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Global Markets Weekly Update: August 21, 2020
U.S.
S&P 500 marks fastest recovery from a bear market in history
The major indexes ended mixed in what T. Rowe Price traders characterized as a week of generally light summer trading—at least in the context of the market’s recent volatility. Nevertheless, the week was notable for the S&P 500 Index hitting record intraday and closing highs on Tuesday. By common definitions, this marked the fastest recovery from a bear market in history—according to Barron’s and Dow Jones Market Data, the 126 trading days it took for the S&P 500 to reclaim its February peak was over 10 times as fast as the index’s average historical rebound (1,542 trading days).
The week’s performance was highly uneven, however, with growth stocks forcefully reasserting their dominance over value shares and large-caps handily outperforming small-caps. Communication services shares were among the best performers, helped by gains in Alphabet (Google), which has a heavy weighting in benchmark indexes. Technology stocks were also strong, boosted by gains in chipmaker Nvidia and Apple, which became the first U.S. publicly traded company with a market capitalization over $2 trillion. Meanwhile, energy shares recorded declines as OPEC and other major hydrocarbon-producing nations predicted a slow recovery in global oil demand. Financials, another prominent value sector, underperformed after Warren Buffett’s Berkshire Hathaway revealed a significant reduction in its bank holdings.
Housing market sees strong rebound while jobless claims rise back above one million
Economic data seemed to be front and center in the market for much of the week. Stocks got off to a good start after reports showing healthy increases in both housing starts and permits in July. The National Association of Home Builders’ measure of builder confidence also reached its highest point on record, while existing home sales in July rose much more than expected and hit their best level since December 2006. IHS Markit’s composite gauge of overall business activity indicated the fastest pace of expansion since February 2019, but two regional manufacturing surveys disappointed on the downside. The weekly unemployment claims report was another dark spot, with the number of Americans filing initial claims rising unexpectedly to 1.1 million. The number of unemployed filing continuing claims fell more than expected, however, and hit its lowest number (14.8 million) since early April.
Encouraging developments in efforts to contain the coronavirus and reopen the economy may have also supported sentiment. The national daily number of new cases continued to fall as hard-hit areas in the South and the Sun Belt registered significant declines. Emergency regulatory approval for new saliva-based tests may have also supported containment hopes, and data suggested that Americans were growing more confident in going out in public. According to Reuters, OpenTable’s tally of restaurant reservations hit its highest level since mid-March, while credit and debit card purchases by Chase cardholders also hit a peak since the start of the pandemic. Worries remained that a return of students to schools and universities would spark another resurgence in the virus, however.
The Wednesday release of the Federal Reserve’s minutes from its July policy meeting appeared to weigh on sentiment somewhat, with some investors perceiving a more downbeat tone on the economy than expected, along with less forceful assurances of further monetary stimulus. Concerns also remained over the lack of progress on a new fiscal stimulus program. A Trump administration official said there may be a bipartisan path to a pared-down USD 500 billion relief bill, however, and Senate Majority Leader Mitch McConnell said a bill to support postal services may provide a negotiating window for broader stimulus.
Another muni issuer turns to Fed for support
Treasury yields drifted modestly lower through most of the week as the disappointing jobless claims and manufacturing data appeared to add to concerns that the U.S. economic recovery is slowing. (Bond prices and yields move in opposite directions.) Despite the tailwind from falling yields, the broad municipal bond market posted losses over much of the week. The firm’s traders noted that municipal investors appear to be taking a more patient approach in anticipation of a less favorable technical environment in September.
In issuer-specific news, the New York Metropolitan Transportation Authority (MTA) became the second borrower to access the Federal Reserve’s Municipal Liquidity Facility (MLF). The MTA chose to sell roughly USD 450 million in revenue-anticipation notes to the Fed after bids in the competitive market were less attractive than the borrowing rate offered through the MLF.
Investment-grade corporate bonds also underperformed as the Fed’s minutes seemed to contribute to risk-off sentiment. Activity in the high yield market was somewhat subdued, according to our traders, as the seasonal slowdown began. The primary calendar remained active, however, and August’s new issuance volume surpassed July’s monthly total.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
27,930.33 |
-0.69 |
-2.13% |
S&P 500 |
3,397.16 |
24.31 |
5.15% |
Nasdaq Composite |
11,311.80 |
292.50 |
26.07% |
S&P MidCap 400 |
1,910.29 |
-38.21 |
-7.40% |
Russell 2000 |
1,551.77 |
-24.25 |
-6.99% |
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
European shares weakened on worsening U.S.-China relations and growing concerns that a resurgence in coronavirus infections could derail an economic recovery. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.81% lower, while Germany’s Xetra DAX Index fell 1.06%, France’s CAC 40 slipped 1.34%, and Italy’s FTSE MIB declined 1.66%. The UK’s FTSE 100 Index shed 1.45%.
The net long position in euro futures climbed to a record level of more than USD 30 billion in the week ended August 11, according to the U.S. Commodity Futures Trading Commission. During the week, the euro reached its highest value relative to the dollar since May 2018, partly on the view that the eurozone economy would recover faster from coronavirus lockdowns than the U.S.
Flash PMI surveys show eurozone rebound is slowing
Preliminary readings from purchasing managers’ indexes (PMIs) suggested that the eurozone’s economic recovery lost momentum in August, driven by flattening growth in the service sector. The composite output index, which combines manufacturing and services, fell to 51.6 from 54.9 in July. (PMI readings of 50 mark the difference between an expansion and a contraction in output.) Although the manufacturing component reflected sharp increases in output and new orders, a rise in coronavirus infections and renewed travel restrictions weighed on services activity.
Italy, Spain tighten restrictions as coronavirus cases climb
Cases of the coronavirus surged in Croatia, Slovenia, Malta, Austria, Hungary, France, and Greece. Italy hit a new daily record of cases during the week, while Spain now has the highest number of infections in western Europe, at 370,000. The two countries tightened rules on the use of face masks and closed nightclubs and dancing venues in hotels and beach resorts. The French government said it would make face masks compulsory in workplaces in September, and the UK and Germany put Croatia on their quarantine lists.
UK economy recovering, but negotiations with EU break down
The UK’s composite PMI surged to more than 60—an 82-month high—as consumers and businesses began to resume activity. In an article for the Daily Mail newspaper, Bank of England Deputy Governor Andy Haldane indicated that the UK was on the path to a rapid recovery from the coronavirus crisis, helped by retail spending that he said had rebounded to pre-pandemic levels in June. Online shopping was a big part of this improvement. Haldane asserted that although overall economic activity was still well below pre-pandemic levels, the UK had already recovered half its lost gross domestic product (GDP).
The latest round of talks between the UK and the European Union (EU) on the details of their post-Brexit relationship broke up without yielding any breakthroughs on the main sticking points of competition and fishing rights, according to anonymous EU officials cited by the Reuters news agency. The EU has said a deal must be struck in time for approval at an October 15–16 leaders’ summit to enable ratification before the UK’s December 31 exit from the bloc.
Japan
Japanese stocks posted losses for the week, with the Nikkei 225 Index falling 1.58%. The yen continued to strengthen against the U. S. dollar, although it remained below its recent peak in late July.
Economy contracts sharply
Japan’s Cabinet Office released on Monday its first estimate of GDP for the first fiscal quarter, ended June 30, 2020. The government reported that Japan’s economy suffered its largest contraction on record as companies experienced the full impact of the global pandemic. GDP fell 7.8% in the quarter, which equates to 27.8% on an annualized basis, largely due to steep declines in exports and domestic consumer spending. The contraction was the sharpest since the government began keeping comparable records in 1980.
Domestic consumption, which accounts for more than 50% of Japan’s GDP, dropped a record 8.2% versus the March quarter (approximately 29% annualized) due to business closures and stay-at-home mandates. The prior record decline, 4.8%, occurred in the same quarter of 2014, after the consumption tax was increased to 8% from 5%. Exports fell 18.5% quarter over quarter (56% annualized) as the slowing global economy curbed the demand for cars, trucks, and other Japanese goods and services.
Economists polled by the Japan Center for Economic Research are forecasting 13% economic growth in the current quarter (ending September 30), as personal spending was in an uptrend in June, in part thanks to a one-time JPY 100,000 special government relief payment. The consensus prediction is that Japan’s economy will contract 5% to 6% in fiscal 2020, which ends in March 2021. Japan’s economy has contracted less than that of most other developed nations in recent months, partly because growth had already slowed significantly in late 2019. While acutely sensitive to plunging export demand, Japan has also managed to mainly avoid the drastic economic shutdowns seen elsewhere.
Business sentiment still dour but improving
The Reuters Tankan manufacturers' (monthly) sentiment index rose to -33 in August from -44 in July, its best level since February. The service-sector reading showed modest improvement at -23 from -26 a month earlier. In the August Tankan, every industry reported improvement in sentiment except oil refinery/ceramics, but many companies remain concerned about a resurgence of the coronavirus and U.S.-China trade tensions. Looking ahead three months, sentiment in the manufacturing sector is expected to show continued improvement, while the services sector is less optimistic about business conditions except for those in information/communications and retailers.
China
Mainland Chinese stocks ended the week slightly higher as President Donald Trump’s postponement of a six-month trade review assuaged concerns about deteriorating U.S.-China ties. Some observers believe that the White House is seeking more time to allow China to increase purchases of U.S. farm and other exports in order to burnish the optics of the trade deal. However, tensions remained on low boil as the U.S. announced more restrictions on Huawei Technologies, making it difficult for the Chinese telecoms giant to maintain production beyond September without a supply of advanced chips from the U.S. or Taiwan. Longer term, the Trump administration’s actions to restrict the access of Chinese companies to U.S. semiconductor technology will likely remain a source of tension with the U.S. and spur Beijing to foster its domestic technology capabilities.
The renminbi edged up 0.4% versus the U.S. dollar to close the week at 6.922 per dollar. In credit markets, the yield on the sovereign 10-year bond increased 3 basis points (0.03%), aided by expectations of a quickening recovery amid signs that China has largely succeeded in containing the coronavirus. Monetary officials left the loan prime rate (LPR)—a reference rate for new bank loans—unchanged for the fourth straight month, as expected. China’s top five banks announced a major change to how mortgage loans are priced on August 25, when mortgage interest rates will switch to floating rates linked to the LPR. The move was reportedly ordered by Beijing and was likely undertaken in order to cool a buoyant property market.
In a sign of China’s success in curbing the coronavirus’s spread, the National Health Commission reported zero recorded cases of local transmission of the virus. Additionally, domestic travel in China has experienced a sharp recovery: Wuhan, the epicenter of the country’s coronavirus outbreak last year, recorded 352,000 tourists in a recent weekend at designated scenic locations, according to Chinese state-run media.
Other Key Markets
Volatility in Brazil
Speculation about Economy Minister Paulo Guedes potentially resigning or being replaced drove volatility in Brazilian stocks and sovereign bonds as well as in Brazil’s currency, the real. Guedes supports a cap on public spending, which has come under pressure from the public and politicians favoring increased fiscal stimulus to boost Brazil’s ailing economy amid the coronavirus pandemic. The prospect of looser fiscal discipline unnerved investors in Brazil, who fear that more government spending would endanger the country’s ability to repay its debt obligations.
Brazilian stocks rebounded later in the week after media reports said that President Jair Bolsonaro has no plans to fire Guedes and that Guedes does not intend to resign. The Bovespa Index, a benchmark for the country’s stock market, finished the week little changed. However, the currency market’s worries about a potential loosening of fiscal discipline continued, with the real falling to its lowest levels in three months before recovering some of its losses after Brazil’s central bank intervened in the market to buy the currency.
Turkish central bank holds rate steady
Turkey’s central bank left its benchmark interest rate unchanged at its Thursday monetary policy meeting, bowing to reported demands from President Recep Tayyip Erdogan to keep rates steady despite downward pressure on Turkey’s currency, the lira. A higher interest rate tends to make a country’s currency more attractive than the currency of a country with lower rates, with all other factors equal. The lira hit record lows against the U.S. dollar earlier in August.
Despite keeping its main rate steady, the Central Bank of the Republic of Turkey managed to marginally tighten policy by encouraging borrowers to use alternate lending facilities that have higher interest rates. While markets had widely expected the central bank to hold its main lending rate at the current 8.25% level, the lira still weakened after the announcement as some market participants may have factored in a surprise rate cut. Turkish stock investors welcomed the news from the central bank as the BIST 100 Index gained nearly 2.5% for the week.
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