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Global Markets Weekly Update: January 10, 2020
U.S.
Stocks hit record highs as Middle East tensions recede
The large-cap benchmarks and the technology-heavy Nasdaq Composite Index pushed further into record territory, as the prospects for a wider armed conflict between the U.S. and Iran appeared to diminish. Technology stocks outperformed, helped by continued strength in Apple following a report of stronger-than-expected iPhone sales in China. A sharp rise in the shares of cloud software firm Salesforce.com also boosted the sector. The apparently stabilizing situation in the Middle East reversed the previous week’s spike in oil prices and weighed on energy shares. The smaller-cap benchmarks also lagged and recorded modest losses for the week.
Futures drop following strikes on U.S. bases, but sentiment quickly recovers
T. Rowe Price traders reported that Wall Street began the week in a “wait and see” mode after equities slumped the previous Friday following the death of Iranian Major General Qasem Soleimani in a U.S. drone strike. Stock futures then slid Tuesday evening due to Iranian retaliation involving rocket attacks on two U.S. air bases in Iraq. Within hours, however, confidence returned following news that the Iranian strikes had not caused any casualties, while reports surfaced that Iran was willing to de-escalate if the U.S. did not respond. A White House press conference on Wednesday further reassured investors, with President Donald Trump stating that “Iran appears to be standing down.” Tensions appeared to continue de-escalating throughout the remainder of the week, helping stocks reach new highs.
Some positive economic data also appeared to support sentiment early in the week. On Monday, IHS Markit reported that its gauge of activity in the U.S. service sector had risen more than expected in December and reached a five-month high. The Institute for Supply Management’s rival gauge, reported Tuesday, also surprised on the upside. Stocks seemed to get a further boost on Wednesday from payroll processor ADP’s tally of monthly private-sector job gains, which for December showed the biggest monthly increase since last April.
Wage gains remain elusive despite tight labor market
Against this backdrop, Friday’s official jobs report from the Labor Department proved moderately disappointing to many observers. The headline increase of 145,000 nonfarm jobs in December was modestly below expectations, but the details of the report were somewhat weaker. Average hourly earnings rose only 0.1% in the month, the worst showing since September and the second-worst since April. Average weekly hours worked also betrayed hopes for an increase and remained at multi-month lows. Combined, the two readings did not appear to bode well for total income gains and consumer spending in the months ahead.
While equity investors appeared to take the news in stride, the jobs report appeared to drive a decline in longer-term bond yields on Friday morning. The yield on the benchmark 10-year Treasury note ended slightly higher for the week after peaking Thursday. (Bond prices and yields move in opposite directions.) The broad municipal market produced positive returns and outperformed U.S. Treasuries amid strong cash flows and light dealer inventories.
Puerto Rico earthquakes do not deter muni investors
A series of earthquakes struck Puerto Rico, leaving millions of the U.S. territory’s residents without electricity and approximately one-quarter of the island without running water. Despite the widespread damage, T. Rowe Price traders reported that COFINA coupon bonds, backed by Puerto Rico sales tax revenues, saw renewed interest from investors and traded notably higher. Bonds from the commonwealth’s electric and water utility agencies, PREPA and PRASA, also traded higher, albeit more modestly.
The investment-grade corporate bond market started the week on a down note due to geopolitical tensions but improved after President Trump’s press conference. Riskier market segments were especially strong despite new issuance, which exceeded expectations by a wide margin. Meanwhile, the firm’s traders observed that the high yield market remained well bid as investors mostly shrugged off geopolitical concerns and used the weakness as an opportunity to spend down elevated cash balances. Despite the decline in oil prices, energy bonds outperformed. The first new deals of 2020 launched, but the primary calendar was somewhat lackluster in terms of supply. High yield funds reported positive flows.
U.S. Stocks1
Index |
Friday's Close |
Week's Change |
% Change YTD |
DJIA |
28,823.77 |
188.89 |
1.00% |
S&P 500 |
3,265.35 |
30.50 |
1.07% |
Nasdaq Composite |
9,178.86 |
158.09 |
2.30% |
S&P MidCap 400 |
2,051.40 |
-4.00 |
-0.56% |
Russell 2000 |
1,657.15 |
-3.64 |
-0.68% |
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 rise as Middle East tensions wane and trade deal looms
European stocks rose as Middle East tensions faded and traders anticipated that the U.S. and China would sign an interim trade deal. The pan-European STOXX Europe 600 Index ended the week 0.39% higher, and Germany’s exporter-heavy DAX index gained 2.38%, while the UK’s FTSE 100 Index slipped 0.76%.
Eurozone business activity firms; inflation picks up
Business activity in the eurozone firmed slightly more than expected in December, as gains in the service sector partially offset another decline in manufacturing, an IHS Markit purchasing managers’ survey showed. The composite purchasing managers’ index inched up to 50.9 from 50.6 in November, still close to the 50 level that separates expansion from contraction. The services index rose to 52.8 from 51.9, while manufacturing shrank for an 11th consecutive month. The upturn in services helped to boost companies’ confidence in the economic outlook to its highest level since May.
The eurozone consumer price index rose 1.3% in December from a year earlier, a six-month high, due to strong consumer spending in the runup to Christmas. While the figure remains below the European Central Bank’s inflation objective of “below, but close to, 2%,” the increase eases pressure on the central bank to cut interest rates further. T. Rowe Price International Economist Tomasz Wieladek believes the data support European Central Bank President Christine Lagarde’s strategy of keeping policy on hold for now, instead focusing on the strategic review of the inflation target, tools, and communication.
German exports fell by a more-than-expected 2.3% in November and exceeded a decline in imports. As a result, the trade surplus narrowed to EUR €18.2 billion from EUR €21.3 billion in October. German industrial production rebounded in November, snapping two months of declines. Output rose 1.1%, compared with a revised decline of 1% the previous month. Even so, German manufacturing orders unexpectedly fell by 1.3% in November compared with October.
BoE Governor says UK interest rate cut possible; central bank running out of ammo
Outgoing Bank of England (BoE) Governor Mark Carney said in a speech in London that there was a case for cutting UK interest rates promptly “if evidence builds that the weakness in activity could persist.” The UK pound fell 0.5% against the U.S. dollar. But he also said there were signs that global growth was stabilizing and that domestic confidence was improving. He highlighted that other than interest rates, the BoE would continue to rely on quantitative easing and forward guidance to fight future downturns at the effective lower bound for interest rates. He suggested that, overall, the BoE had at least 250 basis points worth of accommodation left. Separately, in an interview with the Financial Times newspaper, he said that central banks were running out of ammunition to fight a recession and that central banks would need to look to supplement monetary tools. If there was a deeper global downturn that required more stimulus than a conventional recession, it was not clear that monetary policy would be sufficient to combat it.
In a speech in London, the new European Commission President Ursula von der Leyden said that the UK will find it “basically impossible” to settle all aspects of its future relationship with the European Union (EU) by the end of 2020. She said both sides must prioritize their most important issues. She also said she held a positive meeting with Prime Minister Boris Johnson, who reiterated that the UK will not extend the so-called transition period and will not strike a deal based on close alignment with EU rules. He also vowed that the UK would maintain control of its fishing waters and immigration system.
France grinds to a halt amid pension protests
Trade unions held their fourth mass demonstration across France against proposed pension reforms and are planning to hold more at the weekend. Rail workers at public rail company SNCF have been on strike since December 5—the longest protest at the company since 1938—which has cost hundreds of millions of euros in lost revenues. According to reports, the stoppages have been the worst since the student protests of May 1968.
Catalans, Basques allow formation of new Socialist-led coalition government in Spain
The Spanish Parliament finally approved the country’s first coalition government since the return to democracy in the late 1970s, ending a political stalemate since elections last year. Prime Minister Pedro Sanchez will rule with his ally, the far-left Podemos party led by Pablo Iglesias, but they will have to rely on alliances with smaller parties to get their legislation approved because the two parties hold only 155 of the 350 seats in parliament. The new government’s policies are likely to include the partial reversal of Conservative labor reforms, higher taxes for big companies, more action on cutting emissions, and the reduction of child poverty.
Japan
Stocks were mostly higher in the first trading week of 2020 (equities began trading on Monday, January 6). The Nikkei 225 Stock Average advanced 194 points and closed at 23,850.57, up 0.8% for the year to date. The large-cap TOPIX Index gained 0.8%, and the TOPIX Small Index was generally unchanged. The yen was modestly weaker and closed at ¥109.65 per U.S. dollar.
BoJ likely to raise its GDP forecast for fiscal 2020
Thanks to Prime Minister Shinzo Abe’s latest stimulus package, the Bank of Japan (BoJ) will probably upwardly revise its gross domestic product (GDP) growth forecast for the coming fiscal year. The BoJ’s current GDP forecast is for 0.7% growth in fiscal 2020 (April 1, 2020, to March 31, 2021), but that forecast is expected to be ratcheted up to 1.0% growth at the coming central bank policy meeting because of the positive impact from the government’s $122 billion spending initiative. However, government data released earlier in the week showed that Japan's real (inflation-adjusted) wages fell at their fastest clip since August—bad news for consumer spending and an economy feeling pressure from October’s value-added tax increase.
Japanese household confidence falls to a five-year low
A diffusion index of households’ confidence in the economy fell to -29.8 in December, the worst reading in five years, according to a quarterly survey conducted by the BoJ. The survey of approximately 4,000 households showed that nearly one-third had trimmed their expenditures, such as dining, clothing, and daily necessities, since the October sales tax increase. Less than three-quarters of the respondents think that prices will rise over the coming year, and fewer still think that prices rose over the past 12 months. Core inflation, which stood at an annualized 0.5% rate in November, remains well below the central bank’s 2% target. Most economists believe inflation will remain low due to the modest pace of wage increases.
China
Stocks record sixth weekly gain ahead of Lunar New Year
Chinese stocks rose for the sixth straight week. For the week, the benchmark Shanghai Composite Index added 0.28%, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, advanced 0.44%. Nevertheless, the Shanghai Composite and CSI 300 large-cap indices traded in a range that was remarkably narrow considering the geopolitical news from the Middle East.
Chinese equities also appeared to benefit from the pronounced seasonal strength associated with the weeklong Lunar New Year holiday, which begins relatively early this year, on January 24. The holiday has historically been the best period for mainland stocks, with an average increase, since 2002, of around 4% in the CSI 300 over a 30-day window. According to research firm TS Lombard, the CSI index has been higher 30 days after the Lunar New Year holiday 72% of the time.
China inflation below consensus in December
At 4.5% year over year, consumer price inflation (CPI) in December came in below the consensus expectation of 4.7%. Food inflation slowed, reflecting a welcome 5.6% monthly drop in pork prices, the first decline in seven months. As pork is the most important item in the Chinese food basket, its shortage is a serious issue for the government, which has released supplies of frozen pork into the market. The December price decline was partly due to an unsustainable increase in the number of hogs slaughtered in November. With pork prices rising ahead of the Lunar New Year, the crisis may not be over and constitutes a mild headwind for consumer spending in the first quarter.
Higher oil prices pose a risk
Apart from food, inflation in China remains subdued and is unlikely to constrain further moderate easing by the People’s Bank of China. But a sustained higher oil price on account of U.S.-Iran tensions would be an inflation headwind for China that could see the CPI inflation rate surpass the 5.0% level in the next month or so. China’s central bank said Monday that it would “win the battle” against growing financial risks in the economy, signaling officials’ increased attention to bad loan-related problems among domestic lenders. In the near term, however, economic activity on the mainland is set to slow during the Lunar New Year holiday.
On Thursday, China announced that Vice Premier Liu He would lead a delegation to Washington from January 13–15 to sign the “phase one” trade deal with the U.S., Bloomberg reported. The statement from China’s commerce ministry was the first official confirmation of a signing date previously tweeted by President Trump. However, Chinese officials have remained silent regarding the $200 billion of goods and services that U.S. officials claim China has agreed to buy from the U.S., and details of the deal’s precise terms remain unknown since neither side has released a draft. Nevertheless, traders appeared to regard next week’s signing as a temporary de-escalation in global trade tensions.
Other Key Markets
Saudi stocks prove resilient in face of regional tensions
Saudi stocks, as measured by the Tadawul All Share Index, returned about -0.6% in the five trading sessions since the close of business on Thursday, January 2. The market is closed on Fridays and Saturdays.
Shares fell sharply and oil prices climbed following the recent U.S. airstrike near Baghdad, Iraq, that led to the death of an Iranian general and was followed by a measured Iranian retaliation against bases hosting U.S. troops in Iraq. The Saudi market recouped most of its losses and oil prices retreated on Thursday amid hopes that U.S.-Iranian military actions would not intensify or engulf other nations in the near future. However, according to T. Rowe Price Credit Analyst Razan Nasser, broader tensions and indirect skirmishes, especially with Iranian-sponsored militias in Iraq, are likely to continue.
Chile’s central bank temporarily halts support for peso
Chilean stocks, as measured by the IPSA Index, rose more than 3%, helped by brisk gains on Friday. Shares held up fairly well early in the week despite significant global market volatility and an uptick in geopolitical tensions. The Chilean peso struggled, however, on the heels of a surprise announcement that the Central Bank of Chile would not sell U.S. dollars in the spot market this week to support the peso.
According to T. Rowe Price Emerging Markets Sovereign Analyst Aaron Gifford, such an announcement should not be indicative of a lack of support for the currency, as a pause was ultimately expected given recent positive performance of the peso. The authorities have so far sold USD $7.4 billion in the spot or derivatives markets since violent protests flared up last October. The authorities originally announced a currency intervention program for up to USD $20 billion until the end of May 2020.
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