Markets & Economy

Global Markets Weekly Update

March 16, 2018

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.


Stocks record modest losses

Stocks fell modestly for the week after a Friday rally broke a four-day losing streak for the Standard & Poor's 500 Index and partially compensated for earlier losses. Small- and mid-caps outperformed larger shares. Within the S&P 500, utilities and real estate shares fared best, helped by a decline in longer-term Treasury yields, which make their healthy dividend payments more attractive in comparison. Conversely, the much larger financials sector, which sees lending margins squeezed by lower interest rates, was among the market’s weaker segments. Materials shares also performed poorly. Friday was a so-called “quadruple witching day,” one of four days in the year in which four types of options and futures contracts expire simultaneously, typically resulting in heightened volatility and trading volumes.

Trade worries continue to weigh on sentiment

Fears of heightened global trade tensions appeared to be the main factor weighing on sentiment early in the week. Investors continued to worry about retaliation following the previous week’s announcement of new U.S. tariffs on steel and aluminum imports, but major trading partners in Asia and Europe appeared to be taking a wait-and-see approach. Markets were also unsettled by the dismissal of Secretary of State Rex Tillerson, widely viewed as a free trade advocate within the administration. Also worrisome were what appeared to be reports that President Trump had requested the preparation of a package of tariffs targeting China. Finally, although not a trade issue, news that Special Counsel Robert Mueller had subpoenaed President Trump’s business organization appeared to drain the energy from an early rally on Thursday.

The week’s economic data may have also dampened sentiment. The Commerce Department reported that retail sales declined 0.1% in February, well below the 0.3% rise many expected. February consumer prices rose modestly and in line with expectations, but the absence of an upside surprise seemed to add to worries of a potential slowdown in global growth, according to T. Rowe Price traders. Indeed, the retail sales number and other data caused the Atlanta Federal Reserve’s GDPNow model, a running estimate of current-quarter economic growth, to fall to 1.8% by the end of the week, a slowdown from late 2017 and well below recent consensus expectations.

Bonds: Long-term yields decreases on subdued growth and inflation data

The subdued growth and inflation data led to a modest decrease in the yield on the 10-year Treasury note, which bottomed on Wednesday morning before rising again later in the week. (Bond prices and yields move in opposite directions.) Municipal bonds underperformed, although T. Rowe Price analysts note that light new muni issuance continues to be met with steady demand. They observe that investors seem to be looking for riskier, higher-yielding investments given the uncertainty surrounding interest rates and with tax season on the horizon.

Moderate new issuance in the investment-grade corporate bond market was met with only tepid interest, as equity weakness appeared to make investors somewhat risk averse. T. Rowe Price traders note that the performance of recent new deals, other than CVS, has been lackluster, causing some issuers to delay coming to market until overall sentiment improves. Conversely, the high yield primary calendar was very active, while the secondary market was mostly quiet. As the week progressed, equity losses caused many investors to remain on the sidelines. In issuer-specific news, international cable and mobile services provider Altice reported better-than-expected performance in France, causing its bonds to trade higher.

U.S. Stocks1

Friday’s Close

Week’s Change

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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.


European equities ended the week mixed amid relatively low trading volumes, disappointing inflation numbers for the eurozone, and political uncertainty about the prospects of a trade war and other geopolitical tensions. At the start of the week, the pan-European benchmark STOXX 600 gained ground following the strong U.S. jobs report the week before. Germany’s DAX 30, Spain’s IBEX 35, and France’s CAC 40 all trended higher in what T. Rowe Price traders coined a “Goldilocks” environment in which trade concerns had calmed, oil prices were steady, and volatile bond yields and interest rate uncertainty were no longer forefront topics. But by midweek, investor sentiment turned more negative. T. Rowe Price traders noted that optimism began to flag following U.S. President Donald Trump’s staffing reshuffles, UK Prime Minister Theresa May’s assertion that Russia was connected to the chemical poisoning of a former spy on British soil, and news of softer-than-expected economic data. By the end of the week, trade volumes were subdued and somewhat stuck in a holding pattern as investors worked through the geopolitical uncertainty.

Meanwhile, the European Central Bank (ECB) signaled that it would continue its monetary policy and that it would have to have more confidence that inflation was rising before ending net asset purchases. Eurozone industrial production fell 1.0% in January compared with the month before.

Brexit equals slower growth

UK stocks dipped following a report by the Organization for Economic Cooperation and Development (OECD) that forecast Britain would miss out on buoyant global economic growth over the next two years and grow more slowly than the other Group of Twenty leading economies. Slowing consumer demand and rising inflation were acting as key weights to growth in the UK, the OECD said.

Flight to safety

Core government eurozone bond markets were buoyed by flight-to-safety flows during the week amid concerns around the impact of U.S. plans for steel and aluminum tariffs. Dovish comments by ECB governor Mario Draghi late in the week also drive core eurozone yields lower. The yield on 10-year German bunds had fallen to around 0.58% by Thursday’s close, down for the week.


Japanese equities edge higher, yen weakens

The major Japanese stock market benchmarks rose for the week. The bellwether Nikkei 225 Stock Average ended the week at 21,676.51, a modest 0.97% gain over the prior week. The Nikkei average has lost 4.78% since the beginning of 2018. The large-cap TOPIX Index rose 1.23% for the week but ended Friday down 4.45% for the year to date. The TOPIX Small Index advanced 1.32% but was down 4.10% from the start of the year. The yen closed the week at 105.67 versus the U.S. dollar, a slight decrease of 1.1% versus the prior week. The yen has lost 6.23% against the dollar so far in 2018.

Abe in trouble?

A long-simmering real estate scandal resurfaced during the week, raising fresh questions about the ability of Prime Minister Shinzo Abe to weather the storm. The trouble started in early 2017 when an educational foundation with ties to Abe’s wife purchased government-owned land in Osaka at a fraction of its market price. At the time, Abe and his wife denied any undue influence regarding the sale, with the prime minister going as far as saying that he would resign should any link emerge to him or his wife. Earlier in the month, it was reported that documents related to the land sale had been doctored, and the Nikkei reported during the week that Prime Minister Abe knew of the alterations. Although Abe has denied any knowledge of the altered documents, his opponents accused him of engaging in a cover-up and called for his resignation. With some allies now beginning to question his denials, there are increasing doubts that he will survive the scandal with enough political clout to push through his broad-ranging political, economic, and social reforms.

Wage gains not enough to drive inflation

On the economic front, the Japanese Trade Union Confederation reported that labor unions have negotiated a 2.16% monthly pay increase from several of Japan’s larger companies. Occurring against a backdrop of the lowest unemployment in 25 years and record corporate profits, the modest wage hike disappointed many observers. The figure is well below the 3% increase targeted by the Abe government and is likely not enough to spark a rise in consumption that will be sufficient to meet the Bank of Japan’s 2% inflation target.

The Bank of Japan (BoJ) has sent some mixed signals over recent weeks, with decreases in bond purchases followed by increases and conflicting signals concerning when and if it might begin to wind down its monetary accommodation. Recognizing the heightened scrutiny of Japan’s monetary policy since the Federal Reserve and the ECB have already started down the road toward policy normalization, members of the BoJ have expressed the importance of careful communication. Time will tell whether this recognition translates into greater clarity and coordination in communications.


China merges banking and insurance watchdogs in financial regulatory shake-up

China announced that it would merge its banking and insurance regulators, a long-awaited move that aims to tighten control of the country’s financial sector and curb the risks that have accompanied years of rapid credit growth.

Under a proposal released at the country’s annual legislative meeting, Beijing plans to merge the China Banking Regulatory Commission and the China Insurance Regulatory Commission. The People’s Bank of China (PBOC), the central bank, will gain new powers to draft financial sector regulations, in addition to determining monetary policy.

Combining the nation’s banking and insurance watchdogs marks China’s biggest financial industry overhaul in over a decade. The shake-up comes as Chinese officials are seeking to deleverage the corporate sector and clamp down on riskier lending practices. It also follows a Communist Party congress last October that cemented the authority of President Xi Jinping, who has made containing financial risks a priority as part of a goal to put China on a more sustainable growth path. Earlier in March, China’s party-controlled legislature voted to abolish term limits on the presidency, a move that effectively allows Xi to rule indefinitely.

Many China observers have bemoaned the removal of presidential term limits, a move that was seen as taking the country back to an era of one-man rule. However, T. Rowe Price Portfolio Manager Anh Lu notes that consolidating authority under President Xi could increase China’s ability to reform the economy.

With President Xi Jinping emerging from the recent Communist Party of China conference with his power notably enhanced, the way now seems clear for him to press ahead with his ambitious reform agenda, Lu notes. Key reform objectives include reducing China’s high level of corporate debt and delivering much-needed supply-side reform. While implementing these reforms could disrupt China’s near-term economic growth, if President Xi can push through many of these painful reforms now, Lu believes it will be positive for China’s longer-term economic prosperity and market value.

Other Key Markets

Russian stocks, ruble fall ahead of elections and amid diplomatic row

Russian stocks and the ruble are lower on the week as diplomatic tensions rise ahead of weekend elections in which Vladimir Putin is expected to be reelected to his second consecutive six-year mandate. While a high turnout will be essential to give his victory legitimacy, the real question is what kind of government reshuffle will follow his election, according to T. Rowe Price Sovereign Analyst Peter Botoucharov. Botoucharov will be watching to see whether this cabinet is made of pro-reformers or the old guard, who favor the state capitalism model and may lead Russia after 2022.

Russia’s new government will be essential in determining the speed and direction of Russia’s ongoing economic and structural reform process. In February, S&P Global upgraded Russia’s sovereign rating. However, it noted that sanctions would continue to limit Russia’s growth and efforts to diversify its economy as such measures create uncertainty for investors. Botoucharov expects that Russia will continue to follow along its reform path and maintain a prudent fiscal and conservative monetary policy.

Russia’s markets were heavily sold as diplomatic tensions rose when UK Prime Minister Theresa May expelled 23 Russian diplomats after a nerve gas attack on former Russian spy Sergei Skripal and his daughter in southwest England­­­—a harder stance from the British government than many expected. Western allies backed the move, and the UK subsequently took actions to freeze Russian assets in the UK. Her moves came the same week that the Trump administration confirmed that it would enact new sanctions against Russia for its attempt to interfere in the 2016 U.S. election.

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