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Global Markets Weekly Update: July 10, 2020
U.S.
Stocks end mixed
The major indexes ended mixed for the week, with large-caps outperforming small-caps. The technology-heavy Nasdaq Composite Index fared best and reached new record highs, thanks in part to strong gains for “work from home” shares, such as Amazon.com, Apple, Facebook, and Netflix. The latter two also boosted the communication services sector, which outperformed within the S&P 500 Index, while energy shares were weak as crude oil prices fell back below USD 40 per barrel.
Stocks jumped at the start of trading Monday, with many attributing the strength to a front-page editorial in the China Securities Journal, which stated that “fostering a healthy bull market after the pandemic is now more important to the economy than ever” (see China section below). T. Rowe Price traders noted that growing hopes for a COVID-19 vaccine being released as early as the end of the year also seemed to support the gains, but few concrete developments appeared to drive the rally.
Virus resurgence begins to show up in economic data
Stocks drifted lower over the next few sessions as optimism about progress in fighting the pandemic appeared to drain away. More states announced increases in newly diagnosed cases and hospitalizations, and several governors announced new restrictions or delays in reopening measures. By the end of the week, the U.S. had crossed the threshold of 60,000 new cases reported in a single day, with over 3 million confirmed cases recorded since the start of the pandemic. On Friday, however, stocks seemed to get a lift after Gilead Sciences announced a new study showing that remdesivir, its COVID-19 treatment, might reduce mortality rates in severely ill patients by nearly two-thirds. Earlier studies had demonstrated only that remdesivir could shorten hospital stays.
Investors appeared to be particularly concerned that the impact of the resurgence in the virus seemed to be showing up in economic data. In an interview published Tuesday morning, Atlanta Federal Reserve Bank President Raphael Bostic told a reporter that high-frequency data “suggest that the trajectory of this recovery is going to be a bit bumpier than it might otherwise.” Later that day, his counterpart at the Cleveland Federal Reserve Bank, Loretta Mester, told CNBC that it was likely “to take quite a long time to get back to where activity and employment was pre-pandemic.” On Thursday, however, St. Louis Federal Reserve Bank President James Bullard struck a markedly different tone, telling CNBC that “I think we’re tracking very well right now” and predicting that the unemployment rate could fall as low as 7% by the end of the year.
The week’s major economic reports generally surprised on the upside but may have been dismissed by some investors as largely reflecting conditions before the recent resurgence in the virus. The Institute for Supply Management’s gauge of service sector activity rose more than expected in June and nearly matched its February level, before the recognized onset of the pandemic. Job openings in May also rose more than expected, while weekly initial and continuing jobless claims fell more than anticipated.
Virus worries send yields to lowest levels since April
Longer-term Treasury yields decreased through most of the week on growing coronavirus concerns and briefly slid to levels last seen in late April, aided by particularly strong demand in the Treasury Department’s 10-year note and 30-year bond auctions. (Bond prices and yields move in opposite directions.)
The broad municipal market generated positive returns through Thursday, aided by continued technical support and the decrease in Treasury yields. However, municipals underperformed U.S. government debt over most of the week. T. Rowe Price traders reported that sectors with wider credit spreads—the additional yield offered over Treasuries and an inverse measure of the sector’s relative appeal—experienced strong demand. Municipal bond mutual funds industrywide benefited from net inflows of just over USD 1 billion for the week ended July 8, according to Lipper data, marking the ninth consecutive week of positive flows.
The investment-grade corporate bond market saw light trading volumes and modest new issuance, but T. Rowe Price traders noted that market sentiment received a boost after Bullard’s optimistic comments Thursday. It was also a quiet week in the high yield market. Buyers were more active than sellers as the asset class continued to experience positive flows, and demand outstripped supply due to modest new issuance. In issuer-related news, Uber confirmed that it will purchase food delivery company Postmates in an all-stock transaction.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
26,075.30 |
247.94 |
-8.63% |
S&P 500 |
3,185.04 |
55.03 |
-1.42% |
Nasdaq Composite |
10,617.44 |
409.81 |
18.33% |
S&P MidCap 400 |
1,772.98 |
-5.97 |
-14.06% |
Russell 2000 |
1,422.68 |
-9.18 |
-14.73% |
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 ended the week little changed, depressed by renewed concerns about a resurgence of coronavirus cases. Although the pan-European STOXX Europe 600 Index was flat, major European market indexes were mixed. Germany’s DAX Index rose 0.22%, but France’s CAC 40 Index eased 1.38%, while Italy’s FTSE MIB Index declined 1.12%, and the UK’s FTSE 100 Index fell 1.19%.
Core eurozone bond yields fell on the week as a surge of coronavirus cases in the U.S. ignited fresh fears of a second wave, pushing investors to core assets. Peripheral eurozone bond yields fell overall after a mixed week. Cautious optimism about an economic recovery lifted yields at first, but reignited coronavirus fears caused them to retrace.
Sunak pumps extra GBP 30 billion into UK economy
UK Finance Minister Rishi Sunak pledged an additional GBP 30 billion to support employment, on top of the GBP 133 billion in coronavirus measures he has already unveiled. The money includes over GBP 5 billion in accelerated infrastructure spending, about GBP 9 billion for employers to retain workers through the end of January, funds for home insulation, and help for homebuyers and for hospitality firms. Still, business leaders warned that the measures were not enough to save jobs at risk in retail and manufacturing.
Bank of England Governor Andrew Bailey warned banks in a letter last month to be prepared for negative interest rates in the UK, the Sunday Times reported. He said adapting to such a move would prove to be a “significant operational undertaking” that would require changes to computer systems, updating of financial contracts, and new communications for clients.
In an interview with the Financial Times, European Central Bank President Christine Lagarde suggested that next week’s policy meeting is unlikely to yield fresh loosening measures. She pointed out that financial markets had calmed down enormously and that the central bank had done so much that it now has to time to assess the incoming economic data carefully. She warned, however, that an economic recovery would be constrained, uncertain, and fragmented.
EU Commission lowers economic forecasts
Europe is facing a deeper-than-expected recession in 2020 and a weaker-than-expected economic recovery, the European Commission said. The European Union’s gross domestic product is forecast to shrink 8.3% in 2020 and then to rebound 5.8% in 2021. The eurozone is predicted to contract 8.7%, with growth then accelerating to 6.1%. Both sets of numbers are worse than those unveiled in May.
Japan
Japanese stocks recorded relatively small losses for the week. The Nikkei 225 Stock Average fell 16 points (0.1%) and closed at 22,290.81. Japan’s widely watched benchmark has returned -5.8% 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 weekly declines. The yen was little changed versus the U.S. dollar over the week.
Japan’s tax revenues decline in fiscal 2019
Japan's Finance Ministry reported that tax receipts of JPY 58 trillion (USD 540 billion) in fiscal year 2019 (ended March 31, 2020) declined 3.2% versus fiscal year 2018. While consumption taxes expanded modestly thanks to the tax increase in October, corporate taxes plunged more than 12% due to a government moratorium on collections from companies hurt by the coronavirus. The JPY 63 trillion tax revenue estimate for fiscal year 2020 seems unachievable to many observers given the falloff in consumer spending, social distancing measures that forced the cancellation of many events, and the faltering economic conditions.
Japan reopening large venues
Japan relaxed its coronavirus-related restrictions on holding major events, as planned. Economic Revitalization Minister Yasutoshi Nishimura announced that the number of people allowed at major events would be increased to 5,000 from 1,000 currently, allowing for the 50%-of-capacity restriction that is still in force. Japanese professional baseball and soccer games, which have been played without spectators, reopened to fans on Friday.
Tokyo Governor Yuriko Koike was reelected and declared victory on Sunday, July 5. Koike won the election by a larger margin than in 2016, recording more than 3.6 million votes. The governor reasserted that the coronavirus is the most pressing issue facing her city. Despite the latest resurgence—243 new coronavirus cases were reported in Tokyo on Friday and have averaged more than 100 for the past week—the governor said that she was not currently considering another round of business closures. The metropolitan government no longer relies on numerical targets for its coronavirus policy decision-making. Koike said, without providing details, that she preferred a targeted approach to stemming the spread of the virus.
China
Mainland stock markets surged after a state-run publication talked up the country’s recovery and appeared to officially endorse the rally in equities. A bullish editorial in the China Securities Journal on Monday set in motion a risk-on rally for the rest of the week that sent the benchmark Shanghai Composite Index to a two-year high. By Friday, the large-cap CSI 300 Index and Shanghai Composite Index rallied 7.5% and 7.3%, respectively. In China’s fixed income market, domestic bonds sold off and yields rose. The yield on China’s 10-year bond rose 20 basis points to end the week at 3.13% amid growing optimism about the economy and strong momentum in stocks.
Producer prices show improvement
China's June consumer price inflation rose 2.5%, in line with expectations. However, headline inflation is expected to decline in future readings as food price inflation continues to ebb on lower pork prices. A food basket tracked by China Reality Research fell to a 16-month low and an annual rise of 9%, down from 10.6% in May. More noteworthy was the continued decline in factory gate prices, which fell for the fifth straight month in annual terms. The producer price index fell 3.0% in June from a year earlier, underscoring the threat of deflation due to the coronavirus-induced demand shock, though it exceeded the consensus forecast and the prior month’s 3.7% drop.
After June's positive economic data, many analysts have upgraded their second-quarter estimates for China’s economic growth. Economists now expect a double-digit sequential rebound in China’s gross domestic product (GDP) after the first quarter’s record contraction. For the year, analysts forecast that China’s economy will grow between 2% and 3%. Next week, trade data will be in focus for any signs of divergence between domestic and external demand. Exports are expected to be strong amid soaring global demand for medical and personal protective equipment due to the coronavirus pandemic.
Other Key Markets
Brazilian shares rise on tax reform hopes
Stocks in Brazil, as measured by the Bovespa Index, returned about 3.4%. Shares rose as strength in the Chinese market at the beginning of the week created a positive backdrop for equities in the emerging markets universe. The market was also supported by recent favorable comments from Economy Minister Paulo Guedes, who indicated—as reported by Reuters—that the Bolsonaro administration’s tax reform proposal was ready to be “dispatched” and that the government needs to make “political arrangements” so that it becomes law.
Equities were not derailed by news that President Jair Bolsonaro, who has shown clear disinterest in social distancing measures to contain the coronavirus, was positively diagnosed with COVID-19. At present, Bolsonaro’s case does not seem to be serious; however, if it were to result in incapacitation or death, Vice President Hamilton Maurao, who seems less confrontational to many observers, would take over.
Chilean stocks fall on legislation allowing retirement withdrawals
Chilean stocks, as measured by the IPSA Index, returned about -4.2%. Equities were pressured by the unexpected progress of legislation in Congress that would allow savers to withdraw up to 10% from their retirement accounts. The executive branch is against the idea given the impact it would have on the pension fund system, as well as future savings, and prefers to use other stimulus measures to help households. Legislators, on the other hand, are under pressure to help their constituents, who are facing the worst economic crisis in decades, especially in advance of an important constitutional referendum later this year, as well as general elections in 2021.
According to T. Rowe Price Emerging Markets Sovereign Analyst Aaron Gifford, if the bill were to become law, several billions of dollars of assets may need to be sold to meet redemptions. However, Gifford expects that, even if the current proposal makes it through both chambers of Congress and the president, it would be significantly watered down. He notes that certain restrictions and a prolonged period to meet withdrawals would allow selling to be more orderly as well.
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