Markets & Economy

Global Markets Weekly Update

September 22, 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.

U.S.

Stocks end mixed but large-caps hit new highs

The major indexes ended the week mixed. The large-cap benchmarks were flat to modestly higher, with both the S&P 500 Index and the narrowly focused Dow Jones Industrial Average setting record highs early in the week before falling back a bit. The technology-heavy Nasdaq Composite Index also hit new highs but ended the week down moderately. The smaller-cap benchmarks performed best for the week but stayed below the peaks they established in late July. Interest rate-sensitive utilities and real estate shares performed poorly for the week as Treasury yields increased, and consumer staples shares also lagged. Energy stocks fared well as oil prices hit a three-month high, helped by increasing demand from refineries in the Gulf of Mexico coming back online. Financials also recorded solid gains.

Politics drives sentiment, but not in firm direction

T. Rowe Price traders observed that political developments continued to play a large role in driving sentiment, although not in a decisive direction—volatility was muted, and trading volumes remained subdued through much of the week. Investors did not appear to react to President Donald Trump’s strong words about North Korea on Tuesday, and new threats in response from North Korean leader Kim Jong-un early Friday morning appeared to have only a limited impact when trading opened in New York. Likewise, new Republican efforts to pass a health care bill seemed to have little broad impact, although health care services stocks—particularly those of companies heavily reliant on Medicaid clients—fell sharply on Tuesday before recovering somewhat.

Bonds: yields increase on expectations for rate hike, good economic data

Investors also kept a close eye on the Federal Reserve’s policy meeting on Wednesday, but the results of the meeting were largely in line with expectations—the Fed kept rates steady but announced that, beginning in October, it would reduce the amount of payments on its bond holdings that it reinvests—and did not appear to move stock prices. The impact was more profound in the bond market, with the yield on the 10-year Treasury note briefly touching its highest level since early August following the meeting. An increased chance that the Fed will raise rates at its December meeting was partly behind the increase in yields, but T. Rowe Price analysts noted that some positive housing data may have also been a factor, with both August housing starts and new housing permits coming in above expectations. The lower Treasury prices dragged municipal bond prices down as well. Munis outperformed Treasuries, however, as the municipal market continued to benefit from high demand for new issues.

Investment-grade corporate bonds benefited from supportive technical conditions amid light new issuance, higher rates, and ongoing demand from overseas investors. Credit spreads (the additional yield over Treasuries with similar maturities) across most sectors narrowed, with the technology and media/telecommunications sector a notable outperformer. The technology, media, and telecom segment saw strong demand, due in part to reports that AT&T is contemplating a sale of its pay TV division in Latin America to reduce debt. Dealer inventories are approaching their lows for the year, according to T. Rowe Price analysts, contributing to the strong technical environment.

The high yield market was mostly quiet with the exception of credit-specific headlines. The acquisition of Rite Aid by Walgreens received government approval after yet another adjustment to the terms of the deal. In other merger news, reports surfaced that Sprint and T-Mobile had resumed talks and seemed closer to reaching an agreement. Below investment-grade funds reported inflows for the week.

U.S. Stocks1

 

Index

Friday’s Close

Week’s Change

% Change YTD

DJIA

22,349.59

 81.25

13.09%

S&P 500

 2,502.22

  1.99

11.76%

Nasdaq Composite

 6,426.92

-21.55

19.39%

S&P MidCap 400

 1,769.43

 15.33

 6.66%

Russell 2000

 1,451.08

 19.45

 7.06%

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

European markets gain as economic recovery chugs ahead

The pan-European Stoxx 600 Index closed Friday at 343, a 0.88% gain over the previous week’s 340 finish. Eurozone economic data continued to show modest but steady improvement. Driven by strong results in France and Germany, the eurozone composite purchasing managers’ index, a common measure of economic activity, exceeded expectations and reached a four-month high of 56.7 in September. Consumer prices in the eurozone increased 1.5% year-over-year in August, the highest inflation reading since April and a modest increase over a 1.3% gain in the prior month. Inflation is rising gradually, although it remains below the European Central Bank’s 2% target rate. Eurozone consumer confidence improved more than expected in September, according to the European Commission, and reached its highest level since April 2001.

German government bond yields largely tracked U.S. Treasuries as Germans prepared to go to the polls on Sunday in federal elections. Ten-year German government note yields were somewhat higher for the week, finishing at around 0.45%. Angela Merkel’s Christian Democratic Union is widely expected to return as the largest party, but pundits are uncertain if she will be able to garner the absolute majority necessary to form a government without coalition partners. Elsewhere in the eurozone, Portuguese government bonds rallied after ratings agency S&P upgraded the country’s debt to investment-grade status. Spanish government bonds sold off amid heightened tensions surrounding the Catalonia region’s proposed referendum on independence.

UK stocks advance, but inflation concerns grow

The FTSE 100 Index ended Friday at 7,310.64, a gain of 1.3% over the previous week, as UK stocks appeared to shake off concerns about the recent terrorist bombing in the London Underground. August retail sales were stronger than expected, rising 1% month-over-month versus 0.2% expectations and gaining 2.4% from the same period last year. August saw the largest monthly sales growth since April 2017 and was the 52nd consecutive month of retail sales growth, driven by purchases in clothing and nonessential items.

Speaking on Monday, Bank of England (BoE) Governor Mark Carney sent another strong signal that UK interest rates will probably need to rise soon. Inflation is significantly above the 2% target—the previous week, headline inflation for August rose to 2.9% year-over-year and reached its highest level in five years—and pricing pressures keep growing. The pound weakened versus the U.S. dollar for the week and is down considerably since the highs in mid-2014. Although a weaker pound may be good for UK exporters, it raises prices on imported goods for UK consumers and erodes their purchasing power. The BoE’s next announcement on monetary policy is scheduled for November 2, but Carney has not revealed a specific date when interest rates might rise.

Japan

Japanese stocks posted solid gains in the holiday-shortened trading week—the market was closed on Monday in observance of Respect for the Aged Day. The Nikkei 225 Stock Average advanced 387 points and closed at 20,296.45. For the year to date, the Nikkei was up 6.2%, the broad-based, large-cap TOPIX Index was ahead 9.6%, and the TOPIX Small Index had gained 17.0%. The yen weakened for the week and closed near ¥112 per U.S. dollar, which is about 4.2% stronger than ¥117 per U.S. dollar at the end of 2016.

Bank of Japan keeps policy steady

The Bank of Japan (BoJ) made no changes to its current monetary policy stance at its September 21 policy meeting, marking a year since the implementation of the yield curve control program. The committee voted 8–1 to hold short-term rates on excess reserves for financial institutions at -0.1%. The central bank will also keep buying Japanese government bonds at approximately ¥80 trillion yen (over $700 billion) per year in an effort to keep long-term interest rates (the 10-year bond yield) near 0%.

New BoJ Board member is lone dissenter

Goshi Kataoka was the only monetary policy Board member to disagree on the merit of maintaining the current yield curve control policy. The new Board member asserted that his “no” vote reflects his belief that there is excess supply capacity in capital stock and the labor market and that monetary easing would not increase inflation to 2% by fiscal 2019. Kataoka also took umbrage with the current inflation outlook; he conceded that year-over-year inflation would increase in the near term but believed that longer-term projections for rising inflation were too optimistic.

Board statement reflects a stay-the-course approach

The BoJ policy Board affirmed that “it will continue with quantitative and qualitative monetary easing, with yield curve control, aiming to achieve the price stability target of 2% as long as necessary.” Most economists remain skeptical about the prospects for a turnaround in the inflation trend, believing that there are few indications of higher prices (or policy tightening) on the horizon.

China

S&P downgrades China, citing ballooning debt

S&P cut its credit rating for China over the country’s rising debt risk, an embarrassing setback for China’s government as it tries to preserve the appearance of economic stability before a key leadership transition next month.

S&P Global Ratings downgraded its sovereign credit rating for China by a notch to A+ from AA- with a stable outlook. The decision marks S&P’s first ratings cut for China since 1999 and the second sovereign downgrade for China this year after a similar move in May by Moody’s.

“The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China’s economic and financial risks,” S&P said in a statement. Though China’s government has lately stepped up measures to curb rising corporate leverage that could stabilize risk in the medium term, “we foresee that credit growth in the next two to three years will remain at levels that will increase financial risks gradually,” the agency added.

S&P’s downgrade comes at an awkward time for Beijing, which is trying to portray a rosy picture of the economy before the Communist Party’s twice-a-decade congress starts on October 18. At that meeting, China is expected to unveil a slate of new leaders who will run the country for the next five years and possibly longer. China’s finance ministry called the S&P downgrade a “wrong decision” that ignored the country’s economic fundamentals, according to a statement on its website.

S&P forecast that China’s annual economic growth would remain “close to 5.8% or more” each year through at least 2020, though it also forecast that the country’s credit growth would eclipse nominal economic growth for much of the period. While that growth figure is higher than that of most countries, it would represent a marked slowdown for China, which reported official gross domestic product growth of 6.7% last year.

Other Key Markets

Mexico’s quake likely to require loosening of fiscal targets

This week’s 7.1-magnitude Mexican earthquake, which killed more than 200 people, is likely to have a significant economic impact on Mexico, according to T. Rowe Price Sovereign Analyst Richard Hall. The quake hit one week after an 8.1-magnitude quake devastated several southern Mexican states. He expects the government will need to loosen fiscal restraints to finance additional disaster response resources. Given elections in 2018, political pressure to respond to the earthquake will be high, potentially prompting the government to pursue an extraordinary budget allocation. Thus Hall would not be surprised if the government loosens its fiscal target. Overall, this week’s quake is likely to hurt growth in the third quarter but give it a boost in the fourth. However, Hall believes the disaster will have no clear impact on inflation or monetary policy, and asset markets have remained calm.

Russia’s banking woes worsen

Russia’s central bank nationalized B&N Bank three weeks after nationalizing another top bank in the country. B&N, the country’s 12th largest lender by assets, asked for a rescue package after it required emergency liquidity. The bank said it had underestimated problems within the businesses it bought during its expansion drive. The central bank will take a majority equity stake in B&N and Rost Bank, a failing lender to which B&N had heavy exposure. Three weeks ago, Bank Otkritie, formerly Russia’s largest privately held bank by assets, was taken over to prevent what would have been the country’s largest banking collapse ever. Reuters, sourcing banking sector insiders, said there was no immediate sign of contagion for other Russian banks.

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