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Global Markets Weekly Update: June 05, 2020
U.S.
Stocks surge on labor market rebound
Stocks recorded their best weekly gain in two months as investors celebrated signs of the beginning of an economic recovery. The small-cap indexes were particularly strong, with the Russell 2000 and S&P MidCap 400 indexes surging roughly 8%, while value stocks outpaced growth shares by a wide margin. The technology-heavy Nasdaq Composite Index established an intraday all-time high, and the S&P 500 Index moved within roughly 6% of its February 19 peak.
Within the S&P 500, energy shares outperformed, helped by news that OPEC and other oil major exporters were considering scaling back production. Financials shares were helped by a rise in longer-term interest rates, which boosts banks’ lending margins. Industrials shares were also exceptionally strong, lifted by a sharp rebound in Boeing. The typically defensive consumer staples and health care sectors lagged.
(The market’s rally came despite the worst civil unrest seen in the country in decades. Click here to read a communication from our CEO on recent events.)
Employers add record 2.5 million jobs
Upside surprises in labor market data appeared to drive much of the week’s positive sentiment. Stocks rose sharply on Wednesday, following a much smaller-than-expected decline in ADP’s tally of monthly payrolls. The payroll processing firm reported that private sector jobs contracted by only 2.7 million in May, versus expectations for a drop of around 9 million.
Official news on Friday that overall employment actually increased in May caught observers almost universally by surprise and sent the S&P 500 to its best daily gain in three weeks. Defying consensus expectations for a decline of around 9 million jobs, the Labor Department reported that employers added back 2.5 million positions during the month. Instead of rising to nearly 20% as forecast, the unemployment rate dropped to 13.3% from 14.7%. While the job gains paled in comparison to the 20.7 million jobs lost in April, they helped calm fears that the economy had entered a negative feedback loop in which jobs lost directly to the coronavirus and the shutdown—as in the case of retail and restaurant workers, for example—were cascading into other sectors.
Several other economic reports were less negative than feared. The Institute for Supply Management’s gauge of service sector activity showed a smaller-than-expected contraction in May, and April construction spending also fell less than anticipated. The consumer savings rate reached a record-high 33% in April, raising hopes for a surge in spending as the economy reopens. Nonfarm productivity also fell less than expected in the first quarter.
Two factors that had seemed to drive markets in recent weeks—U.S.-China trade tensions and progress in fighting the coronavirus—appeared to fade a bit from the headlines. Additional data on Monday confirmed the efficacy of Gilead Sciences’ remdesivir in treating patients moderately ill with COVID-19, the disease caused by the coronavirus, but at a level that appeared to disappoint investors. Worries also grew that recent mass gatherings at protests would spark a resurgence in infections. News on Friday that AstraZeneca was planning to manufacture billions of doses of a possible vaccine by the end of the year may have supported the day’s rally, however.
Longer-term Treasury yields jump back to highest levels since mid-March
The positive economic news pushed the yield on the benchmark 10-year Treasury note to its highest level since mid-March. (Bond prices and yields move in opposite directions.) While resulting in a sell-off in Treasuries, the better economic data supported modest gains in the broad municipal market through much of the week. T. Rowe Price traders noted growing demand for recently challenged market segments, including issuers of airport, toll road, and tobacco-payment-backed bonds.
Meanwhile, the investment-grade corporate bond market saw steady demand from U.S. and overseas investors. Credit spreads—the additional yield offered over Treasuries and an inverse measure of the sectors’ relative appeal—moved tighter, with riskier market segments such as energy seeing the greatest spread compression. The firm’s traders reported a very active primary calendar, with the volume of new deals reaching nearly twice initial expectations.
Strong technical conditions benefited the high yield market, with actively managed funds continuing to see positive flows, as they had throughout May. The market saw steady issuance, and most new deals were met with solid demand.
U.S. Stocks1
Index |
Friday's Close |
Week's Change |
% Change YTD |
DJIA |
27,110.98 |
1727.87 |
-5.00% |
S&P 500 |
3,193.93 |
149.62 |
-1.14% |
Nasdaq Composite |
9,814.08 |
324.21 |
9.38% |
S&P MidCap 400 |
1,911.15 |
146.09 |
-7.36% |
Russell 2000 |
1,507.15 |
112.15 |
-9.67% |
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
Shares in Europe surged as countries eased lockdown restrictions and the European Central Bank (ECB) injected fresh stimulus into the eurozone economy. The pan-European STOXX Europe 600 Index ended the week 6.91% higher. Germany’s Xetra DAX Index climbed 10.60%, the CAC 40 in France advanced 10.47%, and Italy’s FTSE MIB Index gained 10.71%. The UK’s FTSE 100 Index added 6.45%.
Core eurozone bond yields climbed on the week as the ECB increased its support for eurozone economies. In Germany, the 10-year bund yield traded at around -0.3% on Friday, up some 11 basis points (0.11%) from the start of the week. Peripheral eurozone bond yields fell markedly on the news, with the Italian 10-year yield slipping to its lowest level since March.
ECB expands bond-buying program
The ECB increased its pandemic emergency purchase program by EUR 600 billion to EUR 1.35 trillion, extending it until at least June 2021, and pledged to reinvest proceeds from maturing bonds until the end of 2022. The ECB kept its key interest rates unchanged and said it continues to stand ready to adjust all its instruments, as appropriate, to ensure that inflation moves toward the ECB’s goal “in a sustained manner.”
Eurozone inflation slowed to a four-year low of 0.1% in May, from 0.3% in April, as energy prices tumbled. However, excluding energy, food, alcohol, and tobacco, core inflation held steady at 0.9%. Inflation turned negative in 12 of the 19 member states. Prices in Germany rose 0.5%.
The final eurozone composite purchasing managers’ index for May exceeded the initial estimate, rising to 31.9 from 13.6 in April, according to IHS Markit. The data, below the 50 break-even level that marks the difference between growth and contraction, signal that the economy continued to shrink as activity fell sharply across the region due to the coronavirus.
German government OKs stimulus package
Germany’s ruling coalition agreed on a EUR 130 billion stimulus package for the country, exceeding the top end of expectations by 30%. The package includes a cut in the value-added tax for the rest of the year, funds for 5G mobile networks and railways, and higher rebates for electric cars. Germany’s stimulus measures, including liquidity aid and loan guarantees, total about a third of its annual economic output and substantially exceed the programs launched by other eurozone countries.
UK Chancellor of the Exchequer Rishi Sunak is preparing an economic stimulus package for July to help the economy cope with the severe recession caused by the coronavirus, the Financial Times reported, quoting government insiders. He is considering funds for training schemes, infrastructure projects, and technology firms.
No progress in UK-EU trade talks
The final round of talks between the UK and the European Union (EU) on a post-Brexit trade relationship ended with both sides still far apart on core topics. UK Prime Minister Boris Johnson is now expected to meet European Commission President Ursula von der Leyen and EU Council President Charles Michel around the time of the next EU summit on June 19. The UK’s post-Brexit transition period expires at the end of this year, and the deadline to request an extension is the end of this month.
Japan
Japanese stocks continued their upward trend in the first week of June. The Nikkei 225 Stock Average advanced 986 points (4.5%) and closed at 22,863.73. Following a third consecutive week of strong gains, the Nikkei Average has recouped most of its steep March sell-off. The widely watched Japanese market benchmark is -3.4% for the year-to-date period. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, also recorded solid weekly gains, but they remain down 6.3% and 9.4%, respectively, in 2020. The yen, which is generally considered a safe-haven currency, weakened versus the U.S. dollar, which could be interpreted as a sign of investor confidence in the global economic recovery. At slightly more than JPY 109.17 per U.S. dollar on Friday, the yen is slightly weaker than where it ended 2019.
Japan’s jobless rate climbs to 2.6%
At face value, the 2.6% unemployment rate in Japan sounds wonderfully low, especially compared with the double-digit rate in the U.S. and about 8% unemployment in the eurozone. Japanese jobless data for the month of April showed a modest uptick from 2.5% in March. However, the calculation ignored 4.2 million workers that were furloughed in April. According to one source, if they were included in the calculation, Japan’s unemployed percentage would have spiked to 11.4%. (In a separate story, The Nikkei reported that nearly six million, or 9% of Japan’s workforce, were employed but not working in April.) Despite the government’s latest stimulus package, which is, in part, designed to help keep workers on payrolls, Finance Minister Taro Aso acknowledged that businesses with excess capacity will eventually be forced to lay off workers, and he expects the unemployment rate to rise in May.
Tax revenues are projected to lag government expenditures by approximately JPY 100 trillion (USD 920 billion) in fiscal 2020, requiring a third extra budget. Government spending to bolster the economy and provide subsidies (approximately JPY 160 trillion) will vastly exceed tax receipts (approximately JPY 64 trillion), according to Japan’s Finance Ministry. Several economists believe that this year’s tax collections will be significantly lower than the Finance Ministry’s projections, which were made before the global pandemic. However, Economy Minister Yasutoshi Nishimura echoed other cabinet members when he asserted that his primary concern was supporting and protecting jobs and family well-being. A subsequent extra budget would likely include additional spending measures.
Consumer spending declines less than expected
Japanese household spending in April was moderately better than expected but fell by the most on record as people stayed home and shops and restaurants were shuttered amid a nationwide lockdown due to the pandemic. Spending fell 11.1% from the year-earlier period, the most since the Internal Affairs Ministry began collecting the data in 2000. The decline was slightly less than the -12.8% expected by economists. While the trend likely bottomed in April or May, household spending is forecast to remain subdued as consumers hoard cash and remain wary about a second wave of the coronavirus.
China
Equity markets in China rose for the week, aided by a thaw in U.S.-China relations. The domestic CSI 300 Index added 3.4%, and the benchmark Shanghai Composite Index gained 2.8%.
U.S. Trade Representative Robert Lighthizer said on Thursday he felt “very good” about progress under the phase one agreement with China, which he said was honoring the pact and fulfilling its commitments on structural change. Lighthizer’s comments at a virtual event held by the Economic Club of New York were seen as an olive branch toward China. However, bilateral tensions are expected to persist ahead of the U.S. presidential election in November after China’s decision to implement a controversial national security law in Hong Kong.
Strong inflows into Chinese government bonds
China’s sovereign 10-year bond yield increased for the week as a resurgence in business activity raised hopes for an economic turnaround following a sharp slowdown at the start of the year. Chinese government bonds have remained popular with overseas investors, with nonresident inflows totaling USD 7.7 billion for the second straight month. However, this may partly reflect the inclusion of Chinese bonds in the JP Morgan Emerging Market Government Bond Index since the end of February.
Central bank introduces two new monetary policy tools
One week after promising more forceful monetary policies to support the economy, the People’s Bank of China (PBoC) sprang into action with the creation of two targeted monetary programs. The PBoC set up a RMB 400 billion quota for the central bank to buy 40% of domestic loans to SMEs (small and mid-size enterprises) from local banks. Additionally, the PBoC pledged to help banks meet the cost of extending loan and interest payment relief to SMEs. Both monetary tools came after Premier Li Keqiang recently announced that policymakers would allow smaller enterprises to defer their interest and principal payments until 2021 to shore up the recovery.
China’s official purchasing managers’ index (PMI) edged down to 50.6 in May from 50.8, reported the country’s statistics bureau, marking the third straight month the reading stayed in expansionary territory. Beneath the headline number, however, the reading showed increases in new orders, a reduction in inventories, and stronger industrial prices—all of which suggested improving demand. Separately, the private Caixin/Markit manufacturing PMI rose to a four-month high of 50.7 in May, while the Caixin services PMI rose to a better-than-expected 55.0, the gauge’s first expansion since the coronavirus outbreak.
Overall, the strong construction activity and sharp rebound in services signaled that policy efforts to encourage activity and support China's SMEs are starting to work, according to analysts.
Other Key Markets
Botoucharov: Turkey takes another step toward “soft form” of capital controls
Turkish stocks, as measured by the BIST-100 Index, returned about 4.3%. Stocks grinded higher, helped by positive sentiment around the world regarding economic recoveries and prospects for the development of a COVID-19 vaccine.
The market was unfazed by the latest inflation readings, which were generally in line with expectations. Turkey’s consumer price index rose more than 1.3% in May, resulting in a year-over-year increase of about 11.4% through the end of May versus a 12-month inflation reading of 10.9% through the end of April. T. Rowe Price Sovereign Analyst Peter Botoucharov believes that Turkey’s inflation rate is likely to remain in the 11% to 13% range for the next few months but could dip slightly below 10% sometime in the third quarter of this year.
The equity market also seemed unaffected by the government taking additional steps toward what Botoucharov considers to be a “soft form” of capital controls. About one year ago, the government started implementing taxes on foreign currency exchange transactions; the initial 0.1% tax was increased last week to 1.0%. The government has also implemented foreign exchange trading limits—specifically, in March, it imposed restrictions on local banks trading Turkish lira with foreign institutions. The latest measure announced this week is that the Capital Markets Board has suspended the licensing of asset managers whose foreign currency-denominated securities make up at least 80% of total holdings. For asset managers with less than 80%, Turkey’s financial market regulator will impose a 15% tax on their management of any such funds.
Hall: Brazilian street protests bear watching
Stocks in Brazil, as measured by the Bovespa Index, returned about 8.4%. A continued strengthening in the real versus the dollar this week enhanced returns to U.S. investors.
Shares were boosted by favorable global sentiment regarding economic recoveries as countries reopen, the prospects for creating a vaccine for the coronavirus, and massive stimulus efforts by governments and central banks around the world. Brazil’s government took additional action this week by creating, as reported by Reuters, an emergency credit line of BRL 20 billion intended to help struggling small businesses and medium-sized enterprises.
Protests in various U.S. cities over the recent death of a Minneapolis man while in police custody have prompted or inspired demonstrations around the world, and T. Rowe Price Sovereign Analyst Richard Hall believes that street protests in Brazil are something to keep an eye on. According to Hall, President Jair Bolsonaro has been tacitly encouraging protests against the Federal Supreme Court, which is investigating some of his actions, and recently made several trips to one of these rallies in Brasilia—including one on horseback—to signal his support. At the same time, anti-Bolsonaro forces are starting to gather on the streets. Under the banner of a “pro-democracy” movement, they are protesting rhetoric from some of Bolsonaro’s supporters who want the military to take action against the court.
Hall believes there are at least two significant implications of the street protests. First, large street protests were an important ingredient in building momentum for former President Dilma Rousseff’s impeachment. If the present-day rallies are big enough, Hall believes the unrest could lead to an increase in impeachment talk. In fact, the speaker of the lower chamber of the legislature, Rodrigo Maia, recently said that he would be the one to decide if and when to begin formal impeachment proceedings. Second, large gatherings during a pandemic could work against local efforts to bring the pandemic under control. Brazil has been hard hit by the coronavirus—arguably due, in part, to Bolsonaro’s lack of interest in quarantine measures and social distancing—and some leaders have been discouraging protests for public health reasons. While there were some signs of the daily death toll plateauing before last weekend’s protests, Hall believes that an increase in COVID-19 deaths in recent days bears watching but will hopefully be just a blip.
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