Global Markets Weekly Update: November 20, 2020
U.S.
Indexes touch new highs but end mixed
The major indexes ended mixed, as good news on the coronavirus vaccine front continued to be offset by worries about the worsening of the pandemic in most parts of the country. The Dow Jones Industrial Average, the S&P MidCap 400 Index, and the small-cap Russell 2000 Index all reached new intraday highs in the first part of the week before surrendering some of their gains. Energy shares outperformed as oil prices rose on hopes for an end to the pandemic in 2021, as well as signals that OPEC and other major oil exporters would delay a global production increase planned for January. Health care and utilities shares lagged.
Stock futures rose on the heels of two significant vaccine announcements during the week. On Monday, Moderna reported early data showing that its mRNA vaccine was 94.5% effective in preventing coronavirus infections while also appearing to prevent severe disease in the few test subjects who did contract the virus. Investors seemed further encouraged that Moderna’s vaccine confirmed the efficacy of the mRNA approach also used by Pfizer in partnership with Germany’s BioNTech. Indeed, on Wednesday, the two companies announced revised data showing that their vaccine was 95% effective, a higher level than the 90%+ initially reported. On Friday morning, Pfizer announced that it had filed for emergency use authorization of the vaccine with the U.S. Food and Drug Administration.
U.S. crosses grim milestone
Further evidence emerged during the week that the pandemic and its drag on the economy would get worse before the vaccines would become widely available, however. New local shutdowns and restrictions were announced across the country as case counts rose and hospital systems grew more stressed. Sentiment seemed to take a particular blow from news Wednesday that the New York City public school system, the nation’s largest, would be switching to remote learning. Meanwhile, mobility measures, credit card purchases, and other high-frequency data showed that consumers were growing more cautious and staying closer to home, whether because of mandates or personal choice. In a grim milestone, the number of U.S. fatalities attributed to the disease crossed 250,000.
It also appeared unlikely that substantial federal fiscal aid would help offset the impact of the surge in the virus, as it had in the spring. The chances for a bipartisan agreement on a new stimulus package appeared to remain slim, especially with President Donald Trump continuing to refuse to concede the election. T. Rowe Price traders reported that the market did catch a bid late in the afternoon Thursday, after rumors surfaced that Senate Majority Leader Mitch McConnell had agreed to resume negotiations with Democrats in Congress.
Around the same time, however, Treasury Secretary Steven Mnuchin announced in a letter to the Federal Reserve that he would allow several of the central bank’s emergency lending programs to expire at the end of the year. Mnuchin cited improved financial conditions in requesting the return of USD 455 billion of unused funding, but in a rare move, Fed officials quickly released a statement announcing their disagreement with the decision, citing a “still-strained and vulnerable economy.” On Friday, Mnuchin stated that he planned instead to use the money to fund direct grants to workers and small businesses, which may have muted the impact of the decision on markets.
Jobless claims rise, retail sales disappoint
The week’s economic data arguably provided evidence for the Fed’s continued caution. Weekly jobless claims rose for the first time in over a month, from 711,000 to 742,000. Continuing claims through state insurance programs continued to fall, from 6.8 million to 6.4 million, although the drop was mostly offset by rising claims through a federal program providing extended benefits, from around 4.1 million to 4.4 million. Retail sales excluding autos in October missed expectations and grew at the slowest pace (0.2%) since April. Industrial production rose a bit more than expected in October, but regional manufacturing gauges indicated slowing expansion. The housing sector remained the standout in the recovery, with sales and construction indicators hitting their highest levels since 2006–2007.
The mixed economic outlook and growing coronavirus concerns pushed the yield on the benchmark 10-year Treasury note to its lowest level in two weeks. (Bond prices and yields move in opposite directions.) The broad municipal bond market delivered solid gains through most of the week and extended its outperformance versus Treasuries for the month-to-date period. T. Rowe Price traders reported strong buying activity in mid- to lower-quality municipals. The largest deal of the week, New Jersey’s sale of USD 3.7 billion in emergency general obligation bonds, was met with intense demand and repriced lower.
Asian demand supports corporate bond market
Positive coronavirus vaccine headlines led investment-grade corporate bond spreads tighter to start the week, with higher-risk energy and pandemic-sensitive issuers, including air lessor and leisure names, outpacing the broader market. The economic backdrop was dampened by the rapid rise in COVID-19 cases, but spreads—the yield offered over Treasuries and an inverse measure of the sector’s relative appeal—largely held or moved tighter, supported by strong demand from Asia and healthy trading volumes. The primary calendar was active, and the levels of new issuance surpassed expectations.
Solid equity returns early in the week supported the performance of high yield bonds. Favorable technical conditions due to steady new issuance and positive flows were also supportive, and our traders noted that investors generally seemed to focus on putting money to work in new deals. Credit spreads tightened across all quality tiers.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
29,263.48 |
-216.33 |
2.54% |
S&P 500 |
3,557.54 |
-27.61 |
10.11% |
Nasdaq Composite |
11,854.97 |
25.68 |
32.12% |
S&P MidCap 400 |
2,148.51 |
35.25 |
4.14% |
Russell 2000 |
1,785.74 |
41.70 |
7.03% |
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 rose for a third consecutive week amid optimism on potential coronavirus vaccines. However, concerns that soaring rates of infection might trigger harsher restrictions curbed gains. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.15% higher, while Germany’s DAX Index advanced 0.46%, France’s CAC 40 gained 2.15%, and Italy’s FTSE MIB climbed 3.84%. The UK’s FTSE 100 Index added 0.55%.
Core eurozone bond yields fell slightly on the week. Yields rose at the start, with the German 10-year bund yield moving from -0.55% to about -0.52%, after more positive coronavirus vaccine news spurred a sell-off in debt that the market views as a haven. Lingering concern over the high infection rate, Hungary’s and Poland’s vetoes to the European recovery fund, and orders from the U.S. Treasury to pull money from some pandemic lending programs dragged yields lower, however. UK gilts and peripheral eurozone government debt largely tracked core markets.
Governments mull lockdown extensions
Several major European countries are considering whether to extend monthlong lockdowns to limit the coronavirus’ spread, even though infection rates may be showing signs of leveling off or falling in some areas. Press reports said the UK might prolong the lockdown beyond its scheduled end on December 2, while giving a five-day respite over the Christmas holiday. A French government spokesperson said that measures would not be eased anytime soon and that President Emmanuel Macron was planning to address the nation next week regarding the situation. German federal and state leaders agreed to postpone a decision on further lockdown measures until next week.
EU recovery package blocked; little progress in talks with UK
Hungary and Poland blocked the European Union’s (EU) planned EUR 1.8 trillion fiscal package, which includes a large fund to help economies weather the damage caused by the coronavirus. They oppose a mechanism that would allow the EU to block disbursements to countries violating its rule of law principles. The Politico news website reported that EU leaders at their Thursday videoconference summit did not indicate how the standoff might be resolved. German Chancellor Angela Merkel said she would hold talks with the leaders of the two countries while defending the existing proposal.
Reports suggest that three main areas of contention—a level playing field for companies, fishing rights, and settling trade disputes—persist as the UK and EU negotiate a post-Brexit agreement on trade. Face-to-face talks have been suspended because a senior negotiator tested positive for COVID-19, although officials will keep working remotely, according to Reuters. France, the Netherlands, and Belgium urged the European Commission to start implementing contingency measures in case there is no deal before the Brexit transition ends on December 31.
Japan
Japanese stocks ended the week with relatively modest gains. The Nikkei 225 Stock Average advanced 0.6% (142 points) and closed at 25,527.37. The widely watched market yardstick climbed above 26,000 on Tuesday but trended lower for the remainder of the week and closed the year-to-date period ahead 7.9%. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, also recorded positive returns. The yen strengthened versus the U.S. dollar and traded near JPY 104 on Friday.
GDP expands faster than expected
Japan’s economy grew at an annualized 21.4% clip in the quarter ended September 30, which was its fastest growth rate since 1968, well ahead of the consensus estimate for 18.9% growth and the first quarter of growth in a year. The primary gross domestic product (GDP) growth driver was net external demand, which contributed more than half of the headline gain, led by a resurgence in global auto demand, strong domestic private demand, and a decline in imports. Private consumption generated a large contribution due to the government’s coronavirus stimulus efforts, but that was partially offset by weakness in business and residential investment. While encouraging—5.0% quarter-to-quarter growth—the economy is still weaker than before the onset of the pandemic, and the outlook for the economy remains guarded because of the uncertainties surrounding the recent spike in coronavirus infections and the potential for additional social distancing measures. Most analysts expect further GDP gains in the December quarter but at a more normalized and subdued pace.
The Japanese government confirmed that approximately 2,400 new coronavirus cases were reported on Thursday, recording back-to-back daily all-time highs. A record-high number of new cases were recorded in Tokyo and the surrounding prefectures, due to clusters in medical facilities and nursing homes, although the latest spike in new cases is not yet a strain on hospital capacity. In response, Prime Minister Yoshihide Suga again increased Japan’s alert level to the highest of four stages. Medical experts have argued that the “To Go Travel” campaign to boost domestic spending has contributed to the rise in the infection rate, but policymakers disagreed and intend to maintain the program.
Summer Olympics back on track for 2021
On Monday, Prime Minister Suga and International Olympic Committee President Thomas Bach agreed that the Tokyo Olympics should be held despite the latest surge in the pandemic. While details on the number of spectators permitted and possible vaccination efforts remained vague, reports suggested that all visitors to Japan would need to be vaccinated and would be exempt from the 14-day quarantine period. The Olympic games are scheduled to be held from July 23 to August 8, 2021, and the Paralympics from August 24 to September 5, 2021. At a press conference following the meeting, Prime Minister Suga expressed his determination to hold the games as “proof that humanity has defeated the virus.”
China
Chinese stocks rose strongly after solid economic data lifted investors’ risk appetite. For the week, the large-cap CSI 300 Index gained 1.78% while the benchmark Shanghai Stock Exchange Composite Index added 2.04%, according to Reuters data. In fixed income markets, the yield on the sovereign 10-year bond increased six basis points to 3.34%. In currency trading, the renminbi strengthened by 0.6% against the U.S. dollar to close at 6.570. The People’s Bank of China (PBOC) injected RMB 800 billion (about USD 121 billion) in medium-term loans into the banking system and left interest rates on hold for the seventh straight month. The central bank also kept its one-year medium-term lending facility rate to financial institutions unchanged at 2.95%.
Rumblings in China's corporate bond market
Yields on Chinese high yield bonds rose during the week after an unprecedented number of defaults among large state-owned enterprises (SOEs). After the coronavirus, some SOEs reportedly have struggled to make their bond payments, although most China investors appear to believe that Beijing would prevent the failure of a large SOE. The market tumult led to around 126 new issues being withdrawn as defaults by SOEs hit a record. Separately, a new directive banning domestic debt issuers from buying their own bonds at the time of issue weighed on sentiment. The order was issued by the National Association of Financial Market Institutional Investors, which falls under the PBOC and shares oversight of corporate bond issuance in China’s interbank market.
China signs RCEP trade deal
China and 14 other Asian countries signed the Regional Comprehensive Economic Partnership (RCEP), a trade deal that will eventually form a free trade area that includes over 30% of current global GDP and is expected to rise to about 50% of global GDP by 2030. The deal brings together China, Japan, and South Korea—the region’s top-three economies—under a regional trade pact for the first time and includes 10 Southeast Asian countries, Australia, and New Zealand. The deal calls for tariffs and quotas to be eliminated for 65% of regional trade in goods and sets a target of 90% in 20 years, with possible expansion to include other services and countries.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned about 2.5%. The central bank held its first monetary policy meeting during the week with Governor Naci Ağbal. In the days prior to the meeting, Turkish President Recep Tayyip Erdoğan spoke out against high interest rates, repeating his unconventional belief that high rates cause Turkey to have high inflation.
Against the backdrop of protracted lira weakness contributing to elevated inflation, T. Rowe Price sovereign analyst Peter Botoucharov believes that Erdoğan may have been distancing himself ahead of time from an expected large interest rate increase. Indeed, on Thursday, the central bank raised all three of its main lending rates: the one-week repo auction rate (from 10.25% to 15.00%), the overnight lending rate (from 11.75% to 16.50%), and the late liquidity window facility rate (from 14.75% to 19.50%). All of these rates are well above the central bank’s projected 12.1% inflation rate at the end of 2020.
In their post-meeting statement, central bank officials noted that the “lagged effects of depreciation in Turkish lira, increasing international food prices and deterioration in inflation expectations…” are worsening the country’s inflation outlook. In response, policymakers have decided “to implement a transparent and strong monetary tightening in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process.”
Although central bank officials insist that “the tightness of monetary policy will be decisively sustained until a permanent fall in inflation is achieved,” some are skeptical that the central bank’s actions and pronouncements will convince observers that the new leadership will be more independent of the Erdoğan regime.
Chile
Chilean stocks, as measured by the IPSA Index, returned about 1.2%.
A new piece of legislation allowing Chileans to withdraw money from the pension system due to the pandemic-driven economic downturn—the second such bill this year—was approved by the lower chamber of the legislature and appeared likely to be voted upon by the entire senate in the coming week. One notable change to the bill that has already been made by the senate is to reduce the period permitting pension withdrawals from 30 days to 15 days.
According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the head of the central bank, Mario Marcel, has expressed opposition to the legislation due, in part, to its potential to have negative implications for asset prices. While Marcel affirmed that the central bank stands ready to help reduce market volatility, he noted that the central bank already holds USD 8 billion in bank bonds that it purchased because of the first pension withdrawal legislation. Marcel also cautioned that the central bank does not have unlimited capacity to purchase bank bonds without becoming the largest or the only investor of a particular security. Gifford believes that, as an alternative, the central bank could purchase local government bonds, although policymakers have reserved that option for financial stability reasons—for example, if a yield surge prompted the central bank to intervene with asset purchases.
According to Gifford, Chile’s president, Sebastián Piñera, is already preparing to block the legislation by sending the matter to the Constitutional Court, where his political party has a majority representation among the judges, so there is no guarantee that the legislation will be enacted. However, Piñera's political capital has waned, support for the bill among the populace and among lawmakers is widespread, and even some from Piñera’s political party have been pushing for the legislation. Gifford believes that the bill will ultimately become law, but he will be monitoring the situation closely to see how events unfold.
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