Global Markets Weekly Update: October 23, 2020
U.S.
Smaller-cap shares outperform as benchmarks end mixed
The major benchmarks ended mixed, as investors reacted to stimulus negotiations while monitoring third-quarter corporate earnings reports. The technology-heavy Nasdaq Composite Index performed worst, dragged lower by weakness in bellwether Apple, while the S&P MidCap 400 and small-cap Russell 2000 indexes managed modest gains. The technology sector also fared worst within the S&P 500 Index, while communication services shares were strong, helped by gains in internet giants Facebook and Alphabet (parent company of Google), despite Tuesday’s news that the latter had become the target of a Justice Department antitrust lawsuit.
Eyes remain on possible stimulus package
Stocks recorded most of their losses for the week on Monday. Over the previous weekend, futures moved higher after President Donald Trump repeated his willingness to back a stimulus deal even larger than the USD $2.2 trillion relief package proposed by Democrats. Stocks moved steadily lower once trading opened, however, as opposition to a large new package appeared to harden in the Republican-led Senate. Nevertheless, a narrowing of differences between Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi seemed to emerge as the week progressed, with Speaker Pelosi stating on Thursday that a deal was “just about there.”
The earnings reporting season got into full swing during the week, with 91 S&P 500 companies scheduled to report third-quarter results, according to Refinitiv. Netflix shares fell sharply on Wednesday, following news of subscriber gains that came in well below consensus expectations. Other notable movers included social media company Snap, which surged on upside surprises in profits, revenues, and user growth and seemed to provide a tailwind to rival Twitter. Conversely, shares of Intel, one of the Dow Jones Industrial Average’s 30 components, fell over 10% in early trading Friday after investors appeared disappointed by results in its data center business. As of the end of the week, analysts polled by FactSet were expecting overall earnings for the S&P 500 to have declined 16.5% in the quarter versus the year before. Of the companies that had reported to date, however, 84% had beaten earnings estimates—the highest proportion since FactSet began tracking data in 2008.
Housing remains the standout in the recovery
The week’s economic data seemed generally supportive, especially regarding the housing sector. Overall housing starts in September missed expectations, but single-family construction and overall building permits reached new 13-year highs. Existing home sales also surprised on the upside, jumping 9.4% in September to their highest level since May 2006. Weekly jobless claims broke a streak of negative surprises and fell more than expected to 787,000, the lowest level since March. Continuing claims also continued to fall sharply, from a revised 9.4 million to 8.4 million, although observers noted that the expiration of unemployment benefits for some workers might be partly at work.
Treasury yields hit four-month high
Hopes for a near-term stimulus deal lifted Treasury yields through most of the week, with the yield on the benchmark 10-year Treasury note marking its highest level (0.87%) since June 9. (Bond prices and yields move in opposite directions.) Increases in longer-term yields resulted in a meaningful steepening of the Treasury curve. The differences in yield in the two-year/10-year segment and the five-year/30-year segment reached their widest levels since summer.
The broad municipal bond market weakened slightly but outperformed U.S. Treasuries for most of the week. The primary market saw heavy levels of new issuance, with many borrowers coming to market in advance of the election, but demand remained solid overall. T. Rowe Price muni traders noted that investors appeared to be anticipating greater demand given the potential for higher marginal tax rates if Democrats win the presidency and majorities in both chambers of Congress. Among the week’s most prominent deals, California sold over USD $1 billion of general obligation (GO) bonds, which were well received. The additional yield over AAA munis that investors demanded for Illinois bonds decreased over the week, particularly for shorter-term issues, as the state’s competitive sale of GO debt was met with strong demand.
High yield investors welcome consolidation in energy sector
Solid demand from investors in Asia and balanced flows supported the investment-grade corporate bond market. Trading volumes increased throughout the week, and primary issuance levels were in line with expectations. The high yield bond market was relatively quiet, according to our traders. New issuance was manageable, and flows into high yield funds provided technical support. The prominent energy sector enjoyed solid demand, partly due to news of the latest deal in a series of mergers and acquisitions, as companies take measures to weather the low oil price environment.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
28,335.57 |
-270.74 |
-0.71% |
S&P 500 |
3,465.39 |
-18.42 |
7.26% |
Nasdaq Composite |
11,548.28 |
-123.28 |
28.71% |
S&P MidCap 400 |
2,015.59 |
18.26 |
-2.30% |
Russell 2000 |
1,639.65 |
5.85 |
-1.73% |
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 fell on signs that the economic recovery was stalling amid tighter restrictions to curb surging coronavirus infections. The pan-European STOXX Europe 600 Index ended the week 1.36% lower, and major country indexes also declined: Germany’s DAX Index slipped 2.04%, France’s CAC 40 gave up 0.53%, and Italy’s FTSE MIB dropped 0.54% The UK’s FTSE 100 Index lost 1.00%, in part reflecting strength in the pound after the resumption of talks with the European Union (EU) on post-Brexit trade ties. UK stocks tend to fall when the pound rises because the index includes many multinationals with overseas revenues.
The German 10-year bund yield inched up on hopes that the U.S. government would pursue additional measures to stimulate its economy. Yields on sovereign bonds from peripheral European economies largely followed suit. Italian government debt yields also climbed after the sale of EUR 8 billion 30-year bonds, which received EUR 90 billion in offers. An inaugural issue of EU 10- and 20-year social bonds attracted bids of more than EUR 233 billion, far exceeding the EUR 17 billion on offer. The issue is part of the EU’s EUR 100 billion SURE (Support to mitigate Unemployment Risks in an Emergency) bond program designed to support jobs.
Additional lockdowns to curb coronavirus
Several countries tightened mobility restrictions to curb rising cases of coronavirus infections. Ireland announced a six-week full lockdown, while Northern Ireland will follow a less strict regime for a month. Lombardy in northern Italy and Belgium imposed curfews; the Madrid region in Spain reportedly is considering one. France extended a curfew to cover almost 70% of its population and said the state of emergency could extend until February 2021. In the UK, Wales opted for a full lockdown lasting 17 days. In England, the highest, tier-3 lockdown regime spread was extended to cover South Yorkshire and Manchester and could be implemented in other areas soon. More English regions and cities were also placed under a tier-2 lockdown, while some large field hospitals began to reopen.
Amending an earlier bailout plan, the UK government increased support for jobs and workers hit by restrictions in tier-2 areas after growing clamor from firms in the hospitality sector. The Italian government approved a preliminary 2021 budget that includes expansionary measures totaling EUR 39 billion, including EU recovery funds, to help heal the economic damage caused by the coronavirus.
Economic recovery shows signs of faltering
European Central Bank President Christine Lagarde said in an interview with French newspaper Le Monde that the European economic recovery risked “losing momentum” as governments imposed new restrictions to curb the coronavirus pandemic. Earlier, she told an online meeting of the G30 finance ministers, central bankers, and academics that it was “clear that both fiscal support and monetary policy support have to remain in place for as long as necessary and ‘cliff effects’ must be avoided.” She also urged European leaders to step up efforts to approve the EUR 750 billion recovery fund so that money could be distributed early next year.
Purchasing managers’ data for October indicated that business activity in the eurozone contracted in October, a sign that the economic recovery is faltering. IHS Markit’s Flash Composite Purchasing Managers’ Index (PMI) fell to 49.4 in October, dragged down by a continuing slowdown in services activity. (PMI readings of 50 mark the difference between contraction and expansion.) The services PMI dropped to 46.2 from 48.0, largely due to coronavirus restrictions.
Japan
Japanese stocks generated gains for the week. The Nikkei 225 Stock Average advanced 106 points (0.5%) and closed at 23,516.59. The widely watched market yardstick has declined (0.6%) for the year-to-date period. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, posted mixed results. The yen strengthened modestly and traded below JPY 105 per U.S. dollar on Friday.
BoJ expected to lower its forecasts for economic growth and inflation
The Bank of Japan’s (BoJ) policy-setting committee will convene on October 28–29 and is expected to lower its projections for gross domestic product (GDP) growth and inflation for the current fiscal year, which ends on March 31, 2021. The primary reason for lowering the growth forecast is the larger-than-expected decline in economic activity in the June quarter caused by the coronavirus pandemic. Data released after the BoJ’s forecast in July showed that Japan’s economy contracted at an annualized 28.1% pace in the period, its worst decline in the postwar era. Additionally, the latest BoJ quarterly survey, compiled in October, showed that large-cap firms plan to reduce capital spending to 1.4% in the current business year from 3.2% in June. However, most economists do not expect any additional stimulus measures unless conditions worsen significantly, because the central bank believes the economy is showing signs of a gradual improvement.
The central bank is also expected to modestly lower its inflation forecast for fiscal 2020, in part because of the “To Go” campaign, which offers vouchers and government discounts for domestic travel. The bank currently projects core consumer prices to fall 0.5% this fiscal year. Although exports and manufacturing output have rebounded, domestic consumption has remained weak. Household spending fell for an 11th consecutive month in August, and wages declined, keeping a lid on consumer spending. The BoJ is not expected to make any significant adjustment to its longer-dated economic growth and inflation targets.
Japanese exports decline at a slower rate
Exports from Japan fell 4.9% in September compared with the same period in 2019, which was the smallest rate of decline in seven months. Automobile and truck shipments to the U.S. have rebounded to the best levels since the onset of the coronavirus. By destination, exports to the U.S. increased for the first time in 14 months, and, while exports to the Asia region dipped 2.0%, shipments to China—Japan’s largest trading partner—rose 14.0%. The slower pace of export declines coupled with an improvement in factory output signals that the economy may be on the mend.
China
Chinese stocks retreated for the week, with the large-cap CSI 300 Index and benchmark Shanghai Composite Index shedding 1.5% and 1.8%, respectively. The yield on China’s 10-year sovereign bond decreased, slowing a steady advance dating back to July. On the monetary policy front, the People’s Bank of China Governor Yi Gang said that China’s key debt ratios could moderate in the coming months as economic growth picks up. Yi also stated that the central bank would pursue a balanced approach to supporting China’s economy, saying that monetary policy “needs to guard the gates of money supply and properly smooth out fluctuations” in the country’s macro leverage ratio. The renminbi currency continued its strengthening against the U.S. dollar aided by strong inflows into China’s domestic bond market, whose relatively high yields have attracted foreign investors.
On the economics front, China reported its economy expanded 4.9% in the third quarter from a year earlier. The GDP report, along with September economic indicators, offered further evidence that China’s economy was gaining momentum after the coronavirus crisis hit early this year. Industrial output, for example, grew by 1.2% in September from August and surpassed pre-pandemic levels. By comparison, industrial activity remains 3% to 7% below pre-crisis levels in the U.S. and Europe.
In company news, Chinese e-commerce giant Alibaba began promotions for “Singles Day,” the world’s largest consumer shopping event it holds on November 11 each year. This year’s event will be extended by three days to meet an expected coronavirus-driven surge in demand. Alibaba said it expects about 800 million consumers to participate in this year’s Singles Day, which despite drawing huge publicity is not considered economically significant given that it cannibalizes consumer spending from adjacent time periods. Last year, Alibaba’s gross merchandise value—a gauge of sales across the company’s various e-commerce platforms—totaled RMB 268.4 billion, or roughly USD 38.3 billion. By comparison, 2019 “Black Friday” online sales totaled USD 7.4 billion.
Mainland renewable energy stocks have also been in focus after President Xi Jinping pledged at the United Nations in September that China would achieve carbon neutrality by 2060. An index of 40 renewable energy stocks compiled by data provider Wind has gained around 5% over the past month, reflecting the belief among domestic investors that green energy will feature prominently in China’s next five-year economic plan to be unveiled at month-end.
Other Key Markets
Turkey
Stocks in Turkey, as measured by the BIST-100 Index, returned about -0.2%. Shares rose in the first half of the week, as investors waited for the outcome of the central bank’s October 22 monetary policy meeting, but they surrendered all of their gains, and more, by the end of the week.
On Thursday, central bank officials decided to leave the one-week repo auction rate and the overnight lending rate at 10.25% and 11.75%, respectively. However, the central bank widened the spread (difference) between the overnight lending rate and the late liquidity window facility rate from 150 to 300 basis points, effectively boosting the latter from 13.25% to 14.75%. For perspective, the central bank increased all three of these key interest rates by 200 basis points in the latter part of September.
In their post-meeting statement, policymakers acknowledged that a “significant tightening in financial conditions has been achieved” due to recent interest rate increases and expressed their intention of “enhancing flexibility in liquidity management and continuing with liquidity measures” until the outlook for inflation improves meaningfully. Based on recent central bank actions and statements, T. Rowe Price analyst Peter Botoucharov believes that policymakers will continue to engage in unorthodox policymaking and monetary tightening, characterized by the use of multiple channels of funding. He expects effective funding costs, which have risen from about 7.5% in July to about 12.75% at present, to continue grinding higher as the central bank increasingly uses the more expensive funding channels to provide lira liquidity to Turkish banks. He also believes that tighter lending conditions could help Turkish inflation stabilize in the 10% to 11% range in the next three to six months.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about 3.0%. During the week, proposed legislation that would affect the central bank’s autonomy made some progress through the Senate, with a vote expected to take place on November 4. The legislation would give the central bank a primary mandate of price stability, with financial stability and promoting full employment as some secondary goals. While the central bank has had de facto independence for most of the past two decades, the central bank governor and the entire monetary policy board ultimately serve at the pleasure of the president.
This new bill, if it becomes law, would make the governor and board have fixed four-year terms that span across presidential terms. According to T. Rowe Price sovereign analyst Richard Hall, if the bill is passed, President Jair Bolsonaro’s administration would be able to appoint the entire board for the next four years, including the first two years of the next presidential term. Hall believes that would somewhat reduce political risks in the 2022 election, though the main issue is likely to be the country’s fiscal situation, and whether government officials are able or willing to respect Brazil’s mandatory spending cap.
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