Global Markets Weekly Update: August 9, 2019
U.S.
Stocks lower on deepening trade worries
Stocks ended modestly lower after a week of trade-driven volatility. The major indexes suffered their worst day of the year on Monday, while the Cboe Volatility Index (VIX) hit its highest level since late 2018. The benchmarks recovered their losses in subsequent trading sessions but remained volatile through the end of the week. Energy shares were among the worst performers in the S&P 500 Index, weighed on by a midweek plunge in domestic oil prices following a surprise rise in U.S. inventories. Longer-term interest rates fell back to their lowest level in three years, favoring real estate shares, and the larger consumer discretionary sector was helped by a rise in Booking Holdings (operator of Priceline and other travel sites) after an earnings and revenue beat.
Chinese devaluation leads markets to worst day thus far in 2019
Monday’s plunge was driven by several factors, but the primary culprit seemed to be China’s decision to let the yuan fall below the level of 7.0 per U.S. dollar—a symbolic threshold that Chinese officials had avoided breaching over the past decade. T. Rowe Price traders noted that the move played into growing concerns that the trade war could devolve into a currency war, although Chinese officials pledged that they would not engage in a competitive devaluation. Chinese officials acknowledged the move as a retaliatory step in response to the White House’s announcement of a new round of tariffs on Chinese goods and announced that China would stop all imports of U.S. agricultural products.
The White House punched back Monday evening by formally labeling China a currency manipulator. The Treasury Department’s move was largely symbolic since China’s daily intervention in its currency is widely acknowledged—and most analysts believe that China intervenes to prop up the yuan, not to drive it lower. Nevertheless, stock futures fell back sharply in response as some worried that the administration would further respond by intervening to weaken the greenback. On July 3, President Donald Trump tweeted that the U.S. should match the “big currency manipulation game” that he alleged was being played by both China and Europe.
Pause in trade battle calms markets at midweek
Investors appeared relieved that the tit-for-tat in the trade battle seemed to come to a halt overnight Monday, when it became clear that Chinese officials had arrested the slide of the yuan at around 7.05 per dollar. Stocks rallied on Tuesday morning and then regained further momentum Thursday after further negative news or inflammatory tweets failed to emerge, according to T. Rowe Price traders. News of a surprising rise in Chinese exports may have also calmed markets.
The calm proved short-lived, however. Stocks fell back again on Friday morning after President Trump told reporters that he was not prepared to make a deal with China and raised the possibility that a new round of negotiations scheduled for September might be canceled. Trump also said that the U.S. was cutting off ties with Chinese telecom giant Huawei, confirming reports Thursday that had weighed on Chinese technology shares (see below). Stocks then recovered most of their losses in late trading Friday, limiting the week’s losses.
Producer prices fall
The week’s economic calendar was relatively light. Labor market signals remained strong, with June job openings surprising on the upside, and weekly jobless claims falling more than expected. On Friday, the Labor Department reported that core producer prices (which exclude food and energy) had declined 0.1% July, marking the first decline since 2017. Along with the rising trade tensions, the report seemed to give further room for the Federal Reserve to continue cutting interest rates, and futures markets ended the week pricing in a roughly 88% likelihood of at least two more quarter-point rate cuts by the end of the year, according to CME Group data.
Trade fears weigh on the corporate bond market
The yield on the benchmark 10-year U.S. Treasury note continued its slide, with most of the drop coming in response to China’s devaluation Monday. (Bond prices and yields move in opposite directions.) Investment-grade corporate bond spreads—an inverse measure of the asset class’s appeal relative to Treasuries—widened as trade tensions dampened investor sentiment. Spreads across most sectors narrowed as the week progressed, but the energy and automotive segments continued to experience weakness. In credit-specific news, semiconductor manufacturer Broadcom rallied after the company confirmed that it will purchase Symantec’s enterprise security business.
High yield bonds also experienced weakness as global markets declined amid fears of escalations in the U.S.-China trade war and as below investment-grade funds reported outflows. T. Rowe Price traders reported that investors showed a preference for higher-quality bonds and observed that the earnings reports released this week failed to inspire much confidence in the market. High yield energy bonds underperformed.
U.S. Stocks1
Index |
Friday's Close |
Week's Change |
% Change YTD |
DJIA |
26,287.44 |
-197.57 |
12.69% |
S&P 500 |
2,918.65 |
-13.40 |
16.43% |
Nasdaq Composite |
7,959.14 |
-44.93 |
19.95% |
S&P MidCap 400 |
1,901.32 |
-13.21 |
14.33% |
Russell 2000 |
1,513.01 |
-20.65 |
12.19% |
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 stock markets finished the week lower amid elevated volatility. Stocks generally followed the trading patterns of global markets, dropping steeply on Monday on the news that China allowed the yuan to fall sharply against the U.S. dollar before recovering some losses later in the week. However, T. Rowe Price traders noted that European trading volumes were lackluster on positive days, possibly indicating a lack of investor enthusiasm for taking risk. The pan-European STOXX Europe 600 Index, the UK’s FTSE 100 Index, and the exporter-heavy German DAX all posted substantial losses.
Italy’s FTSE MIB Index declined more than other European benchmarks, with much of the selling pressure coming at the end of the week following news that Matteo Salvini, deputy prime minister and League party leader, had labeled the current coalition government untenable and called for snap elections. The move increased the political uncertainty in Italy by making a late-October election likely. Italian government bonds also sold off after the news.
German industrial output plummets
Data released on Wednesday showed that German industrial output decreased 1.5% in June, a decline that was much larger than consensus estimates. The disappointing industrial production number ratcheted up fears that escalating trade conflicts would drive Germany’s export-driven economy into recession. In response, German government bond yields moved even further into negative territory. All maturities of the country’s government debt—even the longest term, 30-year bonds—now trade with negative yields.
UK economy contracts in second quarter
UK gross domestic product (GDP) shrank 0.2% in the second quarter, surprising analysts who had largely expected growth to be nearly unchanged. The quarterly contraction was the first in seven years. The details of the GDP report indicated that a manufacturing slump was primarily responsible for the contraction. Uncertainty created by the Brexit situation may be holding back manufacturing in the UK. The British pound fell sharply against the euro and the U.S. dollar following the GDP report.
Japan
Japanese stocks tumbled for the week, with the Nikkei 225 Stock Average falling 1.9%. The benchmark ended the week still ahead 3.4% for the year to date, but significantly lower since the extended holiday break in May. The broader measures of the Japanese market, the large-cap TOPIX Index and the TOPIX Small Index, also posted weekly losses and stand less than 1% higher in 2019. At the close of Japanese trading on Friday, the yen was trading at ¥105.95 per U.S. dollar, stronger for the week and versus ¥108.48 at the end of 2018.
Real wages fall again in June
Inflation-adjusted (real) wages declined for a sixth consecutive month in June, which many view as a red flag for domestic consumption in front of the value-added tax (VAT) increase scheduled for October. Real wages fell 0.5% in June versus the year-ago period, according to the latest data from the Labor Ministry, which also revised May’s annualized decline in real income to -1.3%. Although regular pay increased (0.1%) for the first time this year, overtime pay was 0.2% lower in June. Domestic consumption, which rose 2.7% year over year in June, has been a pillar for Japan’s economy, helping to offset the impact of declining exports.
BoJ buying not distorting valuations
Since the Bank of Japan (BoJ) started buying equities via exchange-traded-funds in 2009, it has accumulated a ¥28 trillion position (around USD $26 billion) in Japanese equities, around 4.7% of the entire market, according to Nikkei Asian Review. By 2020, it is estimated that the BoJ will be the largest holder of equities in the Japanese market, which some worried could lead to distortions, including inflated price-to-earnings ratios rocketing. Nevertheless, a study by Sayuri Shirai, a former BoJ Board member, found that the price-to-earnings ratio of the Japan’s benchmark Nikkei 225 Stock Average actually fell between 2010 and 2018.
China
Equities post biggest drop since May as trade war ratchets up
Stocks in China posted their steepest weekly drop in three months, as traders appeared to brace themselves for a lengthy U.S.-China economic battle. For the week, the benchmark Shanghai Composite Index shed 3.2% and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, fell 3.0%. Chinese technology shares were among the week’s biggest losers after Bloomberg reported late Thursday that the White House was delaying a decision about granting licenses to U.S. companies that applied to resume sales to Huawei Technologies, the Chinese telecom company that the U.S. has blacklisted due to espionage risk. That report came a day after the Trump administration announced a ban on federal purchases of equipment from five Chinese companies, including Huawei, over fears that the companies could reveal U.S. trade secrets to Beijing.
The past week’s deterioration in U.S.-China relations increases the risk of an escalatory spiral that could lead to a scenario of 25% across-the-board tariffs, believes T. Rowe Price Credit Analyst Chris Kushlis. President Trump appears to be gambling that putting added tariff pressure on China—combined with the country’s already slowing economy—will get Chinese negotiators to soften their stance, Kushlis notes. But Beijing’s negotiating position appears to have hardened, and Chinese officials will likely look for the U.S. to make the first move to de-escalate tensions. In any event, Kushlis believes, the reliance on pressure tactics, a potential misreading of each side’s strengths and weaknesses, and other miscalculations could push both countries into a full-blown trade war if not carefully managed.
Other Key Markets
Indian shares rise as central bank cuts interest rates
Stocks in India, as measured by the S&P BSE Sensex Index, returned about 1.25%, as a late-week rally offset earlier losses. Shares initially weakened along with equities in other emerging markets due to the escalation in U.S.-China trade tensions. Increased geopolitical tensions with neighboring Pakistan also weighed on the Indian equity market. The Indian government, led by Prime Minister Narendra Modi, decided to revoke the special constitutional status and autonomy of the Kashmir region. In addition, India has increased its security presence in Kashmir, imposed a curfew, arrested local politicians, and forced tourists to leave. In response, Pakistan has recalled its ambassador to India, kicked out India’s high commissioner, and suspended trade with India.
In economic matters, the Reserve Bank of India (RBI) decided to reduce its repo rate—the interest rate at which it lends to Indian banks—from 5.75% to 5.40%. Central bank governor Shaktikanta Das explained that this 35-basis-point rate cut (versus expectations of 25 basis points) was warranted given the slowing economy and forecasts of benign inflation. The ongoing stress in the nonbank financials sector continues to weigh on consumers and, in particular, is hitting the auto industry hard. Reuters reported that declining auto and motorcycle sales are leading to thousands of job cuts and some factory and dealership closures.
Brazilian stocks rise as pension reform efforts make progress
Stocks in Brazil, as measured by the Bovespa Index, returned about 1.2%. Brazilian shares fell sharply on Monday as U.S.-China trade relations deteriorated, but shares rebounded over the next few days as the country’s much-needed pension reform legislation moved closer to becoming law. During the week, Brazil’s lower chamber of Congress voted in favor of the legislation in its second round of voting, which is required due to the legislation’s changes to the country’s constitution. A first vote in favor of the legislation took place about one month ago. The next step is for the proposal to go to the senate, where two rounds of voting in favor of the legislation will be needed before the bill goes to President Jair Bolsonaro.
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