Markets & Economy

Global Markets Weekly Update

August 10, 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.

U.S.

Stocks end mixed

The major benchmarks ended mixed for the week after a downturn Friday drained earlier gains. The large-cap indexes recorded losses, while the technology-heavy Nasdaq Composite Index and the smaller-cap benchmarks moved modestly higher. The S&P MidCap 400 Index set a new record high at midweek, as did the broadest market benchmarks, the Russell 3000 and Wilshire 5000 indexes. Within the S&P 500 Index, technology and Internet-related shares fared best, while the typically defensive consumer staples and real estate segments lagged. Relatedly, growth stocks handily outpaced value shares. Before spiking again Friday, market volatility continued to moderate, with one measure showing it dipping to its lowest level since late January, according to T. Rowe Price traders.

The firm’s traders noted that the generally favorable tone of second-quarter earnings reports appeared to give the market its momentum early in the week. According to the latest available data from FactSet, earnings for the S&P 500 Index are anticipated to have grown 24.6% over the same quarter a year ago—well above estimates before the start of the earnings reporting season and roughly in line with the first quarter’s pace, which was the best showing in nearly eight years.

Surprise Tesla announcement

What may have been the week’s most notable stock-specific event had nothing to do with earnings. Shares in electric car maker Tesla jumped on Tuesday after CEO Elon Musk tweeted that he had arranged financing and was considering taking the company private in what would be the largest leveraged buyout in history. The stock fell back over the following two days, however, as some investors questioned whether the deal would go through.

Another round of trade disputes—if from a novel direction—appeared to be behind the market’s pullback on Friday. In retaliation for Turkey’s jailing of an American pastor, President Trump announced in a tweet that the U.S. was doubling its tariffs on steel and aluminum imports from the country (see below). A broad decline in the Turkish lira and other emerging market currencies weighed on Wall Street alongside other global markets. Meanwhile, tensions between the U.S. and China continued to simmer, with China announcing new tariffs on $16 billion worth of goods imported from the U.S. 

Bonds: Munis and corporates see heavy issuance

A modest flight to the perceived safety of U.S. Treasuries on Friday helped bring the yield on the 10-year Treasury note down to its lowest level in nearly a month. (Bond prices and yields move in opposite directions.) An increase in the municipal new issuance calendar spurred some weakness in the segment early in the week. The big news came later in the week as Puerto Rico’s governor announced an agreement over restructuring some of Puerto Rico’s debt, spurring gains in the commonwealth’s higher-yielding bonds, including general obligation issues.

The investment-grade corporate bond market saw heavy issuance, with supply exceeding estimates, but it was met by strong demand for new deals. Issuance represented a wide range of sectors and credit quality. Dealer inventories remained light, and secondary market volumes trended lower. Meanwhile, the high yield market was largely focused on earnings, and most reports either met or exceeded expectations. Higher-risk energy credits came under pressure as oil prices declined amid tariff talks, news out of China regarding efforts to increase domestic energy production, and weak inventory numbers. 

U.S. Stocks

 

 Index

Friday’s Close

Week’s Change

% Change YTD

DJIA

25,313.14

-149.44

2.40%

S&P 500

2,833.28

-7.07

5.97%

Nasdaq Composite

7,839.11

27.10

13.55%

S&P MidCap 400

1,997.25

-2.79

5.09%

Russell 2000

1,688.30

14.94

9.95%

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.

Europe

Most European equities ended the week lower amid fresh trade war angst and concerns late in the week about the ramifications of Turkey’s plummeting currency on European banks. Mixed corporate earnings results also weighed on some market sectors. The pan-European STOXX 600 Index ended the week lower by about 0.5%. The German DAX 30, which is highly reactive to global trade uncertainty, France’s CAC 40, and Spain’s IBEX 35 all fell about 1.5% for the week. European bank stocks suffered some of the steepest losses.

The week began on a strong note, as European equities reflected upbeat investor sentiment for global stocks, but after the U.S. said that it would impose 25% tariffs on another $16 billion of Chinese goods, European equities reversed course. Stocks weakened later in the week after the Financial Times reported that the eurozone’s chief financial watchdog raised concerns about the exposure of some of the currency area’s biggest lenders to Turkey—chiefly Spanish bank BBVA, Italian bank UniCredit, and French bank BNP Paribas—in light of the lira’s dramatic fall this year. So far, the Turkish lira has lost more than 30% against the U.S. dollar in 2018, and it fell to an all-time low at the end of the week. The wing of the European Central Bank that is set up to monitor the activity of the region’s biggest banks has begun over the last couple of months to look more closely at European lenders’ links with Turkey. European indexes weakened further after U.S. President Donald Trump indicated that he would double metal tariffs on Turkey. 

Growing uncertainty in Italy

Italy’s FTSE MIB Index ended the week lower by about 2% amid a risk-off sentiment, with the Italian government’s budget negotiations increasingly weighing on the market. Leading figures in the euroskeptic coalition government indicated that they would not shy away from a confrontational approach with the European Union over fiscal plans. (Italy has one of the highest debt burdens in the eurozone.) T. Rowe Price traders noted that the Italian Treasury has bought back nearly €1 billion of short-dated government debt in a previously unannounced operation that appeared to be a bid to provide investors with liquidity in the midst of a sharp market sell-off. The move is the third time the government has bought back its debt since Italian bonds were first hit by negative investor sentiment in late May. That sell-off was triggered by the formation of the current populist governing coalition.

Bond yields decline

Core eurozone bond yields declined at the end of the week amid a renewed move toward safe-haven assets due to further deterioration of Turkish financial conditions. The German 10-year yield was around 0.32% at the end of the week after opening the week at 0.41%. UK bond yields also fell at the end of the week, but Italian bonds underperformed.

Japan

Japanese stocks tumbled on Friday, leading to a loss for the week. The Nikkei 225 Stock Average fell 227 points (1.0%) and closed at 22,298.08 on Friday. The Nikkei is 2.1% lower for the year to date. The broad-based large-cap TOPIX Index and the TOPIX Small Index also declined for the week and are further in the red in 2018. The yen ended the week at ¥111.1 per U.S. dollar, modestly stronger for the week and the year to date, versus ¥112.7 at the end of 2017.

Japan’s economy rebounds in second quarter

Solid household and business spending helped the Japanese economy grow more than expected in the June quarter. According to preliminary government estimates, Japan’s economy grew at a 1.9% annualized pace in the second quarter, avoiding a technical recession, or two consecutive quarters of contraction. (Japan’s economy had contracted 0.9% in the first quarter.) Private consumption expanded at an annualized 2.8% clip in the second quarter following a flat result in the first quarter. Government consumption grew 0.9%, export growth widened 0.8%, and imports rose 3.9%.

On a quarterly basis, gross domestic product expanded 0.5%, which was better than the median estimate for 0.3% growth. Domestic consumption, which accounts for approximately 60% of the economy, gained 0.7% on solid demand for autos and home appliances. The data suggest that Japan’s economy remains in a period of solid expansion. Estimates for the rest of the calendar year are similarly strong, although geopolitical trade issues (exports and investments), capacity constraints due to labor shortages, and tariffs remain major risks to the forecast.

Abe seen as likely to win a third term as his party’s president

After Fumio Kishida decided not to run, Prime Minister Shinzo Abe seems likely to win a third-consecutive term in the presidential election later this year. An official announcement that Shigeru Ishiba, the former defense minister, will oppose Abe is expected. The Minister for Internal Affairs and Communications, Seiko Noda, is likely to throw her hat in the ring as well, but she is still struggling to garner the 20 needed endorsements to get on the ballot.

China

China’s currency extends record slide on contagion fears from Turkey

The Chinese currency slid for the ninth-straight week as a global currency sell-off triggered by Turkey’s financial troubles compounded worries about China’s trade fight with the U.S. After rising earlier during the week, the yuan erased its gains on Friday amid fears that Turkey’s currency woes could spill over onto the mainland. The Turkish lira plunged as much as 14% to a record low on Friday as investors worried about deteriorating relations with the U.S. The yuan’s ninth weekly decline marks the currency’s longest losing streak since China adopted its current foreign exchange regime in 1994.

The yuan’s drop against the dollar has accelerated since mid-June as trade tensions between the U.S. and China have heated up. Earlier in the week, Beijing said that it would levy 25% tariffs on an additional $16 billion worth of U.S. imports starting August 23—the same day that the U.S. plans to start collecting 25% extra in tariffs on $16 billion of Chinese goods. The escalating tariff cycle comes as the People’s Bank of China (PBOC) has stepped up efforts to stabilize the yuan. Earlier in the week, the PBOC urged state-owned lenders to prevent “herd behavior” that could lead to runaway foreign exchange trades, Bloomberg reported. That move followed a measure the previous week that makes it more expensive for investors to bet against the yuan. Despite the bearish headlines about China, news focused on China’s slowing economy tends to obscure the significant income gains on the mainland and an increasingly consumption-driven economy, believes Portfolio Manager Eric Moffett. 

Other Key Markets

Turkey

Turkish assets remained under pressure, in part because U.S.-Turkey relations continued to deteriorate. The lira plunged to an all-time low versus the U.S. dollar after the U.S. Trade Representative’s office announced that it is reviewing Turkey’s duty-free access to U.S. markets for Turkish exports. This came shortly after Turkey imposed tariffs on certain U.S. goods—possibly in retaliation for the broad aluminum and steel tariffs implemented by the Trump administration.

Turkey’s detention of a U.S. pastor—who has been formally indicted for alleged espionage and affiliating with terrorists—remained a point of contention between the two NATO allies. The U.S. recently announced sanctions against two Turkish government ministers for their role in the pastor’s detention, and Turkey reciprocated with sanctions against two U.S. officials. In an attempt to resolve the situation, a U.S. deputy secretary of state and a Turkish deputy foreign minister met on Wednesday, but Turkey has thus far refused to release the pastor.

Ulle Adamson, a T. Rowe Price emerging markets equity analyst and portfolio manager, believes that the risks of a hard landing—an abrupt economic downturn following a recent period of strong growth—have increased, as Turkish bond yields have risen sharply and as significant currency weakness could quickly lead to spiraling inflation. Still, Adamson is watching the situation in Turkey very closely, as she believes that the situation could right itself if the country puts the right economic and fiscal policies in place.

Russia

Elsewhere in emerging Europe, Russian assets, including the ruble, were pressured by an unexpected announcement of sanctions against Russia by the U.S. State Department and by news that a bipartisan bill authorizing more sanctions was introduced in the U.S. Senate. This legislation, if passed by both houses of Congress and signed by President Trump, would severely penalize Russia for its actions in Ukraine and Syria and for alleged efforts to meddle in the upcoming November midterm elections. The proposed penalties would include new sanctions targeting certain individuals, restrictions on Russian government debt sales, and—because the energy sector is a major part of the Russian economy—more stringent rules for energy sector projects.

While there is the potential for additional U.S. sanctions against Russian individuals and entities, and while the timing and severity of possible sanctions are unpredictable, Adamson notes that the macro backdrop has improved in the last few years—Russia is currently in the middle of a moderate cyclical recovery that started in 2017—and the Kremlin’s top economic priorities are to keep inflation low, ensure fiscal discipline, and accumulate fiscal reserves. Russia’s fiscal and monetary policies are currently restrictive, but they are aimed at maintaining the country’s financial stability. In addition, this year’s increase in oil prices is helping the government raise revenue and accumulate reserves. Risks to the economic recovery include a significant decline in oil prices, a sharp drop in the ruble, and tough new U.S. sanctions that force the Kremlin to curtail infrastructure spending and improvements.

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