the deteriorating tenor in trade rhetoric seemed partly to blame for Thursday’s steep declines. A columnist for China’s The People’s Daily referred to the U.S. as the “biggest troublemaker in the international community,” and a Chinese researcher speculated that the trade war could last until 2035. Investors may have also reacted poorly to the administration’s announcement of $16 billion in subsidies to U.S. farmers to offset the impact of Chinese agricultural tariffs, suggesting that the White House was digging in on tariffs in the near term despite market weakness and increasing economic concerns.
Renewed signs of manufacturing slowdown
Indeed, the week’s economic reports brought relatively little to celebrate. On Thursday, IHS Markit reported that its gauge of manufacturing activity had declined sharply and reached its lowest level since the financial crisis a decade ago. Factory weakness was seemingly confirmed on Friday by data from the Commerce Department showing a drop in April durable goods orders. Particularly concerning was a 0.9% drop in core capital goods, which exclude aircraft and defense orders. Existing home sales in April also disappointed, falling 0.4% in defiance of consensus expectations for a nearly 3% rise. New home sales also declined in April, although they had reached an 11-year high in March.
Benchmark yield hits lowest level since 2017
The disappointing data and the continued search for perceived safe-haven assets due to trade concerns pushed the benchmark 10-year Treasury note yield down to around 2.31%, its lowest level since late 2017. (Bond prices and yields move in opposite directions.) The drop pushed the 10-year yield back below the three-month Treasury bill yield—a yield curve inversion that has typically preceded an economic downturn.
The investment-grade (IG) corporate bond market was mostly focused on issuance. The week’s supply was slightly below expectations, while demand for the new deals was somewhat mixed. Trade tensions caused semiconductor manufacturers to underperform, weighing on the broader technology/media and telecommunications segment. Credit spreads—an inverse measure of the sector’s relative appeal—widened across most IG segments.
Modest new issuance was supportive for the high yield market, although trade tensions weighed on investors’ risk appetite and overshadowed the positive technical backdrop somewhat. Commodities issues underperformed amid concerns that a drawn-out trade war could hurt global oil demand. Investors closely monitored headlines related to the Sprint/T-Mobile merger, which continues to be a fluid situation. High yield funds reported outflows.
Munis underperform as prospects diminish for infrastructure legislation
After weeks of increasing richness, the ratio of municipal yields to Treasury yields weakened, particularly at the long end of the yield curve. Passage of a national infrastructure plan seemed less likely as President Trump abruptly ended talks with Democratic leaders in Congress this week. Local government officials and government finance groups have been advocating for a federal infrastructure bill, including an increase in the federal gasoline tax and reinstatement of advanced refunding, to alleviate pressure on municipalities for financing new projects.
U.S. Stocks1
Index | Friday's Close | Week's Change | % Change YTD |
DJIA |
25,585.69 |
-178.31 |
9.68% |
S&P 500 |
2,826.06 |
-33.47 |
12.73% |
Nasdaq Composite |
7,637.01 |
-179.27 |
15.10% |
S&P MidCap 400 |
1,862.83 |
-26.47 |
12.01% |
Russell 2000 |
1,514.11 |
-21.60 |
12.28% |
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 lose ground amid ongoing trade tensions
European equities lost ground, dragged lower by continuing U.S.-China trade tensions and weak Chinese economic data. The pan-European STOXX 600 Index lost about 1.5%, the German DAX index lost more than 2%, and the UK’s FTSE dropped about 1%.
Pound falls as May’s resignation ups uncertainty
The pound fell against the U.S. dollar but rebounded slightly after embattled UK Prime Minister Theresa May announced that she would resign on June 7 given her inability to get her Brexit deal approved by the British Parliament. T. Rowe Price traders note that May’s resignation isn’t likely to change the debate, regardless of who becomes the new leader. Parliament is not likely to support a “no deal” departure, and there are still many members who are against Brexit of any kind. The European Union (EU) is also unlikely to offer anything materially different from May’s deal.
Eurozone PMIs show continued weakness
Eurozone purchasing manufacturers’ indexes (PMI) continued to paint a bleak picture of manufacturing and services activity in the region. In Germany, activity in both sectors fell, underscoring the toll unresolved trade tensions are having on Europe’s largest economy. IHS Markit’s flash PMI for manufacturing slipped to 44.3 from 44.4 in April, marking the fifth consecutive monthly reading below the 50 mark that separates growth from contraction. IHS Markit’s services PMI fell to 55.0 from 55.7, the first decline after four consecutive increases.
European voters go to polls
Voters from all 28 EU countries took to the polls to elect the 751 members to the European Parliament in Strasbourg, France. Election results, expected the following Monday, were widely expected to underscore the rise of populist political parties across the region. The largest groups—the center-right European People’s Party and the center-left Progressive Alliance of Socialists and Democrats—were expected to lose seats, while the euroskeptic and populist movements are expected to gain. Such an outcome could create a much more divided Parliament, making compromises more difficult to achieve.
Japan
Japanese stocks ended lower for the week. The Nikkei 225 Stock Average fell 133 points (0.6%) but is still ahead 5.5% for the year to date. The broader measures of the Japanese market, the large-cap TOPIX Index and the TOPIX Small Index, posted similar declines. At the close on Friday, the yen stood at ¥109.62 per U.S. dollar, little changed versus the start of the year.
Japanese exports continued to decline in April; imports rise
Japan’s exports declined for a fifth consecutive month in April, driven in part by a slowdown in semiconductor chipmaking equipment shipments to China. According to the Ministry of Finance, Japan’s exports fell 2.4% in April versus the year-ago period, which represented a steeper decline than the 1.8% fall-off projected in a recent Reuters poll. Imports rose 6.4% year over year, the largest increase since November, which was well above analysts’ forecasts for a 4.8% gain. The Markit/Nikkei Japan Manufacturing purchasing managers’ index dipped in May to a seasonally adjusted 49.6 (readings below 50 indicate contraction) from 50.2 in April.
GDP growth significantly better than consensus expectations
The Cabinet Office reported its first estimate for gross domestic product (GDP) growth in the three months ended March 31 (Japan’s fourth fiscal quarter). The surprisingly strong data showed that Japan’s economy expanded at a 2.1% annualized rate—versus market expectations for a 0.2% contraction. The main driver was external demand, however. The public demand component was virtually flat, while employee compensation edged higher.
Solid economic growth data increase the odds of an October tax increase
The second estimate of GDP growth will be released on June 10, but the positive preliminary growth figures reduce the likelihood of a delay in the consumption tax increase slated for October. Prime Minister Shinzo Abe told Liberal Democratic Party officials at a Monday meeting that, "We will continue to watch economic trends closely and conduct policy with the economy as a top priority." These comments suggest that if exports and industrial production continue to falter, he will lobby for additional stimulus in the future. Additionally, there is speculation that Abe could dissolve the lower house for a snap election to coincide with the upper house elections.
China
Chinese stocks fall as U.S. trade tensions bleed into tech sector
Chinese stocks fell for the week as the intensifying U.S.-China trade battle spilled into the technology sector following reports that the Trump administration was considering penalizing more Chinese tech companies one week after it placed telecommunications leader Huawei Technologies on a blacklist. For the week, the benchmark Shanghai Composite Index shed 1% and the large-cap CSI 300 Index, China’s blue chip benchmark, fell 1.5%, according to Reuters. Friday marked the fifth straight weekly decline for the Shanghai benchmark and the third straight weekly loss for the CSI 300.
The latest week’s declines followed reports that the Trump administration was considering blacklisting five Chinese surveillance technology companies—including Hikvision Digital, China’s biggest surveillance camera maker—in a move that would bar them from using U.S. components or software. In addition to fueling the perception that the U.S. was going after China’s homegrown technology leaders, the latest escalation raised fears that China would retaliate on U.S. tech companies that do business on the mainland. In an interview with Bloomberg TV, China’s ambassador to the U.S. called the U.S. accusations against Huawei “groundless suspicion” and its blacklisting an “unusual” act of state power against a private company, adding that China was prepared to hit back with countermeasures.
T. Rowe Price sovereign credit analyst Chris Kushlis believes the latest tariff escalation will likely shave 0.3% from China’s annual GDP growth this year, with an impact of up to 1% if additional tariffs threatened by the Trump administration go into effect. However, Beijing will likely respond with various monetary easing measures in the coming months as officials try to cushion the trade war’s impact on domestic growth, Kushlis notes.
Other Key Markets
Turkish shares pare losses on news of stimulus package
Stocks in Turkey, as measured by the BIST-100 Index, returned about -0.8% for the week. Turkish assets initially sagged in part due to President Recep Tayyip Erdogan’s insistence on purchasing Russian military hardware, which could lead to U.S. sanctions. Another negative factor was the implementation of a one-day settlement delay for retail foreign currency purchases of at least $100,000; Turkish authorities claimed that the move was to deter “market speculation.” In addition, the lira slipped as the central bank resumed one-week repo auctions at the 24% interest rate; it had briefly suspended the auctions, forcing banks to borrow from the central bank at the higher overnight lending rate of 25.5%.
The equity market pared its losses on Thursday and Friday, partially in response to news of a new stimulus package announced by Treasury and Finance Minister Berat Albayrak that is intended to support import-dependent sectors. The funding is to be provided by some of Turkey’s state-owned banks later this year. While details are somewhat limited, T. Rowe Price sovereign debt analyst Peter Botoucharov believes that these new measures will further weaken Turkey’s two anchors: its fiscal position and banking sector balance sheets.
BJP landslide lifts Indian shares
Stocks in India, as measured by the S&P BSE Sensex Index, returned about 4%. Shares were lifted by optimism that the ruling BJP party and its coalition partners would win enough votes so that Prime Minister Narendra Modi could serve a second five-year term in office.
Voting in the general election, which took place over the last few weeks, concluded on May 19, and ballots were counted on May 23. The BJP won around 300 seats in the 543-seat legislature, while other parties allied with the BJP won roughly 50 seats. As a result of this electoral landslide, Modi’s economic agenda and reform efforts—which have thus far disappointed some investors—could be more robust and more likely to become law in his second term.
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