Global Markets Weekly Update: September 04, 2020
U.S.
Tech-heavy Nasdaq leads U.S. equities lower
Stocks finished the week lower, as investors took profits after an August rally that left the major benchmarks at or near all-time highs. The technology-heavy Nasdaq Composite Index suffered the largest losses, declining more than 3%, but has still produced significant gains on a year-to-date basis. The S&P 500 Index also remained positive for the year, but the more narrowly focused Dow Jones Industrial Average slipped back into negative territory for 2020. Value stocks lost ground but held up better than their growth counterparts.
After August rally, profit taking may have driven downturn
Although the S&P 500 finished Monday with modest losses, the benchmark still returned more than 7% in August, its best month since April. The market climbed on Tuesday and Wednesday, driven by some of the tech names that have propelled the recovery from the late-March lows. Apple continued to attract investor demand after a four-for-one stock split, and shares of video-conferencing company Zoom Video Communications surged after a strong earnings report.
However, sentiment quickly shifted on Thursday as the S&P 500 fell 3.5%, led lower by tech names. It was hard to identify a driver for the downturn, but T. Rowe Price traders noted that investors may have simply concluded that some of the large tech names had become overvalued and that it was time to take profits. The firm’s traders also observed that some of the volatility experienced during the week may have come from the increasing use of options by investors who wanted to take advantage of potential gains in the market.
Unemployment rate falls to 8.4%
A light week for economic data was highlighted by the Labor Department’s monthly nonfarm payroll report, which showed that employers added 1.4 million jobs in August, a number in line with consensus estimates. Temporary workers who were hired to complete this year’s census made up 238,000 of the total, but employment gains were also solid in retail, professional and business services, and the leisure and hospitality sectors. However, the unemployment rate, which is based on a separate survey, fell more than expected, dropping to 8.4% in August from 10.2% in July. About 48% of the jobs lost during March and April have been recovered in the past four months. Initial unemployment claims fell from the prior week but, at a seasonally adjusted 881,000, remained elevated as many employers are still struggling to recover from the economic damage caused by the pandemic.
Treasury yield ticks higher after jobs report
The sell-off in equities, month-end portfolio rebalancing, and Federal Reserve debt purchases drove the yield of the benchmark 10-year U.S. Treasury note lower early in the week. However, demand for Treasuries waned after the release of Friday’s employment report, and the 10-year yield finished little changed for the week. (Bond prices and yields move in opposite directions.)
The broad municipal bond market posted modestly negative returns amid elevated levels of issuance and underperformed the Treasury rally, as the pace of cash flows into municipal bond funds slowed. T. Rowe Price traders noted that California’s roughly $2.5 billion general obligation bond deal was met with solid investor demand.
New issuance in both the investment-grade and high yield corporate bond markets was subdued ahead of the Labor Day weekend. Solid manufacturing data in the U.S., Europe, and China appeared to boost investor sentiment in the investment-grade market, and T. Rowe Price traders said high yield bonds held up relatively well in light trading despite the volatility in the equity market.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
28,133.31 |
-520.56 |
-1.42% |
S&P 500 |
3,426.96 |
-81.05 |
6.07% |
Nasdaq Composite |
11,313.13 |
-382.50 |
26.09% |
S&P MidCap 400 |
1,946.51 |
-48.41 |
-5.65% |
Russell 2000 |
1,536.12 |
-42.22 |
-7.93% |
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 pulled back in sympathy with the technology-led decline in U.S. equities. However, news of merger talks between Spanish lenders Bankia and CaixaBank helped to curb losses. In local-currency terms, the pan-European STOXX Europe 600 Index ended the week 1.76% lower. Germany’s Xetra DAX Index fell 1.46%, France’s CAC 40 slid 0.76%, Italy’s FTSE MIB declined 2.27%, and the UK’s FTSE 100 Index dropped 2.76%.
ECB under pressure as eurozone falls into deflation
An early estimate of eurozone consumer prices showed inflation of -0.2% in August—the first decline since May 2016—heaping more pressure on the European Central Bank (ECB) to increase stimulus.
Speculation that the ECB would have to act soon to counter a stronger euro had mounted before the release of the latest data on consumer prices. The euro's strength is worrying policymakers, who warned that further appreciation would weigh on exports, drag down prices, and hold back the economic recovery, according to the Financial Times newspaper. Evidence of this unease emerged earlier when the euro briefly rallied to more than USD 1.20 for the first time since 2018, prompting ECB Chief Economist Philip Lane to say the euro-dollar rate “does matter” for monetary policy. The consensus calls for the ECB to keep its policy settings unchanged at its meeting next week.
France could extend furlough program, growing the size of its recovery plan
Finance Minister Bruno Le Maire said France could extend its emergency furlough scheme beyond 2020 if the economic crisis worsens. His comments suggested France was ready to expand its EUR 100 billion stimulus plan unveiled earlier in the week. Funds will be devoted to enhancing competitiveness, fostering climate-friendly energy sources, and supporting jobs.
Growing pessimism over UK-EU trade deal
There is growing pessimism that the UK and EU trade talks next week will break the impasse between the two sides, after Prime Minister Boris Johnson said the UK would look to double its fishing quota. EU officials said the demand would lead to a loss of one in three EU fishing boats. The Times newspaper said senior government officials put the chances of a deal at 30% to 40% and that a breakthrough on the key issues of fisheries and state aid remains elusive.
Japan
Japanese stocks posted gains for the week, despite the sell-off on Friday. The Nikkei 225 Stock Average advanced 323 points (1.4%) and closed at 23,205.43. The widely watched market benchmark remained under water (-1.9%) for the year-to-date period. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, posted similar-sized weekly gains. The yen weakened slightly and traded near JPY 106 per U.S. dollar. The yield on 10-year Japanese government bonds declined for the week as the Bank of Japan (BoJ) reaffirmed its commitment to an ultra-accommodative monetary policy.
Kataoka urges more aggressive policy easing
According to Goushi Kataoka, the most dovish board member of the BoJ’s policy-setting committee, the central bank needs to enact more aggressive monetary policy easing measures to stave off the effects of deflation and the faltering outlook for consumption and capital spending. In his assessment, the BoJ should be buying government bonds more aggressively and needs to forcefully assert that it is willing to lower interest rates to reduce the strains on businesses and consumers. In a speech to business leaders, Kataoka said, “There’s no change to what needs to be done even under a new administration, which is to use fiscal and monetary tools to spur demand, provide liquidity, and take various steps to help people who are suffering…. By taking action to show our determination we won’t tolerate deflation, we can improve the credibility of our price target.” The pandemic has exacerbated recessionary conditions in Japan, and, in his view, poses unnecessary challenges for the new prime minister, who will take office later this month.
Kataoka, who has steadfastly abstained from voting for the status quo—keeping the current interest rate targets in place—asserts that slack demand, due to the coronavirus, will continue to hamper consumption and inflation, making it unlikely that price growth will accelerate toward the central bank’s 2% target. He believes that the uncertainty surrounding the pandemic has hurt the medium- and long-term outlook for businesses and will continue to weigh on their capital expenditures.
Japanese businesses targeted by Berkshire Hathaway
Berkshire Hathaway Chairman Warren Buffett, known as a consummate value investor, made headlines when his company announced that it had invested USD 6.2 billion in five of Japan's major trading houses. Berkshire has acquired slightly more than 5% of the shares in Itochu, Marubeni, Mitsubishi, Mitsui & Company, and Sumitomo during approximately the past 12 months, and could increase the position to 9.9%. These trading houses have diversified businesses, including commodity exploration, that could be prime beneficiaries of rising inflation, spurred by global central bank stimulus totaling more than USD 9 trillion, or higher oil/commodity prices as global economic conditions improve. Additionally, most investors agree that these stocks are undervalued (i.e., trade below book value), generate stable, above-average cash flow, and would benefit from further U.S. dollar weakness. The purchases represent one of Berkshire Hathaway’s largest-ever investments in Japan and yet adhere to Buffett’s penchant for value investing.
Suga ahead in the public polls to replace Abe
Chief Cabinet Secretary Yoshihide Suga, the government’s chief spokesman for the past seven years, has become the leading candidate to replace retiring Prime Minister Shinzo Abe, according to a recent public opinion poll conducted by Asahi Shimbun. The poll showed that Suga held 38% of the public’s support, well ahead of former Defense Minister Shigeru Ishiba, who, with 25% support, had previously led several media opinion polls. The winner of the election, which is set for September 14, is virtually assured of becoming prime minister because of the Liberal Democratic Party’s parliamentary majority. Most believe that monetary and fiscal policies will be little changed under Suga, because his views are closely aligned with those of the outgoing prime minister. Two notable areas where Suga has been outspoken is his advocacy for additional competition in the mobile services sector, where he believes mobile rates could be 40% lower, and for consolidation in regional banks, where a prolonged period of low interest rates has crushed their profit margins.
China
Mainland Chinese stock markets fell, with both the large-cap CSI 300 and benchmark Shanghai Composite Index shedding 1.5% following the overnight sell-off on Wall Street. The yield on China’s 10-year bond increased and ended the week at 3.14%.
PBOC revamps short-term rate mechanism
The People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) announced simpler rules to facilitate trading of domestic bonds by overseas investors. Under the new measures, foreign investors can access onshore foreign exchange and rate-hedging tools and invest in exchange-traded bond products. Separately, the PBOC said on August 31 that the depositary institutions repo rate (DR) would now be the key short-term reference rate. Following the move, DR rates will become the pricing basis for most money and liquidity products. Along with the medium-term lending facility rate, the new key rate will form the backbone of China’s policy rate system and brings the country a step closer to the rate-setting systems of other major central banks.
PMI readings confirm recovery; virus cases plunge
Official and private purchasing managers’ index (PMI) readings for August showed that China’s recovery continued, albeit at a slower pace. Both the official and Caixin/Markit surveys of manufacturing activity remained firmly in expansionary activity, with the private Caixin/Markit manufacturing gauge signaling the fastest expansion rate since January 2011. The readings suggested that the production side of China’s economy remained in solid shape, despite the impact of devastating rains that flooded large parts of the country over the summer. On the services side, the official services PMI reached 55.4 in August, underscoring stronger domestic demand for services, while the Caixin/Markit reading of services activity was broadly flat. However, services companies increased their hiring for the first time since January, suggesting a recovery in the labor market, according to China’s statistics office.
In the near term, analysts expect to see more evidence that economic activity is rebounding in China, where the coronavirus has largely been contained. Just 25 new cases were reported on September 3, all of them imported. In Hong Kong, which is undertaking mass testing, only six confirmed cases were found in the first batch of 128,000 tests.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned about -1.3%. Shares fell and the lira touched a new all-time low amid tightening Turkish financial conditions. A sharp, late-week decline on Wall Street also weighed on investor sentiment, as did Turkish tensions with Greece and the divided island of Cyprus regarding Ankara’s search for energy resources. News that Russia would hold “live-fire” naval exercises in the region later in September raised the risk of increasing tensions further.
According to T. Rowe Price sovereign analyst Peter Botoucharov, the Turkish central bank’s efforts to increasingly provide lira liquidity to banks by way of more expensive liquidity channels has pushed effective funding costs slightly above 10%—via funding through expensive one-month repo operations—versus the 8.25% one-week repo rate and the 9.75% overnight lending rate. Although the central bank has not recently used the late liquidity window facility, whose interest rate is currently 11.25%, Botoucharov believes that effective funding costs are likely to grind higher in the weeks ahead, possibly to around 10.5%. However, this would still leave “real” (inflation-adjusted) interest rates in negative territory, as the year-over-year inflation rate in August was recently reported at about 11.8%.
Chile
Chilean stocks, as measured by the IPSA Index, posted modest losses for the week as of Friday afternoon.
On Tuesday, the Central Bank of Chile (BCCh) held its regularly scheduled monetary policy meeting and, as expected, kept its benchmark lending rate at its technical minimum of 0.5%. Policymakers also signaled in their post-meeting statement that they will continue using the same set of unconventional tools, including the buying of bank bonds, to provide monetary stimulus. However, government bonds were not added to the list despite congress recently authorizing the expansion of the central bank’s quantitative easing (QE) toolkit. Furthermore, the BCCh lightened up on its forward guidance by committing to keeping rates unchanged for most of its policy horizon, rather than the totality thereof, as it had stated previously.
On Wednesday, the central bank also released its quarterly monetary policy report, which set out new economic forecasts and policy expectations. This included an improved GDP growth rate to a range of -4.5% to -5.5% this year versus -5.5% to -7.5% in the previous report. Meanwhile, the BCCh also notched up its inflation forecasts to 2.8% from 2.7% in 2020 and to 2.6% from 2.2% in 2021. On the policy front, the document was in line with the previous day’s monetary policy statement.
According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the central bank’s actions this week put it on a more hawkish path than previously anticipated by the market. Even though Gifford expected the BCCh to act conservatively, he was surprised by the bank’s failure to incorporate government bond purchases into its QE program after lobbying congress to allow it. Gifford believes that this may reflect the recently passed pension withdrawal bill, which allows participants to withdraw up to 10% of their independent retirement accounts due to the COVID-19 pandemic. According to his estimates, Gifford believes that this will inject around 6% of GDP of cash into households’ pockets, providing a huge stimulative effect in the economy in the near term.
The mutual funds referred to in this website are offered and sold only to persons residing in the United States and are offered by prospectus only. The prospectuses include investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing.
T. ROWE PRICE, INVEST WITH CONFIDENCE and the bighorn sheep design are trademarks or registered trademarks of T. Rowe Price Group, Inc. in the United States, European Union, and other countries. All other trademarks are the property of T. Rowe Price or their respective owners.
Copyright 2006-2020, T. Rowe Price. All rights reserved.
T. Rowe Price Investment Services, Inc., Distributor.