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Global Markets Weekly Update: March 06, 2020
U.S.
COVID-19 volatility leaves benchmarks mixed
The major stock indexes ended mixed after a second week of extraordinary volatility driven by COVID-19 fears. (For our latest update on the possible implications of the outbreak for the global economy and markets, click here.) The large-cap benchmarks and the technology-heavy Nasdaq Composite Index recorded gains, thanks to sharp rallies on Monday and Wednesday, but the smaller-cap indexes ended modestly lower.
Within the S&P 500 Index, the typically defensive utilities sector performed best. Health care shares were also strong after the prospects for Senator Bernie Sanders’ “Medicare for All” system seemed to diminish following former Vice President Joe Biden’s solid performance in many presidential primary elections on Super Tuesday. Energy shares again led the declines as U.S. oil prices plunged to multiyear lows on Friday following OPEC’s failure to convince non-OPEC member Russia to agree to production cuts.
The potential policy responses of the U.S. and other governments to the COVID-19 outbreak and how effective they would prove seemed to take center stage on Wall Street over the week. Stocks had their best daily gain in nearly three months on Monday, which T. Rowe Price traders attributed, in part, to hopes for the announcement of coordinated policy measures at Tuesday’s meeting of G-7 finance ministers and central bank officials. Stocks fell back Tuesday morning, however, after investors appeared disappointed by a lack of firm details—particularly about fresh fiscal stimulus and coordinated interest rate cuts—coming out of the meeting.
Emergency Fed rate cut fails to rally markets
Markets were soon caught by surprise by the Federal Reserve’s 10 a.m. announcement on Tuesday of an emergency half-point (0.5%) rate cut, citing “evolving risks to economic activity” from the coronavirus. Stocks briefly rallied on the news, but then fell back sharply. Some observers noted that the Fed’s surprise move in advance of its policy meeting later in March may have signaled that policymakers were getting a privileged view into signs of stress in credit markets. Investors may have also been disappointed that Fed Chair Jerome Powell’s statement did not include more details on the Fed’s outlook for the economy.
Levenson: Fed likely to keep rates steady from here
T. Rowe Price Chief U.S. Economist Alan Levenson expects the Fed to maintain the accommodative policy stance established with the March 3 emergency cut. Provided that the outbreak is contained, which Levenson thinks is the most likely trajectory, he believes the Fed will look through the short-term negative impact. That said, he believes policymakers would not hesitate to ease again if deteriorating market and economic sentiment threatened to prolong the slump. Even less likely, in his view, are conditions that would prompt a rate hike this year. Indeed, the Fed would welcome an upside growth surprise that lifted the personal consumption expenditures price index to, or even modestly above, its 2% medium-term inflation rate objective.
Although ample anecdotal evidence of canceled travel and other disruptions arrived during the week as a result of the coronavirus, the week’s data provided little confirmation of a slowdown. The Institute for Supply Management’s gauge of service sector stayed firmly in positive territory, and construction data were particularly strong. Weekly jobless claims stayed near the previous week’s low level, and the closely watched February payrolls report, released on Friday, surprised well to the upside. Employers added 273,000 jobs in February, and the previous months’ strong gains were revised upward by 85,000 jobs.
Group CIO Sharps: No meaningful structural imbalances in economy
Rob Sharps, group chief investment officer at T. Rowe Price, observes that investors are beginning to understand that management teams are now focused on contingency planning and business continuity as opposed to hiring and expansion. Meanwhile, individuals are evaluating many of their plans and are becoming more cautious, delaying and deferring travel in particular. Nevertheless, while he expects further market volatility, Sharps stresses that he does not see any meaningful structural imbalances in the economy right now, and he is hopeful that the COVID-19 outbreak will not have any meaningful or long-lived impact on the economy.
Treasury yields reach record lows
The bond market seemed unimpressed by the payrolls report, and the week’s drastic moves in Treasury yields appeared to be another factor driving equity market volatility. After falling sharply the previous week, the yield on the benchmark 10-year Treasury note tumbled further following the Fed’s rate cut, moving below 1% for the first time in history on Tuesday and then reaching a new record low of around 0.66% on Friday morning. (Bond prices and yields move in opposite directions.)
According to T. Rowe Price traders, the investment-grade corporate bond market had a more muted response to the Fed’s surprise rate cut, although Joe Biden’s Super Tuesday victories seemed to spark increased buying and credit spread compression across most market segments. (Credit spreads measure the extra yield offered over Treasuries and serve as an inverse indicator of the sector’s relative appeal.) However, the positive sentiment faded as growth concerns led to less liquidity in the secondary market and spreads moved wider. In a positive sign, issuance resumed after the primary calendar was dormant the previous week.
Biden’s gains and the Fed’s rate move seemed to encourage high yield investors to put cash to work in better-quality names within the noninvestment-grade category, according to the firm’s traders. The energy sector partly retraced its recent losses. However, volatility reemerged in the second half of the week and weighed on sentiment as equities traded lower amid ongoing coronavirus concerns. Below investment-grade funds reported negative flows industry-wide. The plunge in oil prices took a particularly large toll on energy sector issues, which are heavily represented in the high yield market.
U.S. Stocks1
Index | Friday's Close | Week's Change | % Change YTD |
DJIA |
25,864.78 |
735.49 |
-9.37% |
S&P 500 |
2,972.37 |
51.56 |
-8.00% |
Nasdaq Composite |
8,575.62 |
118.11 |
-4.42% |
S&P MidCap 400 |
1,797.87 |
-0.95 |
-12.85% |
Russell 2000 |
1,449.19 |
-7.91 |
-13.14% |
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 resumed their decline as the rapid spread of the coronavirus intensified fears of a global economic downturn. The slide wiped out earlier gains triggered by hopes for coordinated stimulus efforts to mitigate the worst effects of COVID-19. The pan-European STOXX Europe 600 Index fell 2.21%. Germany’s Xetra DAX Index slipped 2.77%, France’s CAC-40 Index declined 3.18%, and Italy’s FTSE MIB Index dropped 5.25%. The UK’s FTSE 100 Index slid 1.75%.
Italy takes fiscal measures to combat coronavirus, Germany poised to act
Some big European economies either implemented or prepared to take fiscal measures to deal with the impact from the coronavirus outbreak. Italy, where the outbreak has been worst, started with EUR €900 million for the hard-hit northern regions, rapidly followed by a EUR €3.6 billion stimulus package, which it subsequently doubled to €7.5 billion. German Finance Minister Olaf Scholz said that Germany would be ready to enact a fiscal stimulus package should the epidemic spark a global economic crisis. Germany has the means to act fast and decisively, he said.
ECB “ready” to counter coronavirus
European Central Bank (ECB) President Christine Lagarde said in a statement after a meeting of the Executive Board that the ECB is “ready to take appropriate and targeted measures” to counter the economic impact of the coronavirus, signaling a greater willingness to act. The statement followed similar comments from the U.S. Federal Reserve last week and the Bank of Japan on Monday. Last week, the ECB played down the need for a policy response.
Wieladek: ECB TLTROs and rate cut possible
T. Rowe Price International Economist Tomasz Wieladek believes that the ECB’s governing council, which will meet on March 12, may follow other major central banks and announce new measures to support the eurozone economy at a time when the spread of COVID-19 has led to heightened uncertainty. He notes that the measures could take the form of a new round of targeted longer-term refinancing operations (TLTROs), possibly aimed at encouraging banks to lend to small and medium-sized businesses. In his view, the central bank could also cut interest rates by another 10 basis points deeper into negative territory. Wieladek adds that an announcement that the ECB will increase the pace of its bond-buying program is more likely to come in April, although such a move should not be completely ruled out for this month.
BoE readies emergency funding for businesses
Andrew Bailey, the next Bank of England governor, said in testimony to a parliamentary committee that businesses would need emergency funding to cope with the “shock” caused by the coronavirus. He said that he had discussed the matter with Chancellor of the Exchequer Rishi Sunak. Bailey played down the prospect of an interest rate cut before the March 26 policy meeting, saying more evidence was needed about the COVID-19 pandemic’s effects on the economy. Markets responded by reducing the odds of an unscheduled rate cut to 50% from a near certainty earlier. Meanwhile, the UK Treasury also said that possible measures to support the health service, businesses, and the economy were being prepared, according to Reuters. Sunak said that his department would provide an update on economic developments and measures when it unveils his first budget on March 11.
UK and EU stress disagreements after first round of post-Brexit talks
The first round of talks between the European Union (EU) and the UK on a future relationship ended with both sides emphasizing areas of disagreement. Major points of contention included the general level of the playing field between the UK and the EU, fishing rights in UK waters, the role of the European Court of Justice, and how a future deal would be policed. The EU’s chief Brexit negotiator, Michel Barnier, warned that there were some “very serious divergences,” while a UK government spokesman said that this was just the first round of negotiations that were going to be “tough.” Comments made in the press by British officials indicated less of a desire on the UK side for a comprehensive trade deal with the bloc, with Prime Minister Boris Johnson threatening to walk away from a deal if he judged insufficient progress had been made by the half-way point in June.
Japan
Concerns about the economic effects of the coronavirus continued to weigh on Japanese stocks. The widely followed Nikkei 225 Stock Average declined 393 points (1.86%) for the week and closed at 20,749.75. For the year-to-date period, the index is down more than 12%. The large-cap TOPIX Index and the TOPIX Small Index were down 2.6% and 3.0%, respectively.
Despite central bank support, stocks lose ground
After losing more than 9% the previous week, the Nikkei index staged a modest rebound through Thursday’s trading as supportive actions from the Federal Reserve and comments from other central banks boosted investor sentiment. However, fears about the domestic and global effects of COVID-19 weighed on Japanese equities at the end of the week, with stocks dropping about 3% on Friday.
In response to the uncertainties caused by the spread of the coronavirus, Bank of Japan (BoJ) Governor Haruhiko Kuroda issued a statement on Monday saying that the central bank “will closely monitor future developments, and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.” The BoJ subsequently announced that it would add 500 billion yen of liquidity through open market operations. Bloomberg reported that the central bank had purchased a record amount of exchange-traded stock funds on Monday, March 2.
Japan issues travel restrictions in attempt to slow coronavirus
As of March 5, the World Health Organization reported that Japan had 317 confirmed COVID-19 cases (not including the occurrences on the Diamond Princess cruise ship)—more than any other country in Asia, except for China and South Korea. However, there are increasing concerns that the relatively slow pace of testing in Japan undercounts the actual number of people with the coronavirus.
Japan issued new travel restrictions in an attempt to contain the outbreak. Visitors from China and South Korea will have to be quarantined for two weeks, and travelers from some parts of South Korea and Iran that have been hard-hit by the coronavirus will be banned. The country also faces questions about its ability to host the Summer Olympics, which are scheduled to officially open July 24 in Tokyo; a government minister said that it is possible the games could be delayed if the situation worsens.
Yen strengthens versus dollar
The yield on the 10-year Japanese government bond was little changed and finished the week at 0.146%, while the yen strengthened to ¥105.28 versus the U.S. dollar. The yen has been boosted by demand for historically safer assets in the risk-off environment, while plunging U.S. interest rates have weighed on the greenback.
China
Equity markets appeared to engage in a tug-of-war between fears about coronavirus-driven disruptions to the global economy and expectations for further support from central banks after the Fed’s emergency interest rate cut. The Chinese government is also providing greater policy support to bolster the flagging economy. The Shanghai Composite A-share index closed 5.4% higher week-on-week, while the CSI 300 large-cap index gained 5.0%. The indices strengthened until Thursday but fell by 1.2% and 1.6%, respectively, on Friday in response to the sharp losses in overseas stock markets from midweek.
China surprises with positive equity returns in February
Domestic A-shares were the only major stock market to end February in positive territory, after the coronavirus showed signs of having peaked, with the situation even improving in Wuhan, the outbreak’s epicenter. On the last day of February, discharged patients accounted for more than half of cumulative cases for the first time. This key indicator of recovery has continued to improve, reaching 65% of confirmed cases on March 4.
China PMIs crashed in February, as expected
The first significant economic release for February, the official purchasing managers’ index (PMI) for manufacturing, plunged to a record-low 35.7 from 50.0 in January. (For this diffusion index, 50 is the threshold between expansion and contraction.) This reading came in well below most forecasts and could signal that China’s economy will suffer a worse-than-expected contraction in the first quarter. The Caixin/Markit PMI likewise fell to a record low of 40.3 in February. Higher-frequency economic indicators suggest a similar level of weakness, with coal consumption at China's top six power plants, for example, 70% below normal levels. While the PMI declines were dramatic, the subindex for future output—a measure of business expectations—reached a five-year high, suggesting that businesses expect economic conditions to improve going forward.
China's services sector hurt most
Although much attention has focused on the decline in manufacturing activity, the services side of the economy has also come under severe pressure. Markit's services PMI fell 25.3 points in February, while the official number from the government fell 24.5 points—nearly twice the decline suffered by the manufacturing indices. The severity of this contraction reflects the person-to-person nature of many services transactions and the prohibitions on travel and public gatherings.
Concerns over global and Asian supply chains
South Korea’s severe outbreak has complicated the outlook for Asian supply chains considerably. A slowing South Korean economy could aggravate supply chain disruptions and make it harder for China to reboot its factories. In 2019, South Korea supplied 18% of China’s and Hong Kong's need for semiconductors and 43% of memory chips. South Korea also supplied 42% of Vietnam's semiconductor imports and 26% of Taiwan's memory chip imports. In response to the coronavirus disruption, Seoul announced a supplementary budget to support the economy.
Other Key Markets
Brazilian shares fall as country records more COVID-19 cases
Stocks in Brazil, as measured by the Bovespa Index, fell about 6.0%. Shares were initially buoyed by a rebound in U.S. shares from recent lows, as well as the U.S. Federal Reserve’s unexpected interest rate cut on Tuesday. However, the equity market surrendered its early week gains and more on Thursday and Friday amid renewed concerns about the spreading coronavirus. Through Thursday, as reported by Reuters, Brazil had eight confirmed cases of COVID-19 and more than 600 potential cases that have not yet been confirmed.
Brazil’s currency continued to weaken versus the U.S. dollar during the week, despite the Central Bank of Brazil’s intervention efforts to support the real, which had fallen about 11% year-to-date through the end of February. Against a backdrop of strong demand for U.S. dollars and rising expectations for various central banks to follow the Fed’s lead in cutting interest rates, Brazil’s central bank conducted three auctions of USD $1 billion in foreign exchange swap contracts. Despite the auctions, the real continued to fall.
According to T. Rowe Price Sovereign Analyst Richard Hall, the central bank’s actions during the week suggest that policymakers are not serious about trying to stabilize the currency. He believes that if they really wanted to stabilize the real, they could be much more effective with a larger swaps auction, on the order of USD $10 billion in a week. However, Hall acknowledges that such an action in the midst of broad emerging markets currency weakness wouldn’t make sense, so he sees the interventions as an attempt to slow the depreciation and to provide liquidity to the market.
Cheaper oil imports help Turkish shares rise along with economic prospects
Turkish stocks, as measured by the BIST 100 Index, rose 3.4%. A vigorous rally in U.S. shares on Monday and the U.S. Federal Reserve’s unexpected interest rate reduction on Tuesday helped the Turkish market pare its deep losses from the previous week. Recent declines in oil prices are also beneficial for the economy because Turkey is a major oil importer, and lower oil prices should feed through into lower inflation that could enable the central bank to continue reducing interest rates.
In addition, investors were optimistic that tensions between Turkey and Russia—stemming from recent military actions in Syria—would diminish following a Thursday meeting between Turkish President Recep Tayyip Erdogan and Russian President Vladimir Putin. Erdogan and Putin agreed to implement a ceasefire starting early Friday morning in the Idlib vicinity, to establish some buffer zones, and to conduct some joint patrols. While the lira benefited from these de-escalation moves, the equity market dropped on Friday, along with other world markets.
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