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Global Markets Weekly Update: May 01, 2020
U.S.
Small-caps outperform as stocks end mixed
Stocks ended mixed for the week, as investors weighed some hopeful developments in the battle against the coronavirus pandemic against poor economic news and a possible restart to the U.S.-China trade war. Small- and mid-caps outperformed for the week, as the major indexes rounded out their best monthly performance since 1987. Energy shares outperformed within the S&P 500 Index by a wide margin, helped by signs that crude oil consumption was recovering in some countries. Cruise line shares were also notable standouts, surging early in the week on growing optimism that they had the financial resources to survive the current no-sail orders. Health care and utilities shares lagged.
The week began on a positive note, with investors seemingly encouraged by the partial lifting of lockdown orders in some states and the gradual reopening of major economies overseas (see Europe section below). Coronavirus infection and hospitalization trends also appeared to be encouraging in some areas, although the overall rate of new cases in the U.S. appeared to be plateauing rather than falling.
Treatment and vaccine hopes boost sentiment
News of a possible treatment for patients ill with the virus helped spark another leg up for markets on Wednesday. Gilead Sciences announced that its drug remdesivir had performed well in a large trial in reducing the severity of the disease in patients suffering from COVID-19, the disease caused by the coronavirus. Dr. Anthony Fauci, the head of the National Institute of Allergy and Infectious Diseases, stated at the White House that remdesivir had a “clear-cut, significant, positive effect in diminishing the time to recovery.” Progress on a vaccine remained much slower, but investors also seemed to be encouraged by reports that an Oxford University team might have one available as early as September.
Even as the chances for an exit from the pandemic appeared to improve somewhat, the toll that the crisis was already taking on the economy seemed to grow bleaker. Stocks pulled back again Thursday, after the Labor Department reported that another 3.84 million Americans had filed for unemployment, more than expected and bringing the six-week tally to over 30 million, or approximately 18% of the U.S. working population. March personal incomes also fell back more than expected, while personal spending tumbled 7.5%, the largest drop since records began over six decades ago. President Donald Trump appeared to further unsettle markets Thursday evening by stating he was considering imposing new trade sanctions on China in retaliation for its lack of cooperation early in the pandemic.
It was the market’s busiest week of earnings season, with roughly one-third of S&P 500 companies expected to report first-quarter results, according to Refinitiv. Two of the most heavily weighted firms in the index, Facebook and Amazon.com, reported after the close of trading Thursday and beat consensus revenue expectations. Amazon’s earnings fell as the company spent heavily to keep up with booming demand, however, and shares dropped sharply on Friday on news that the House Judiciary Committee had asked CEO Jeff Bezos to testify about allegations that the company had earlier misled Congress on how it interacted with third-party sellers on its site.
Longer-term bond yields moved slightly higher for the week. (Bond prices and yields move in opposite directions.) The Federal Reserve’s policy committee met during the week but left the federal funds target rate unchanged, as expected. Fed Chair Jerome Powell stated that the committee will hold its policy rate near 0% until the economy is on track to meet the Fed’s employment and inflation goals.
Fallen angels enter high yield indexes
According to T. Rowe Price traders, the investment-grade corporate bond primary calendar was in the spotlight ahead of month-end. Heavy issuance on Thursday caused the week’s total to be twice the expected amount, and our traders reported that most deals were met with solid demand. High yield bond investors were largely focused on earnings releases and the secondary trading of recent new issues. Strong demand for recent “fallen angels”—or companies whose debt has recently lost investment-grade status—as they transitioned to high yield indexes drove much of the market’s buying activity. The plunge in oil prices has resulted in a number of energy issuer downgrades in recent weeks.
The broad municipal market produced negative returns for much of the week and underperformed Treasuries, as several primary market deals were postponed or struggled to price without concessions while secondary market activity remained weak. Amid growing concerns surrounding the loss of revenues for muni issuers, the Fed announced that it was expanding the eligibility criteria for cities and counties that can utilize its municipal lending facility. Cities with populations of 250,000 or more and counties with populations of at least 500,000 will now be eligible to participate.
U.S. Stocks1
Index |
Friday's Close |
Week's Change |
% Change YTD |
DJIA |
23,723.69 |
-51.58 |
-16.87% |
S&P 500 |
2,830.71 |
-6.03 |
-12.38% |
Nasdaq Composite |
8,604.95 |
-29.57 |
-4.10% |
S&P MidCap 400 |
1,586.51 |
36.14 |
-23.10% |
Russell 2000 |
1,257.39 |
24.34 |
-24.64% |
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 equities rose as investors welcomed announcements that lockdown measures will soon start being lifted. However, the European Central Bank’s decision not to inject more stimulus into the economy eroded gains. The pan-European STOXX Europe 600 Index ended the week 2.60% higher. Germany’s Xetra DAX Index surged 5.08%, France’s CAC 40 climbed 4.07%, and Italy’s FTSE MIB Index gained 4.93%. The UK’s FTSE 100 Index rose 0.73%.
ECB unveils new liquidity measures
The European Central Bank (ECB) left its key deposit rate at a record low of -0.5% and reaffirmed its plan to buy more than €1 trillion of bonds to shore up financial markets. It also expanded its loans to banks through targeted longer-term refinancing operations (TLTROs), offering them at an interest rate as low as -1% from June. The bank further announced a round of fresh lending, called non-targeted pandemic emergency longer-term refinancing operations (PELTROs), starting in May with a rate of -0.25% “to support liquidity conditions in the euro area financial system and contribute to preserving the smooth functioning of money markets by providing an effective liquidity backstop.” ECB President Christine Lagarde said the central bank was “fully committed to doing everything possible within its mandate to support every citizen of the eurozone” but that “an ambitious and coordinated fiscal stance is critical.”
Eurozone GDP shrinks at record rate
Gross domestic product (GDP) in the common currency zone shrank in the first quarter by 3.8% on the quarter, more than the 3.5% forecast, because of lockdowns to curb the spread of the coronavirus. Spanish and French economic contractions were also worse than expected, at 5.2% and 5.8%, respectively. France’s slump was the worst since 1949. Second-quarter readings are expected to be worse, as most lockdowns started after early March and a reopening of economies will be gradual. Eurozone inflation, meanwhile, slowed to 0.4% in April, well under the ECB’s target of almost 2%.
Italy's credit rating was unexpectedly reduced
Fitch unexpectedly cut Italy’s credit rating to BBB-, one level above below investment grade, due to the impact of the coronavirus. Fitch had been due to review the rating in July. The previous Friday, S&P Global Ratings left Italy’s rating at BBB with a negative outlook, despite forecasting a sharp increase in the debt level to 153% of GDP. Although Fitch’s downgrade raises the prospect that the bloc’s third-biggest economy could lose access to ECB financing, the central bank has already started buying Greek debt temporarily and accepting below investment-grade bonds as collateral from banks in repurchase operations.
Several nations announce plans to ease lockdowns
Italy, Spain, France, Germany, and Greece gave more detailed plans on gradually reopening their economies after the coronavirus lockdowns, while warning about a second wave of infections.
- Italian Prime Minister Giuseppe Conte said Italy's manufacturers will restart on May 4, and physical activity outside home will be allowed. However, schools will remain closed until September. He said a second phase of reopening shops and public places will take place on May 18.
- Germany allowed small shops to reopen this week. Playgrounds, museums, and churches can reopen from Monday, to be followed soon after by schools and sports events.
- In France, businesses can reopen from May 11, excluding cafés, restaurants, and large meeting places such as big museums and cinemas. Local public transport will largely be restored. Schools will then reopen progressively.
- In Spain, Prime Minister Pedro Sanchez said restrictions would be lifted in four stages over the next two months with regional variations. Mainland Spain will join the first phase, when restaurants, hotels, small shops, and places of worship can reopen on May 11. Most schools will not reopen until September.
- In Greece, restrictions on movement in towns and cities will be lifted from May 4, when bookshops, electronics and sports equipment stores, and hairdressing salons will reopen.
Japan
Despite a steep decline on Friday, May 1, Japanese stocks gained in the holiday-shortened trading week. The Japanese equity markets were closed for Showa Day on Wednesday, April 29, to celebrate the birthday of former Emperor Showa, who died in 1989. Showa Day is the first of four market holidays in the Golden Week. The Nikkei 225 Stock Average advanced 357 points (1.9%) and closed at 19,619.35, down 17.1% for the year-to-date period. The large-cap TOPIX Index and the small-cap TOPIX Small Index both advanced more modestly for the week. The yen strengthened and closed near ¥107 per U.S. dollar on Friday.
The BoJ employs additional easing measures
Following the April monetary policy committee meeting on Monday, April 27, the Bank of Japan (BoJ) announced that it would remove the ¥80 trillion annual quota for Japanese government bond purchases in favor of unlimited purchases as warranted. However, in a surprise move, the central bank said it would approximately triple its purchases of corporate bonds and commercial paper to about ¥20 trillion annually from ¥4.2 trillion and ¥3.2 trillion, respectively, a much larger move than was leaked to the press. The bank affirmed that it will closely monitor the economic impact of the coronavirus and strengthen its special coronavirus funds-supplying operations and will not hesitate to employ additional easing measures.
As expected, long- and short-term policy rates were unchanged, and the BoJ’s outlook report reflected significant downward adjustments to its economic forecast due to the global pandemic. The central bank believes the negative economic impact from the coronavirus will begin to dissipate in the back half of the year. The committee said its latest measures are intended to bolster liquidity as the current conditions pose risks for Japan’s economy and price stability. Although analysts were mixed on the effectiveness of additional government bond purchases, increased new issuance for fiscal stimulus was viewed as significant. Most economists agree that the new guidance affords the BoJ more flexibility, and some analysts view the removal of an explicit buying target as a step toward normalizing quantitative easing at some point in the future.
Japan expected to extend its nationwide state of emergency
Japan’s leaders intend to maintain the nation’s current state of emergency for about another month, until the end of May or through the first week in June (it was originally set to end on May 6). The additional length of the stay-at-home order is likely because of the government’s concerns about social distancing during Golden Week; the potential for another spike in new coronavirus infections; and because hospitals, which have been the primary source of contagion, have remained at overcapacity levels since the start of the crisis. According to the latest report, the government's goal of reducing human-to-human contact by 80% has not been achieved; this mandate is considered critical for terminating the state of emergency. Recent statistics show that there have been more than 14,000 confirmed coronavirus cases in Japan and approximately 450 deaths.
China
Financial markets in China were shut on Friday for an extended Labor Day holiday and were set to open again on Wednesday, May 6. Over the shortened week, the CSI 300 large-cap index rose 3.0%, beating the Shanghai Composite, which gained 1.8%.
In an attempt to boost consumer spending, the Labor Day holiday is one day longer than last year. Most analysts believe a mood of caution will prevail, however, as workers worry about job security, global recession, and a potential second wave of infections. Per capita disposable income fell by 3.9% in the first quarter, so any rebound due to pent-up consumption may be brief. Cinemas remain closed, and shopping malls are imposing social distancing and frequent temperature checks. While a few travel restrictions remain, with some local governments discouraging travel between provinces, signs suggest that economic and social activity continue to normalize across China.
Indeed, a senior health official reported on Monday that Wuhan, where the pandemic began, has no remaining cases of COVID-19 in its city hospitals. Beijing this week downgraded its emergency response level and relaxed quarantine restrictions on new arrivals. This triggered an immediate sharp rise in online domestic flight bookings to the capital. The Ministry of Commerce, meanwhile, is promoting an online shopping festival in May, and some local governments have issued shopping vouchers to residents, mostly for nominal amounts.
National People's Congress to open on May 22
On Tuesday, in another sign of growing confidence, Beijing announced that the annual National People's Congress (NPC), originally scheduled for March, will begin on May 22, although some sessions of the NPC are expected to be undertaken online this year. It is not clear how many of the 2,900 delegates will travel to Beijing to attend the congress in person. Also postponed in March, the Boao Forum for Asia, China's equivalent to Switzerland’s World Economic Forum in Davos, has been cancelled and will not take place in 2020.
PMIs point to slow progress in China's recovery
China's April purchasing managers’ indexes (PMIs) were mixed. The nonmanufacturing PMI from the National Bureau of Statistics (NBS) improved, beating consensus, while the Caixin manufacturing PMIs disappointed. Profits recorded by industrial enterprises plunged 36.7% in the 12 months ended in Marchm following 38.3% year-over-year contractions in the first two months of 2020, according to NBS data. Meanwhile, the first-quarter GDP report revealed a surge in inventory investment associated with coronavirus lockdowns, reflected in a 15% year-on-year increase in the industrial inventory of finished goods. Running down unwanted inventories is likely to act as a drag on growth in the second quarter.
While a domestic economic recovery is underway, China's export industries remain vulnerable to the global recession taking hold. As the global recession has only just begun to make its presence felt, the pressure on Chinese exports is widely expected to increase in the coming months. South Korean exports are the first to be published in Asia and are often viewed as something of a bellwether. Released on Friday, South Korea's customs exports fell 24.3% year on year in April, close to the consensus, with weakness across all main export categories.
Moody's reaffirms China's sovereign rating
On Tuesday, Moody's Investors Service released a generally positive report on China. The rating agency confirmed China's stable A1 rating and said that the sovereign's credit strength was intact. According to Moody's, China still has the policy space needed to combat the coronavirus and promote economic recovery. Targeted fiscal and monetary easing will help facilitate a moderate economic recovery in the second half of the year. While more policy measures can be expected if the recovery is weak, aggressive measures to hit some predetermined official growth target as in 2008 are considered unlikely.
Other Key Markets
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about 1.0% through the close of business on Thursday. The market was closed on Friday for the Labor Day holiday. The real continued to weaken versus the U.S. dollar, partly due to expectations that low inflation readings would enable the central bank to reduce short-term interest rates again at its upcoming monetary policy meeting. Comments from Economy Minister Paulo Guedes about allowing the real to find an appropriate exchange rate also weighed on the currency, as it implies no willingness for authorities to make a massive or extended commitment to intervene in the currency markets.
In addition, the real struggled amid growing tensions within President Jair Bolsonaro’s administration. Following the recetn acrimonious departure of the health minister, Justice Minister Sergio Moro resigned after he accused Bolsonaro of interfering with federal police matters by firing the director-general. T. Rowe Price Sovereign Analyst Richard Hall notes that impeachment talk is likely to increase, but he believes that impeachment is unlikely—in part because it is a lengthy process—unless Bolsonaro’s popularity drops so much that the people plead with Congress to remove him or evidence turns up that Bolsonaro has committed a crime or some other impeachable offense.
South Africa
South African stocks, as measured by the FTSE/JSE All Share Index, returned about 1.6% through the close of business on Thursday. The market was closed on Monday for the Freedom Day holiday and on Friday for Workers’ Day.
On Thursday, S&P Global Ratings downgraded South Africa’s sovereign debt deeper into junk bond territory, from BB to BB-, with a stable outlook. All three major credit rating agencies are currently assigning below investment-grade ratings to South Africa; about one month ago, Moody’s was the last of the three to downgrade South African debt out of the investment-grade universe. According to T. Rowe Price Fixed Income Trader Chris O’ Donoghue, S&P’s downgrade decision, which reflects the economic impact and fiscal implications of the coronavirus pandemic and an extended lockdown, was not a surprise. However, the timing was somewhat sooner than he expected.
Recently, South African President Cyril Ramaphosa unveiled an economic stimulus package worth approximately 500 billion rand—more than generally expected—in hopes of preventing a deeper economic downturn. According to T. Rowe Price Credit Analyst Roy Adkins, the spending measures could increase the likelihood of funding stresses. Part of the package (130 billion rand) represents reallocated spending, another part (200 billion rand) is a loan guarantee arrangement for businesses and not direct spending, and the remainder (170 billion rand) represents new spending. Adkins projects a revenue shortfall of approximately 200 billion rand, which means the South African government will need to raise about 370 billion rand. Adkins notes that funding can be procured from a variety of sources, however.
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