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Global Markets Weekly Update: July 17, 2020
U.S.
S&P 500 hits best level since February
The major indexes ended the week mixed. The S&P 500 Index marked its third consecutive week of gains and reached intraday levels not seen since the market sell-off began in late February; at its Wednesday peak, the index was also briefly in positive territory for the year. A shift out of higher-valuation growth shares into value stocks caused the technology-heavy Nasdaq Composite Index to pull back from its all-time highs, however. The market rotation was also evident in the outperformance of smaller-cap stocks, which have lagged considerably in recent months. Within the S&P 500, industrials shares outperformed by a wide margin, while technology stocks lost ground.
Earnings season kicks off
The week marked the unofficial start of the earnings season, with 32 of the S&P 500 companies scheduled to report second-quarter results, according to Refinitiv. Several major banks reported steep drops in profits as they set aside billions of dollars in anticipation of writing down bad loans, but investors seemed encouraged in some cases by gains in underwriting and trading revenues. Analysts polled by FactSet currently expect overall profits for the S&P 500 to have contracted 44% in the quarter relative to a year before—if confirmed, it would be the worst performance since the 69% earnings drop amid the financial crisis in the final quarter of 2008.
Early vaccine hopes boost sentiment
Wall Street began the week on a negative note, with worries about the resurgence of the coronavirus across much of the U.S. seemingly weighing on sentiment. T. Rowe Price traders noted that renewed shutdowns in California seemed to be a particular focus of worry, with indoor dining at restaurants prohibited and the Los Angeles and San Diego school districts announcing a return to online classes in the fall. The resurgence also appeared to be showing up in high-frequency economic data, such as restaurant reservations and travel indicators.
Good news on the vaccine front at midweek appeared to ease resurgence concerns and help markets move higher. After the close of trading Tuesday, Moderna Therapeutics announced that its novel messenger RNA vaccine had produced high levels of antibodies in all test participants in an initial safety trial, although some experienced side effects. On Wednesday, Oxford University researchers announced that their vaccine candidate, which is under development with AstraZeneca, had produced not only antibodies in participants, but also “killer” T-cells that may offer prolonged immunity.
Both vaccine candidates are receiving support from the U.S. government’s “Operation Warp Speed” program, and advance steps in manufacturing mean vaccines may be available in limited quantities as early as the fall if further test results are positive. On Wednesday, Dr. Anthony Fauci, the nation’s top infectious disease official, said he believes the U.S. will meet its goal of having a coronavirus vaccine by year-end.
Barr criticizes companies doing business in China
Tensions with China seemed to remain a modest drag on sentiment. President Donald Trump did not announce any new measures against China at a press conference Tuesday, as some had feared, but White House officials stepped up their criticism of both its government and U.S. companies that do business in the country. On Thursday, Attorney General William Barr was particularly pointed, accusing Disney, Apple, and other U.S. firms of “kowtowing” to the ruling Chinese Communist Party.
The week’s economic data were mixed. Manufacturing data were generally positive, with two regional gauges of factory activity indicating healthy expansion and coming in above expectations. June retail sales also beat expectations, but the University of Michigan’s preliminary gauge of July consumer sentiment fell back from June levels, which its chief researcher attributed to growing coronavirus worries. Weekly jobless claims surprised on the downside, falling only slightly from the previous week. Continuing claims fell more than expected, however.
Inflation rises but remains below target
Treasury yields decreased slightly through most of the week due, in part, to inflation readings that remained well below the Federal Reserve’s 2.0% annual target. Although a spike in gasoline prices in June contributed to a 0.6% increase in the headline consumer price index (CPI) for the month—the biggest jump in nearly eight years—the core CPI reading, which excludes food and energy prices, was only 1.2% for the 12-month period.
The broad municipal market generated solid returns through most of the week and outpaced Treasuries. New issuance was elevated, but technical conditions remained favorable as taxable muni issuance continued to compose a meaningful share of new deal activity, limiting the available supply of tax-exempt bonds.
The investment-grade corporate bond market saw light trading volumes amid fairly balanced buying and selling activity. Positive flows and modest new issuance due to earnings blackout periods provided technical support for the asset class, while the volume of new deals was well below early estimates. Light issuance, along with equity gains and continued flows into the asset class, supported the high yield market. Buyers were generally more active than sellers, although our traders noted that the summer lull in overall trading volumes appears to have set in.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
26,671.95 |
596.65 |
-6.54% |
S&P 500 |
3,224.73 |
39.69 |
-0.19% |
Nasdaq Composite |
10,503.19 |
-114.25 |
17.06% |
S&P MidCap 400 |
1,837.44 |
64.46 |
-10.93% |
Russell 2000 |
1,473.84 |
51.16 |
-11.67% |
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 rose over the week on reports of progress in the development of a coronavirus vaccine.
The pan-European STOXX Europe 600 Index ended the week 1.6% higher. The major country indexes also climbed, with Germany’s Xetra DAX up 2.26%, France’s CAC 40 1.99% higher, and Italy’s FTSE MIB ahead by 3.24%. The UK’s FTSE 100 Index added 3%.
EU leaders hold talks on recovery fund
European Union (EU) leaders started a two-day summit Friday to discuss the proposed EUR 750 billion EU recovery fund, amid market hopes for a deal by the end of summer. The size of the fund, distribution criteria, and the proportion of grants to loans are the main areas of disagreement. The Netherlands, Sweden, Denmark, and Austria want to link loans to reforms designed to boost productivity and jobs. Italy and Spain, which were hit hard by the coronavirus, seek a simplified reform agenda and distribution of funds via grants.
The European Central Bank (ECB) left monetary policy unchanged as it entered what some have described as a “wait and see” period to assess the strength of the economic recovery before launching any new measures. ECB President Christine Lagarde said that there has been a “significant but uneven” recovery since the eurozone economy bottomed in April but “exceptionally elevated uncertainty” was still weighing on consumer spending and business investment. She asserted that ample monetary stimulus remained necessary to support the economic recovery and safeguard medium-term price stability.
Macron adds EUR 100 billion to stimulus
French President Emmanuel Macron said another EUR 100 billion would be injected into the economy to support a recovery. The sum comes on top of the EUR 460 billion already pledged by the government. He indicated that the new funds would go toward efforts to stem a big rise in unemployment. New Prime Minister Jean Castex said the money would be invested in training, jobs for young people, and support for service industries. French Finance Minister Bruno Le Maire told France 2 TV that firms would see EUR 20 billion in tax cuts over the next two years.
In May, the UK’s gross domestic product grew by a slower-than-expected 1.8% from April, when it shrank by about 20%. In the three months ended May 31, the economy contracted a little more than 19%. Manufacturing and house building showed signs of recovery, as staff returned to work at some businesses. In the services sector, there was a pickup in retail activity amid record online sales, but some areas still experienced declines. The Office for Budget Responsibility (OBR) forecast that the economy could shrink by as much as 14% this year if there was lasting damage caused by the coronavirus pandemic. The OBR warned that this scenario could drive up government borrowing to almost GBP 391 billion.
Japan
Japanese stocks posted gains for the week. The Nikkei 225 Stock Average advanced 406 points (1.8%) and closed at 22,696.42. Japan’s widely watched benchmark has returned -4.1% for the year-to-date period. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, also rallied for the week. The yen was little changed versus the U.S. dollar and traded near JPY 107 per U.S. dollar on Friday.
No monetary policy changes from the BoJ
At its policy meeting, the Bank of Japan (BoJ) decided to keep short- and long-term rates unchanged. The board voted 8-1 to stand pat on monetary policy, as expected, although it lowered its growth forecasts and cautioned that risks to economic activity and prices were skewed to the downside. The central bank believes that the economy will contract 4.7% in fiscal 2020, which ends March 31, 2021. However, the BoJ believes the economy will recover strongly in fiscal 2021 and 2022. In a statement after the meeting, BoJ Governor Haruhiko Kuroda told reporters that "there is no doubt that the economy is bottoming out and is on a recovery phase.” Analysts believe that despite myriad uncertainties and weakness in the economic outlook, the central bank has done all that it can for now in terms of support for the economy.
Japanese bankruptcies surge in first half
According to Tokyo Shoko Research, a firm that tracks Japanese bankruptcies, more than 4,000 businesses declared bankruptcy in the six-month period through June 30, 2020. The research firm said that 240 of the business failures were directly ascribed to the coronavirus pandemic, which particularly hurt the hotel and restaurant segment. Nearly 1,300 of the bankruptcies were in the accommodation and food services industries, largely due to declining tourism. Other factors cited included higher labor costs and the consumption tax increase in October 2019. The latest government data show that the number of foreign travelers to Japan fell 99.9% year over year in June to 2,600. May’s Japanese tourist tally was 1,700, the lowest figure on record since 1964.
China
Chinese stocks slumped in a volatile trading week amid indications of economic weakness, renewed U.S. trade tensions, and profit taking following recent gains. The large-cap CSI 300 Index fell 4.4%, its biggest weekly decline since February, while the country’s benchmark Shanghai Composite Index lost 5.0%. China’s sovereign 10-year bond yield declined by nine basis points to 3.04% on the week through Friday.
Gross domestic product turns positive in second quarter
China’s economy grew a better-than-expected 3.2% in the second quarter from a year earlier, reversing a historic 6.8% contraction in the first quarter, according to preliminary data from the country’s statistics bureau. On a sequential basis, gross domestic product rebounded by a rate of 11.5% quarter on quarter, following a 10.0% drop in the first quarter. In the release accompanying the data, China’s National Bureau of Statistics warned that “we should be aware that some indicators are still in decline and the losses caused by the epidemic need to be recovered.”
In other economic news, China’s industrial production grew 4.8% in June from a year earlier, its third straight monthly gain, while retail sales fell a worse-than-expected 1.8% last month. The latest indicators showed a continuation of the same trends seen in April and May, underscoring how the supply side of China’s economy is driving the recovery more than consumer demand.
China has become the first major economy to return to positive annual economic growth following the coronavirus outbreak. Increased fiscal spending, healthy exports (boosted by pandemic-related demand for health care, semiconductors, and personal computer equipment), and an unexpectedly strong property market rebound accounted for the quarterly economic upswing.
However, the data have also raised concerns about the strength and sustainability of the country’s recovery in the near term as coronavirus infections increase globally and China-U.S. relations deteriorate. On Tuesday, President Trump signed an executive order ending Hong Kong's preferential trade treatment and enacted a bill that threatens sanctions against Chinese officials, individuals, and potentially banks for any perceived erosion of Hong Kong's autonomy.
Other Key Markets
Kushlis: Inflation readings may constrain India’s central bank
Indian stocks, as measured by the Sensex Index, returned about 1.2%. In economic news, the government reported its first CPI reading in three months due to the pandemic-driven lockdowns. In June, the CPI increased 6.1% year over year, which was higher than an expected 5.3% reading, as well as March’s 5.8% calculation.
According to T. Rowe Price Credit Analyst Chris Kushlis, the 12-month inflation result looks partly driven by a price spike across a range of items—particularly food—in April, which was the first full month of the lockdown. Kushlis observes that, for some items like food, the price spike has receded, whereas prices for other items like medical goods and personal care—which includes gold—have continued to rise. All in all, shorter-term inflation measures suggest that sequential pressures have notably leveled off. However, Kushlis believes that the year-over-year figures could constrain the central bank from easing short-term interest rates again in the near term. The Reserve Bank of India previously reduced its main policy rate, the repo rate, from 4.40% to 4.00% in the latter part of May.
Chilean shares fall as legislation advances allowing withdrawals from retirement accounts
Chilean stocks, as measured by the IPSA Index, returned about -1.1% through noon on Friday. The equity market climbed at the start of the week but later gave back its gains, as the lower chamber of Congress passed legislation on Wednesday that would allow savers to withdraw up to 10% from their retirement accounts. The bill has become very popular, prompting some citizens to demand its passage in public demonstrations. The bill will now be discussed in the Senate.
Also on Wednesday, Chile’s central bank held its monetary policy meeting. As was widely expected, policymakers kept the benchmark rate unchanged at 0.5% while signaling low interest rates for the foreseeable future. The central bank will also keep its asset purchase program intact, buying up to USD 1.5 billion of central bank paper and bank bonds over the next four weeks.
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