Markets & Economy

Global Markets Weekly Update

December 15, 2017

Review the performance of global stock and bond markets over the past week, along with relevant insights from T. Rowe Price economists and investment professionals.


Large-caps manage new highs as investors anticipate tax cuts

Most of the major benchmarks recorded modest gains during the week, bringing the large-cap benchmarks and the technology-heavy Nasdaq Composite Index to new highs. The smaller-cap benchmarks lagged and remained a bit off the peaks they established early in the month. Within the S&P 500 Index, consumer discretionary and consumer staples shares led the gains, with the former helped by news of Disney’s purchase of much of 21st Century Fox (media companies are classified as consumer discretionary stocks). Materials and utilities shares lagged, and energy shares were also weak despite international (Brent) oil prices climbing above $65 on Tuesday, their highest level since June 2015. A late-November agreement between OPEC and non-OPEC member Russia to extend production cuts has pushed up prices, and recent pipeline shutdowns and other disruptions have provided further supply pressure.

Fed meeting brings no surprises

Trading volumes were subdued at the beginning of the week but picked up as investors awaited the outcome of the Federal Reserve’s monetary policy meeting on Tuesday and Wednesday. The meeting resulted in few surprises, however, with the Fed announcing its third quarter-point rate hike for the year, as was almost universally expected, while keeping its rate outlook for the following year intact, anticipating three more hikes in 2018. T. Rowe Price traders noted that the Fed’s failure to adjust rate expectations higher weighed on financials a bit, however, as did a soft November inflation reading. Banks’ profitability and lending margins typically benefit from higher interest rates.

Uncertainty over the progress of House and Senate Republicans in finalizing tax reform legislation sparked some volatility late in the week. On Thursday, stocks turned lower after reports surfaced that Senator Marco Rubio would vote against the bill unless it included a larger child tax credit for low-income families. Investors seemed to quickly regain confidence that the bill would pass, however, and financials led a rebound when trading resumed Friday morning. Republican leaders were reported to have increased the child tax credit, and House Ways and Means Chairman Kevin Brady said that the conference committee had completed its negotiations.

Muni market calms

Longer-term bond yields were largely unchanged for the week, with strong November retail sales data helping offset the soft inflation figures. Municipal bonds posted negative returns, underperforming Treasuries. T. Rowe Price analysts noted that, compared with the previous week, muni investors appeared to be taking a much more measured approach before rushing into new issuance. However, positive momentum returned midweek as the yield curve flattened somewhat and as muni yields relative to Treasury yields became slightly more attractive.

It was a quiet week in the investment-grade corporate bond market, with the Fed meeting doing little to change constructive market sentiment. The primary calendar was muted and is expected to remain that way for the rest of the year. However, secondary market volumes were decent and balanced, and dealer inventories appear manageable heading into year-end. Despite the negative headlines related to tax reform, buyers were active toward the end of the week.

High yield market activity began to slow, but the handful of new deals offered was mostly met with strong demand. The market had a subdued reaction to the Fed rate hike, indicating that it was already priced in. High yield credit spreads—the yield difference between lower-quality and higher-quality bonds—were largely unchanged, and below investment-grade portfolios reported outflows.

U.S. Stocks1



Friday’s Close

Week’s Change

% Change YTD





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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. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell indexes. Russell® is a trademark of Russell Investment Group.


Major European stock indexes were generally down for the week, although the UK’s FTSE 100 recorded gains. T. Rowe Price traders noted that expiring futures and options and some adjustments to major European equity indexes were driving market activity at the end of the week, but they expect trading volume to decline over the remainder of December.

Bank of England keeps benchmark rate unchanged as UK inflation reaches five-year high

After raising its bank lending rate for the first time in 10 years in November, the Bank of England (BoE) kept its bank rate unchanged at 0.50% at its December meeting on Thursday. UK inflation rose at an annual rate of 3.1% in November—which was higher than expected and the fastest pace in more than five years—but the bank’s policymakers noted in their statement that they believe inflation “is likely to be close to its peak” and will return to the BoE’s 2% target. In the minutes from the meeting, the bank also noted the recent progress on Brexit negotiations, saying that the chance of a disorderly exit from the European Union has lessened. Yields of UK government bonds declined.

European Central Bank expects faster pace of growth

The European Central Bank (ECB) kept its key lending rates and its bond-buying program unchanged at its December meeting, but the ECB raised its growth and inflation forecasts through 2020. Government bonds in the eurozone saw modest price declines following the news. For the week, the German 10-year bund’s yield was little changed. According to Reuters, however, the additional yield offered by the U.S. Treasury 10-year note versus the bund neared its widest level since April. Italian government bonds sold off on political uncertainty after Italy set March 4, 2018, as the date for its general election.


Japan’s equity markets post mixed results for the week

The major Japanese stock market benchmarks turned in mixed results for the week. The bellwether Nikkei 225 Stock Average ended the week at 22,553.22, losing 1.13% (258 points) versus the prior week. The Nikkei 225 remains solidly positive for the year to date, having risen 17.99% (3,439 points) since the beginning of 2017. The large-cap TOPIX Index fell 0.57% (10 points) for the week but has gained 18.10% (275 points) for the year to date. The TOPIX Small Index rose 0.45% (11 points) versus last week’s close and is now up nearly 28% (520 points) from the start of 2017. The yen closed the week at 112.33 versus the U.S. dollar, a 1.03% decline from the prior week. The yen has lost 4.02% against the dollar for the year to date.

Japan finalizes trade deal with European Union

The European Union and Japan capped off several years of negotiation and finalized a sweeping trade deal during the week. The Economic Partnership Agreement encompasses 600 million consumers and nearly one-third of the global economy and will eliminate tariffs on more than 95% of products traded between the markets. Japan will open much of its tightly controlled agricultural market to European imports, including wine and cheese, while the European Union will greatly reduce barriers to Japanese automakers and technology firms. Japanese and European policymakers are hailing the agreement as a significant step forward in the relationship between the two markets and an encouraging sign of progress toward greater openness in the global economy.

Business confidence surges…

A relatively weak yen and strong external demand are helping to drive record profits for Japan’s big export-oriented manufacturers. According to the latest quarterly Tankan survey released by the Bank of Japan, business confidence among large manufacturers exceeded expectations and reached its highest level in 11 years. The improvement in sentiment was even sharper among small manufacturers and nonmanufacturers, both of which hit their highest levels since 1991. The improved sentiment among smaller companies suggests optimism may be growing about Japan’s domestic economy, which has now experienced seven consecutive quarters of gross domestic product growth.

…amid signs that the labor market could tighten

So far, however, economic growth and improved business confidence have largely failed to translate into wage increases. There are signs that that might finally begin to change in 2018. Japan’s unemployment rate currently stands at 2.8%, its lowest level in 23 years. Improved business sentiment coupled with solid global and domestic economic growth suggest that Japanese companies, both large and small, may be forced to compete for scarce workers, which could increase wage pressures in 2018. Additionally, the government is taking steps to promote wage growth in its efforts to boost inflation, which remains stubbornly low. Tax overhaul plans for fiscal year 2018 were approved by the government this week and could lower the effective tax rates on some companies that raise pay 3% or more on the year, although a three-year expiration window for the incentives might limit their impact.


Cooling growth, monetary policy tightening in China portend slowdown in 2018

A batch of economic data showing that China’s growth cooled last month and several tightening measures by its central bank are the latest signs that the country could be entering a long-awaited slowdown after surprisingly strong growth in 2017.

Industrial output—a gauge of economic activity—slowed in November for the second straight month. Growth in fixed-asset investment in the first 11 months of 2017 eased from the growth pace from January to October when compared with year-earlier periods. Both data points matched economists’ estimates. Retail sales surged 10.2%, which was higher than October’s increase but still lagged expectations. Economists attributed the slowdown in industrial output to an official antipollution campaign that began earlier this year, while a decline in real estate activity appeared to weigh on fixed-asset investment.

November’s data show that China’s economy remains in strong shape at the end of 2017, a year in which growth was expected to decelerate after Beijing stepped up efforts to crack down on excessive borrowing and real estate speculation. But global demand for Chinese goods, a buoyant housing market, and public infrastructure spending have led China’s economy to outperform this year.

The latest monthly indicators coincided with several tightening measures announced by the People’s Bank of China (PBOC), which nudged the interest rates higher on various loans it charges to domestic banks. The PBOC also slightly increased the rates on its medium-term lending facility, one of several policy tools it created in recent years to monitor the country’s money supply. The PBOC’s adjustments came shortly after the U.S. Federal Reserve raised short-term interest rates for the third time this year. Rising U.S. interest rates and an unexpected slowdown in China as the government’s deleveraging campaign picks up are two key risks for investors in 2018, believes Hong Kong-based Portfolio Manager Eric Moffett. However, China still needs to implement structural reforms in order to transition to lower but more sustainable growth over the long term, Moffett notes.

Other Key Markets

Turkey raises rates less than expected

Turkey’s central bank raised its late liquidity window rate 50 basis points to 12.75%, less than expected and unlikely to create the conditions for a sustained reversal in inflation expectations, according to T. Rowe Price Sovereign Analyst Peter Botoucharov. The increase was the first in eight months and came after the rate of inflation hit a 14-year high in November. The bank left its benchmark repo rate at 8%. While the bank attempts to fight inflation pressures, Turkey’s President Recep Tayyip Erdogan has frequently called for cheaper credit to spur the economy. In November, Erdogan criticized the central bank, saying that the high level of inflation was the result of high interest rates.

S&P cuts Colombia’s credit rating

S&P Global Ratings cut Colombia’s credit rating one notch to BBB-, citing weakened fiscal and external profiles, which have created diminished policy flexibility and slow economic growth. In response to the cut, the central bank kept interest rates unchanged in its monetary policy meeting, partially to further evaluate the downgrade. The bank has cut rates 300 basis points since December 2016 to spur the country’s economy, which has been hurt by lower commodity prices. T. Rowe Price Sovereign Analyst Aaron Gifford believes that the worst is probably over in Colombia given the rebound in the economy and firming oil prices, making additional downgrades unlikely. There is a risk that fiscal concerns will arise under a new administration—presidential elections are scheduled for May 2018—which could lead to another downgrade by the remaining agencies that hold Colombia one notch higher than does S&P, though a loss of investment-grade status seems doubtful, Gifford observes.

Bank of Canada governor gives Canadian dollar a boost, citing confidence in Canada’s growth

Bank of Canada Governor Stephen Poloz gave the Canadian dollar a boost against the U.S. dollar when he said that the bank is growing increasingly confident that the economy will need less stimulus going forward, as it is on track to grow about 3% this year. The bank raised rates twice this year but left its benchmark rates steady at 1% ast week.

Russia’s central bank cuts rates more than expected

Russia’s central bank cut interest rates more than expected to 7.75%, lowering its key rate by one half of a percentage point. The bank said it expects that lower oil production will reduce inflation risks.

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