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Global Markets Weekly Update: August 14, 2020
U.S.
S&P 500 nears February peak
The major indexes registered gains for the week, helping the S&P 500 Index to briefly move within roughly 0.2% of its February all-time high. Slower-growing value stocks outperformed for the second consecutive week, suggesting to some that a market rotation was underway after the dramatic outperformance of large-cap growth shares in recent months. Industrials shares outperformed within the S&P 500, helped by strong gains in package delivery firms FedEx and United Parcel Service. The small utilities and real estate sectors lagged as increasing longer-term Treasury bond yields made their typically high dividend payments less attractive in comparison.
T. Rowe Price traders noted that the week’s trading was typical of late summer, with particular catalysts for the market's moves remaining harder to identify than usual. The downward trend in new coronavirus cases seemed to support sentiment early in the week, although the number of daily fatalities reached a three-month high on August 12. Markets also seemingly got a brief boost after Russia announced it had approved a “Sputnik” coronavirus vaccine, but enthusiasm appeared to wane after many experts cautioned that it was being released without extensive testing. Reflecting reduced fears about the virus, perhaps, shares in Boeing rose early in the week after the Transportation Security Administration reported that 830,000 passengers had boarded commercial airplanes on Sunday, the biggest daily number since the pandemic took hold in March.
Levenson: Congress’s inaction likely to weigh heavily on incomes, spending
Optimism about further fiscal stimulus may have also helped the week’s gains, but signals were conflicting here as well. Over the previous weekend, President Donald Trump signed executive actions extending supplemental unemployment benefits, halting evictions, delaying student loan payments, and cutting payroll taxes. While critics immediately raised doubts about the constitutionality and efficacy of the actions, investors seemed hopeful that they would help break the impasse in congressional negotiations—with consensus expectations for a stimulus package of around USD 1.5 trillion, according to our traders. Negotiations made no progress, however, and on Thursday, the U.S. Senate went into recess until September 8. The U.S. House of Representatives is already on recess and, according to The Hill, is not expected to reconvene until Monday, September 14.
T. Rowe Price Chief U.S. Economist Alan Levenson warns that Congress’s inaction is likely to carry large consequences. He estimates that the July 31 expiration of the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s USD 600 weekly federal top-up of state unemployment insurance will reduce personal income by 4.5% and weigh heavily on consumer spending. Moreover, he notes that authority to apply for Payroll Protection Program (PPP) loans expired on August 8, and Congress’s failure to reauthorize and refine the program—including allowing firms with substantial and sustained revenue losses to apply for a second loan—may soon force a new round of layoffs. In the National Federation of Independent Business’s latest (July 20–21) COVID-19 survey, 71% of respondents reported having used their entire PPP loan, and 21% anticipated layoffs after depleting their loan proceeds.
The week’s economic data may have helped Wall Street take the stimulus uncertainty in stride. The number of Americans filing initial unemployment claims fell more than expected and moved below one million for the first time in 21 weeks. The University of Michigan’s preliminary measure of August consumer sentiment ticked upward, defying consensus expectations for a further decrease after July’s sharp drop. The headline gain in July retail sales missed expectations (1.2% versus 1.8%), but sales outside of the volatile auto segment rose more than expected (1.9% versus 1.3%).
Treasury yields jump on economic data, financing needs, inflation signals
The positive economic signals appeared to play a role in the jump in longer-term bond yields over the week, but so did record-sized auctions of U.S. government debt and large sales of corporate bonds that lured investors away from the Treasury market. The consumer price index (CPI) for July surprised to the upside, reinforcing expectations for higher inflation. Both the headline and core CPI readings advanced 0.6% over the month, which marked the core CPI’s largest one-month increase since January 1991. The yield on the benchmark 10-year Treasury note increased to around 0.73% on Thursday afternoon, its highest level since late June. (Bond prices and yields move in opposite directions.)
Fed provides further support to muni borrowers
The broad municipal bond market posted losses over much of the week but outperformed Treasuries. The firm’s traders reported a spike in market participants expressing interest in selling, as some investors sought to take profits following strong municipal performance over recent months. The Supreme Court of New Jersey ruled in favor of the state’s plan to borrow nearly USD 10 billion via the Federal Reserve’s Municipal Liquidity Facility (MLF). The court determined that the emergency borrowing plan, intended to fill the state’s budget gap, is allowed under the constitution since the public health crisis qualifies as a “true disaster.” To make borrowing through the MLF less cost-prohibitive for muni issuers, the Federal Reserve lowered the interest rate spread—versus an overnight benchmark rate for comparable maturities—it charges for tax-exempt notes by 0.50% across credit rating categories.
T. Rowe Price traders reported that investment-grade corporate bond issuance significantly exceeded early expectations as earnings blackout periods ended and a diverse group of issuers brought new deals to the market before the anticipated end-of-summer slowdown. The issuance was generally met with solid demand, although the market seemed to struggle to absorb the large volume of new deals later in the week. Meanwhile, the high yield market was focused on new deals, with August issuance already surpassing the total for the entire month of July. JPMorgan reported that bond refinancing activity has significantly increased as issuers take advantage of the sharp decline in yields since the beginning of July.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
27,931.02 |
497.54 |
-2.13% |
S&P 500 |
3,372.85 |
21.57 |
4.40% |
Nasdaq Composite |
11,019.30 |
8.32 |
22.81% |
S&P MidCap 400 |
1,948.50 |
9.97 |
-5.55% |
Russell 2000 |
1,576.02 |
6.84 |
-5.54% |
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
Equities in Europe ended the week higher on signs of progress in developing a vaccine against COVID‑19, the disease caused by the coronavirus, and hopes that major economies could pursue additional stimulus measures to bolster a nascent recovery. The strong rally at the start of the week stalled on rising fears of a potential second wave of coronavirus infections in Europe, a risk that prompted the UK to impose more travel restrictions. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.24% higher, Germany’s DAX Index rose 1.79%, France’s CAC-40 ticked up 1.50%, and Italy’s FTSE MIB gained 2.62%. The UK’s FTSE 100 Index climbed 0.96%.
Europe coronavirus cases rise sharply
Spikes in coronavirus infection rates sparked fears about a second wave in the pandemic. The BBC reported that Germany recorded its biggest daily increase in coronavirus cases in more than three months on Wednesday, while France suffered the biggest daily uptick in positive tests since lifting its lockdown restrictions in May. Spain has the worst infection rate in Europe, with 675 “active outbreaks.” The UK recorded the biggest rise in cases in seven weeks and added France, the Netherlands, and Malta to its quarantine list.
Record plunge in UK GDP; Budget may be delayed
The UK fell into a recession in the second quarter, when the economy shrank by a record 20.4% sequentially. Consumption, government spending, exports, imports, and business investment declined significantly. However, there were signs of a recovery in June, when gross domestic product (GDP) rose 8.7% from May.
Official data showed that the UK shed 730,000 jobs between March and July, likely because companies froze hiring during the coronavirus lockdown. More than a quarter of the workforce is still inactive at home. Some fear further losses as the government winds down its job retention scheme and companies lay off workers. The National Statistics office estimated that about five million workers are still on furlough. Bank of England Deputy Governor Dave Ramsden indicated to The Times newspaper that unemployment would be a big factor in any decision to expand the central bank’s bond purchases. Meanwhile, the Chancellor of the Exchequer, Rishi Sunak, is considering whether to shelve his fall budget if the UK is hit by a second wave of coronavirus infections.
German ZEW economic sentiment jumps, but recovery is slow
The monthly ZEW survey of economic sentiment leapt to 71.5 from 59.3 in July, signaling that investors’ outlook for the German economy has improved significantly. Although hopes of a quick recovery continued to grow, experts at the economic research institute noted that progress has been slow, with the indicator for the current economic situation in Germany falling to -81.3 from -80.9 in July.
Japan
Stocks in Japan surged in back-to-back weeks. In this holiday-shortened trading week (Japanese markets were closed on Monday in observance of Mountain Day), the Nikkei 225 Stock Average advanced 959 points (4.3%) and closed at 23,289.36, levels not seen since a brief spike in early June. The widely watched market yardstick has recouped most of its coronavirus-related losses and on Friday had returned -1.6% for the year-to-date period. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, also posted strong weekly gains. The yen weakened slightly and traded near JPY 107 per U.S. dollar.
The global pandemic chokes Japan’s growth
Japan's GDP growth is expected to contract more than 7% (26.6% annualized) in the three months ended June 30 versus the prior quarter, according to a survey of economists polled by the Japan Center for Economic Research. The coronavirus-induced economic contraction will be the steepest quarterly decline in four decades—more severe than the global financial crisis in the first quarter of 2009. Japan’s economy was already in recession following economic declines in the previous two quarters.
Stay-at-home orders, social distancing measures, and the closure of nonessential businesses—which began in Tokyo and several other prefectures in early April—lasted for approximately one month. Domestic consumption, which represents more than half of Japan’s GDP, is expected to fall approximately 6.9% from the already weak March quarter level, while capital expenditures are forecast to decline about 4.5%. Second-quarter exports of goods and services are projected to fall more than 18%, while the dip in imports is expected to be relatively modest. The survey showed that economists believed that GDP would recover sharply in the final two quarters of 2020 and turn positive in fiscal 2021.
Japanese companies expect profits to fall 36%
According to research from The Nikkei, Japanese-listed companies expect their profits to decline 36% in fiscal 2020 (ending March 31, 2021) from the year-earlier period. Approximately 60% of Japan’s businesses have forecast lower revenues and net income for the fiscal year. With approximately two-thirds of Japan’s companies reporting guidance, the companies that provided six-month and full-year guidance project a 24% fall-off in sales and a 54% decline in first-half profits. The projections for the second half of the year were stronger: These companies expect a 2% decline in sales coupled with an income gain of 19%, which implies the implementation of stringent cost-cutting initiatives. Auto giants Toyota and Honda each forecast 64% net profit declines for the fiscal year.
China
Mainland Chinese stock markets ended the week broadly unchanged as investors stayed on the sidelines ahead of U.S.-China trade talks on August 15. Many analysts see the talks—which are intended to review the progress of the phase one trade deal over the past six months—as a potential risk to markets, though President Trump is believed to want the deal upheld ahead of the November presidential election. However, U.S. import targets for 2020, to which China has committed, already appear out of reach.
In fixed income markets, the yield on China’s 10-year bond was broadly flat following mixed economic data, while the yuan ended largely unchanged against the U.S. dollar. China recently introduced several changes to improve its bond defaults mechanism, though more work needs to be done before domestic credit markets are on par with global standards, according to Asia Times Financial. The first Chinese bond default was in 2014, according to S&P Global Ratings, with 300 technical defaults by 110 companies since then. Just 100 have been resolved so far, mostly by in- and out-of-court restructuring, delayed payment, or liquidation. So far this year, domestic bond defaults have risen 6.6% from a year ago.
Economic readings show recovery cooled
July economic readings released during the week were mixed. Consumer inflation rose for the second straight month driven by higher food prices, while retail sales and industrial output were both less than expected. Overall, the latest month’s data showed that China’s economic activity slowed in July as devastating floods in much of the country damaged agricultural output and disrupted industry. However, the data also suggested a sluggish recovery in demand amid elevated inventory levels. Surprisingly, China’s export-focused sectors fared the best, with the auto sector recording its best output growth since 2016. However, the urban unemployment rate stayed at a relatively high 5.7%, with a sharp increase in the 20 to 24 age bracket—a worrying data point for Beijing, which has put a high priority on stabilizing employment. In other economic news, credit data released by the People’s Bank of China showed that growth in new lending slowed following a coronavirus-driven spike, indicating that credit growth was returning to normalized levels.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned about 2.2%. Shares rose, recouping some of their recent losses, but the lira remained under pressure, as investors responded to the central bank’s recent policy adjustments. The previous week, the central bank announced that it was phasing out the targeted liquidity facilities that were established in March to stimulate credit growth. These facilities achieved this via repo and swap auctions with interest rates that recently had been below the benchmark one-week repo rate, currently 8.25%.
The central bank also signaled that it will increasingly provide lira liquidity to Turkey’s banking system by way of more expensive liquidity channels. With a temporary suspension of repo rate auctions, the overnight lending rate—currently 9.75%—has effectively become the benchmark rate, which means policymakers have made a stealth rate increase, according to T. Rowe Price Sovereign Analyst Peter Botoucharov.
If financial conditions warrant, or if the lira depreciates rapidly, central bank officials could effectively tighten policy further by requiring—as they did in 2018—the use of the late liquidity window facility, whose interest rate is currently 11.25%. Botoucharov observes, however, that the current bout of lira weakness has not been as severe as in 2018, when the lira plunged more than 30% versus the U.S. dollar over the course of several months.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about -1.5%. During the week, Rodrigo Maia (the president of the Chamber of Deputies) and Economy Minister Paulo Guedes held a joint press conference in which they stressed the need for the government to maintain fiscal responsibility and respect the country’s spending cap in 2021, which is mandated by a constitutional amendment. Maia specifically said that he would not allow lawmakers to use the coronavirus crisis or resort to any “cleverness” to undermine the spending cap, though discussions around the cap could return later this year in the context of the 2021 budget.
Maia also supported President Jair Bolsonaro’s economic team’s belief that emergency assistance for low-income workers cannot be extended at current levels. Another important observation was that Arthur Lira, a legislative leader in the lower chamber of the National Congress and the most likely person to replace Maia next year, participated in the press conference and showed solidarity with his colleagues. Shortly thereafter in a social media post, Bolsonaro himself acknowledged the importance of fiscal responsibility and the spending cap.
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