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Global Markets Weekly Update: March 13, 2020
U.S.
Stocks enter bear market
Stocks suffered a week of historic losses as worries deepened about the impact of the novel coronavirus outbreak. (Click here to watch a video featuring the perspective of our group chief investment officer, Robert Sharps.) The declines pushed the major indexes well into bear market territory, with the Dow Jones Industrial Average falling over 28% from its recent peak to its Thursday low and the S&P 500 Index down about 27%. The onset of the bear market was the fastest in history—major indexes were setting new highs as recently as mid-February—and the Dow suffered its worst daily decline since 1987 on Thursday. The Cboe Volatility Index (VIX) reached its highest level since the financial crisis of 2008, and “circuit breakers” designed to halt trading when the S&P 500 falls by more than 7% were deployed on Monday and Thursday for the first time since 1997.
All S&P 500 sectors fell sharply, but energy shares performed worst as oil prices tumbled. Health care, technology, and communication services shares held up best. As companies and individuals continued to cancel travel and events, shares in the affected industries were dealt the heaviest blow. Some cruise ship shares shed roughly half of their value as of the previous week at their Thursday lows, and airline shares accelerated their declines following President Donald Trump’s announcement of a 30-day ban on travel from most of Europe to the U.S.
While many factors were undoubtedly at work, the sell-off seemed to have four major drivers:
- On Monday, crude oil prices sank the most since the Gulf War in 1991 following Saudi Arabia’s decision to radically increase exports in order to drive down prices and punish Russia for its refusal to follow production limits (see Saudi Arabia section below).
- Confusion over the federal government’s response to the crisis appeared to deepen over the week. Stock futures fell sharply as President Trump addressed the nation from the Oval Office Wednesday night. The president’s surprise announcement of the European travel ban seemed to unsettle markets, and investors also appeared disappointed that the address did not include firm details on a broad fiscal stimulus plan. The president urged Congress to pass legislation cutting payroll taxes, but Democrats in the House appeared cool to the idea, proposing instead relief targeted at lower-income individuals.
News that House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin were working on a compromise plan appeared to help calm markets on Friday. On Thursday night, Speaker Pelosi told reporters that a deal was just “awaiting an exchange of paper,” while Secretary Mnuchin told CNBC on Friday morning that “we’re very close to getting this done.” Late Friday afternoon, stocks rose further after President Trump declared a national emergency and announced new stimulus measures, as well as plans for drive-through testing procedures.
- The number of COVID-19 cases climbed sharply over the week, while delays in supplying testing kits led many experts to caution that the actual number of cases was much higher. The cancellation of major sporting and cultural events seemed to highlight the severity of the outbreak, as did reports of new quarantines and the World Health Organization’s official designation of a global pandemic. Signs of panic buying also emerged, especially in the curious global run on paper products.
- Signs of stress in credit markets emerged early in the week, while borrowing costs for energy companies and other stressed industries jumped sharply. Particularly prominent was Boeing’s decision to draw down a $13.8 billion credit line to help it deal with falling airline demand and its MAX 737 problems.
Extraordinary volatility in Treasuries
Treasuries were extraordinarily volatile, with the yield on the 10-year Treasury note decreasing to below 0.35% in overnight trading before Monday’s U.S. market open as investors flooded into perceived safe havens. However, in unusual trading activity later in the week, investors sold Treasuries even as equities and other riskier asset classes plummeted. This drove the 10-year Treasury yield rapidly higher; on Friday, it traded near 0.90%. (Bond prices and yields move in opposite directions.) The yield on the 30-year Treasury bond was also volatile, increasing toward the end of the week after reaching a record low of 0.99%.
T. Rowe Price traders also noted unusual dislocations in the prices of Treasury futures contracts and the underlying bonds. In an effort to address the atypical market activity in Treasury trading, the Fed injected $1.5 trillion in liquidity into short-term lending markets on Thursday. The Fed’s action probably also contributed to a brief respite from Thursday’s heavy selling in equities, but it could not stem the rapid decline in sentiment toward riskier assets.
Oil decline triggers steep sell-off in high yield bonds
Saudi Arabia’s move to cut oil prices triggered a record sell-off in high yield bonds on Monday. Issuers from energy-related sectors account for a large proportion of the U.S. high yield bond market, so the plummeting oil prices suddenly put the fundamental condition of these energy companies under pressure and damaged their ability to repay their debt going forward.
By some measures, high yield credit spreads posted their largest-ever one-day move on Monday. (Credit spreads measure the additional yield that investors demand for holding a bond with credit risk over a similar-maturity Treasury security.) Credit spreads on investment-grade corporate bonds also widened, with the bulk of the selling focused on energy-related bonds.
Municipal bonds declined sharply and lagged the early-week rally in Treasuries. High-yield municipal bonds underperformed higher-quality munis. Thin liquidity and price markdowns weighed on bellwether high-yield municipal issues.
U.S. Stocks1
Index | Friday's Close | Week's Change | % Change YTD |
DJIA |
23,185.62 |
-2679.16 |
-18.76% |
S&P 500 |
2,711.02 |
-261.35 |
-16.09% |
Nasdaq Composite |
7,874.23 |
-701.39 |
-12.24% |
S&P MidCap 400 |
1,546.65 |
-251.22 |
-25.03% |
Russell 2000 |
1,208.96 |
-240.23 |
-27.54% |
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 trading in a bear market after heavy selling sparked by the spreading coronavirus, the U.S. decision to restrict travel from Europe, a plunge in oil prices sparked by the collapse of the OPEC-Russia alliance, and disappointment with measures that stopped short of a coordinated fiscal stimulus. However, equities clawed back some losses on Friday on hopes of more government intervention to counteract the coronavirus. Most major indexes—including the pan-European STOXX Europe 600 Index and individual country indexes for the UK, France, Germany, and Italy—generally declined 15% to 20%.
ECB unveils fresh stimulus, while EU offers extra funds
The European Central Bank (ECB) approved fresh stimulus measures to help the eurozone economy cope with the growing cost of the coronavirus epidemic but kept interest rates unchanged, which disappointed financial markets. The ECB said it would offer fresh loans to banks, provide previously agreed liquidity facilities at even more favorable rates, and temporarily increase assets by EUR €120 billion until the end of the year. Meanwhile, in their first-ever teleconference call, European Union (EU) leaders agreed to ease EU spending rules and mobilize at least €25 billion of EU funds.
UK, Germany, Italy unveil economic measures to counter coronavirus
The UK, Germany, and Italy announced measures to help counter the economic impact of the coronavirus as the likelihood of a regional recession grows.
In coordinated UK monetary and fiscal policy moves, a 50-basis-point interest rate cut by the Bank of England (BoE) preceded the announcement of a £30 billion spending package in the annual budget to help the economy weather the coronavirus outbreak. Chancellor of the Exchequer Rishi Sunak also announced that he would abolish property taxes on business for many firms in England, extend sick pay, and boost funding for the National Health Service. Apart from lowering rates to 0.25%, the BoE announced a £100 billion cheap funding scheme for banks that is designed to support small businesses and relaxed financial regulations so that lenders will be able to pump an extra £200 billion of credit into the economy.
The German government unveiled measures to help companies hit by the coronavirus outbreak and announced an additional €12.4 billion in state investment in infrastructure over the next three years. However, the measures stopped well short of the fiscal stimulus demanded by economists and companies. Finance Minister Olaf Scholz insisted Germany is prepared to do everything needed to stabilize the economy. A poll by the Association of German Chambers of Industry and Commerce showed that half of all German companies expect their revenue to shrink this year as a result of the coronavirus.
Italy increased its emergency economic measures and suspended mortgage payments to mitigate the consequences of imposing nationwide quarantine restrictions. The government said it would inject €10 billion into the economy, up from €7.5 billion the day before.
Economic disruption spreads as Europe grapples with coronavirus
The measures were announced as economic disruption across Europe mounted with the rapid spread of the coronavirus outbreak. Germany, France, Italy, Spain, Greece, Belgium, and Austria imposed measures, including travel bans, restrictions on gatherings, and closures of schools, universities, restaurants, and bars. Italy’s entire population is under a lockdown, although essential travel is permitted, and Spain locked down four towns, containing 60,000 people, and suspended parliament. Italy and the UK suspended soccer matches in their major leagues.
Italy, Spain, and UK intervene in markets
Authorities in Italy, Spain, and the UK imposed measures to bring stability to asset prices as record declines almost paralyzed markets. Italian and Spanish regulators announced bans on short selling after their equity markets recorded the worst-ever one-day falls. The London Stock Exchange eased requirements for market makers that trade fixed income exchange-traded funds (ETFs). The moves followed the U.S. Federal Reserve’s injection of half a trillion dollars into the financial system on Thursday.
Japan
Japanese stocks fell to levels not seen in more than three years. The Nikkei 225 Stock Average declined 3,319 points (16.0%) and closed at 17,431.05, down 26.3% for the year-to-date period. Other broad-based market yardsticks have recorded similarly large losses. The large-cap TOPIX Index and the TOPIX Small Index are down 26.7% and 32.9%, respectively, in 2020. The yen stood at ¥105.07 per U.S. dollar on Friday, relatively unchanged for the week.
Japan likely to ease monetary policy…
Most observers expect the Bank of Japan (BoJ) to loosen monetary policy at its March 18–19 policy committee meeting. Plunging stocks, the strengthening yen, and concern about the coronavirus pandemic are weakening investor sentiment and curtailing business investment, which could derail Japan’s already fragile economic recovery.
…and boost ETF purchases
The central bank is also widely expected to continue stepping up its volume of ETF purchases. Pledging to buy ETFs at a faster pace could help put a floor under the stock market and prevent business sentiment from worsening. At the beginning of March, BoJ Governor Haruhiko Kuroda promised to provide liquidity through market operations and asset buying. Since then, the central bank has periodically purchased about ¥100 billion (USD $950 million) per day. The bank is expected to maintain that pace of ETF buying until the end of the fiscal year (March 31).
Record levels of bond buying spurred by yen strength
According to preliminary data from Japan’s Finance Ministry, Japanese investors purchased approximately ¥4.2 trillion ($41 billion) of overseas debt in the week ended March 6. The data also showed that Japanese pension funds bought a record amount of overseas debt for a second consecutive month in February. With the yen appreciating to a multiyear high and Japan’s 10-year government bond yield expected to remain negative for the foreseeable future, many expect that foreign bonds will continue to garner strong demand from Japanese investors searching for yield.
Japan’s annualized gross domestic product (GDP) growth rate for the quarter ended December 31, 2019, was revised lower—to -7.1% from an initial estimate of -6.3%. The growth rate was significantly worse than market forecasts due to greater-than-expected declines in private consumption and capital expenditures.
China
Amid some of the most volatile market conditions since the global financial crisis, the Shanghai Composite Index fell 4.8%, with the CSI 300 large-cap index down 5.9%. Despite China having suffered the majority of the world's coronavirus cases and the economy having gone into lockdown for much of February, the Shanghai Composite’s 5.3% year-to-date loss is much less than the 20.2% fall in the MSCI All Country World Index.
Observers have pointed to several potential reasons for the relative resilience. The number of new cases in China has fallen sharply and was below 50 for five consecutive days (to March 10). Reassuringly, all temporary isolation hospitals in Wuhan have now been closed while the national total for daily recoveries in China is over 1,000. In contrast, the slower response of health authorities in other countries in tackling the coronavirus has led to fears of a more prolonged, complex, and potentially deeper shock to the global economy.
More stimulus expected even as crisis eases
Expectations also grew among both domestic and overseas investors that China will introduce greater policy easing in addition to the measures that have already been announced. The People's Bank of China, as expected, announced a cut in bank’s required reserve ratio, but many agree that more accommodation is likely in the coming weeks and months. Retail investors play a predominant role in China's equity markets—accounting for around 80% of daily turnover—and tend to focus as much on expected changes in government policies as on economic fundamentals.
Signs of gradual economic recovery continue
China appears to be incrementally rebooting its economy after a forced one-month shutdown. Coal output for power stations is currently 34% above the February average, for example. Restaurant chains are reopening in China's major cities, having been closed since late January. And construction—one of the sectors worst hit by the restrictions—has achieved a 58% restart rate, according to China's housing ministry. In the logistics industry—vital for global supply chains—economic powerhouse Shenzhen reported that conditions were almost back to normal. This suggests a potential V-shaped rebound in the purchasing managers’ index surveys for March.
Money and credit data offer mixed signals
At first glance, China's credit data for February appeared weak. In terms of month-on-month changes, M2 (broad money supply), bank loans, and TSF (total social financing, China's broadest measure of new credit) all fell short. A shortfall may be understandable, given that residential home sales and mortgages ground to a halt in February, while many bank branches were shut under quarantine regulations.
On the positive side, corporate bond issuance held up, and bank loans to companies showed a switch from long-term to short-term loans, signaling financial support to business. Shadow-banking categories have continued to shrink, reflecting policy directives given to banks last year. Banking data in China are heavily seasonal in addition to Lunar New Year influences.
Other Key Markets
Brazilian shares suffer additional blow from veto of spending bill
Stocks in Brazil, as measured by the Bovespa Index, plunged 15.7%. The equity market and the real sold off along with other global markets due to the spreading of the coronavirus and the World Health Organization’s pandemic declaration. As of Friday afternoon, Brazil had about 150 confirmed cases versus approximately 137,000 worldwide. On Friday, health officials stated that test results confirmed that President Jair Bolsonaro did not have the coronavirus that causes COVID-19.
Adding to market pessimism was news that Brazil’s Congress voted to overturn President Bolsonaro’s veto of a social assistance spending bill. According to T. Rowe Price Sovereign Analyst Richard Hall, while the cost of the spending measure is a relatively small percentage (0.27%) of the country’s gross domestic product, the timing of this situation is problematic because it raises concerns about whether the congressional leadership—which preferred to leave the veto unchallenged—can hold the line on fiscal matters.
The government operates with a statutory spending limit, and the expansion of this social benefit will further eat into the little remaining space under the spending cap, thus reducing the government’s ability to provide fiscal stimulus or respond robustly if the pandemic worsens in Brazil. Hall notes that it also moves forward the timeline for when the penalties of reaching the spending cap (such as no real increase in minimum wage, plus draconian limits on hiring and public sector wages) are likely to come into force.
Kingdom of Saudi Arabia
Saudi stocks, as measured by the Tadawul All Share Index, plunged about 14.9% in the five trading sessions since the close of business on Thursday, March 5. The market is closed on Fridays and Saturdays.
While the global spread of the coronavirus created a negative backdrop, the equity market plunged as world oil prices plummeted following the kingdom’s apparent decision to start a price war. Saudi Arabia announced plans to boost oil production starting in April and to offer discounts to global customers. This action was taken following Russia’s decision on Friday, March 6, not to cooperate with a proposed additional OPEC oil production cut of 1.5 million barrels per day. As reported by Bloomberg, Saudi Aramco, which is owned and controlled by the state, has also been ordered to boost its production capacity from 12 million to 13 million barrels per day.
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