Markets & Economy

Global Markets Weekly Update

September 21, 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.

Dow and S&P 500 hit new highs

The major benchmarks were mixed for the week. The large-cap Dow Jones Industrial Average and the S&P 500 Index outperformed and reached all-time highs, while the technology-focused Nasdaq Composite Index and the smaller-cap benchmarks recorded modest losses. A sharp increase in longer-term bond yields early in the week boosted financials stocks by improving bank lending margins but weighed on real estate investment trusts and utilities shares, whose relatively high dividends became less compelling in comparison. The strong performance of the financials sector and relatively weak performance of technology stocks helped value stocks outperform their growth counterparts for the first week in over a month, although growth stocks remained well ahead of value stocks for the year to date.

Investors take escalation of U.S.-China trade battle in stride

The week brought a further escalation in the trade conflict between the U.S. and China, but it appeared to weigh on sentiment only briefly. Stocks fell sharply on Monday afternoon, which T. Rowe Price traders attributed to reports that the White House would soon make another tariff announcement. Indeed, after the close of trading, President Trump delivered on a threat that he made in August and declared that $200 billion worth of Chinese goods would immediately be subject to a 10% tariff, rising to 25% by the end of the year. The next round came on top of $50 billion worth of Chinese goods already subject to new tariffs this year.

In a pattern that surprised many observers, stocks rose solidly when trading began Tuesday and carried the momentum through much of the rest of the week. Investors may have been calmed by the low 10% level of the initial tariff, which some interpreted as a sign of a willingness to negotiate on the part of the administration. China seemed to offer its own olive branches. In particular, Chinese officials indicated that they would not allow the country’s currency, the yuan, to devalue further. The yuan has declined over 8% versus the U.S. dollar since April, making China’s goods more competitive on world markets and largely offsetting the impact of a 10% tariff. Chinese officials also announced a series of measures to open China’s markets to foreign goods, such as reducing the time it takes goods to clear customs.

Jobless claims hit lowest level since 1969

Sentiment may also have received a boost from solid U.S. economic data. Weekly jobless claims, reported Thursday, fell to 201,000, the lowest level in half a century. Regional manufacturing indexes were also strong. Housing data were more mixed, with housing starts jumping in August but new permits falling, suggesting some weakness ahead.

Bonds: 10-year Treasury note yield hits four-month high

The yield on the benchmark 10-year Treasury note touched 3.10% on Thursday, its highest level in four months, before falling back a bit on Friday. (Bond prices and yields move in opposite directions.) According to T. Rowe Price Chief U.S. Economist Alan Levenson, the Federal Reserve is all but certain to raise short-term interest rates when it meets on September 25-26.

T. Rowe Price analysts noted that municipal bonds continued to feel soft through the week, as investor apathy and cash flows out of municipal bond mutual funds coincided with the seasonal weakness between the July and December coupon reinvestment periods. The market saw increased selling activity, particularly in the high yield municipal segment. The selling activity also impacted the new issuance calendar, leading many issuers to cheapen their offerings. Supply continued to be constrained in the market, with 30-day visible supply at its lowest level since early July at just over USD $5 billion.

The investment-grade corporate bond market saw healthy new issuance, with volume in line with expectations. Recent new deals traded well overall with renewed demand from overseas investors providing technical support. Spreads—the additional yield offered over Treasuries with similar maturities—tightened across most investment-grade segments throughout the week. Meanwhile, inflows to high yield funds and moderate new issuance contributed to firmer sentiment in the below investment-grade market.

U.S. Stocks

 

 Index

Friday’s Close

Week’s Change

% Change YTD

DJIA

26,743.50

588.83

8.19%

S&P 500

2,929.67

24.69

9.58%

Nasdaq Composite

7,986.96

-23.08

15.70%

S&P MidCap 400

2,040.81

-5.75

7.38%

Russell 2000

1,711.29

-10.43

11.45%

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

Shares extend winning streak

European stocks brushed off trade tensions and Brexit woes and rode the coattails of the U.S. stock rally. The pan-European STOXX Europe 600 Index rose about 1.6%, lifted by financials, mining, and oil stocks.

Brexit tensions increase odds of no deal

The odds of a hard Brexit rose as UK Prime Minster Theresa May and European Union (EU) leaders traded Brexit demands. After climbing to a 10-week high, the British pound gave back gains, losing about 1.5% against the U.S. dollar on the week after EU leaders at a summit in Salzburg rebuffed May’s so-called Chequers plan. In this plan, she proposed to create an EU-UK free trade area, covering goods and agriculture. Instead, EU leaders took an unexpectedly tough tone and gave her four weeks to save the exit talks, which would include making a decisive move on the Northern Ireland border, which has become a key sticking point in negotiations. The EU wants a customs border in the Irish Sea between Northern Ireland and the rest of the UK, a demand that May had previously rejected. In a Friday speech, May seemed to abandon her Chequers plan, blaming its failure on the EU’s inability to compromise and stated that the negotiations had reached an impasse.

Fitzsimmons: Three Brexit outcomes are plausible

T. Rowe Price Global Fixed Income Portfolio Manager Quentin Fitzsimmons believes that three Brexit outcomes are most plausible: (1) The EU and UK agree to extend the deadline in hopes of coming to an agreement, (2) Both sides accept the UK’s exit strategy in the form of participation in a customs union or trade agreement, and (3) They accept a hard Brexit with a dramatic cutoff in the economic and legal status quo with the EU, effective March 30, 2019.

Trade frictions weigh on Europe’s manufacturers

Trade tensions continued to take a toll on European manufacturers. The IHS Markit Eurozone Composite Purchasing Managers’ Index (PMI) fell to a four-month low in September, dragged lower by weaker manufacturing activity and stagnant exports.

Japan

Japanese stocks posted strong gains in the holiday-shortened trading week—the Tokyo Stock Exchange was closed on Monday for Respect for the Aged Day. For the week, the Nikkei 225 Stock Average advanced 775 points (3.36%) and closed at 23,869.93, on Friday—up 4.85% for the year to date. The broad-based TOPIX Index and the TOPIX Small Index also rallied for the week, but they remain in negative territory, down 0.7% and 3.6%, respectively, in 2018. At the close of trading on Friday, the yen stood at ¥112.7 per U.S. dollar, modestly weaker for the week and virtually unchanged since the end of 2017.

Major stock benchmarks close at multi-month highs

The strong back-to-back weekly gains were fueled by easing global trade tensions and the strengthening U.S. economy, which bolstered the performance of many Japanese commodities and manufacturing companies. Reuters reports that the Nikkei closed at its highest level since January 24, while the broader TOPIX Index closed at a four-month high. Investors appeared to be optimistic about the next round of trade talks between the U.S. and Japan, slated to take place on September 24.

Abe wins a third term as LDP leader

Prime Minister Shinzo Abe easily won reelection as the leader of the Liberal Democratic Party, defeating former defense minister Shigeru Ishiba. The victory means Abe will be the prime minister for three more years and potentially become the longest-serving premier in Japan’s history. Abe told reporters that he would reshuffle his cabinet but declined to provide specifics.

BOJ affirms need for maintaining monetary easing

On Wednesday, following the Bank of Japan’s (BoJ) September Monetary Policy Meeting, Central Bank Governor Haruhiko Kuroda said that there would be no change to the current monetary policy until inflation reaches the 2% target. He also cautioned that international trade conflicts could impinge global growth. The BoJ’s statement on monetary policy acknowledged growing domestic demand and "a virtuous cycle from income to spending being maintained in both the corporate and household sectors.” However, the policy committee cautioned that there were risks to this outlook, including U.S. macroeconomic policy, the consequences of protectionism, developments in emerging and commodity-producing economies, and impacts from Brexit.

China

Chinese stocks surge on state support despite fresh U.S. tariffs

China’s main stock indexes rallied as promises from Beijing to stimulate domestic consumption outweighed the next round of U.S. tariffs set to go into effect later in September. For the week, the benchmark Shanghai Composite Index rose 4.3%, its best weekly gain since March 2016, according to Bloomberg. The large-cap CSI300 Index surged 3.0%, also its largest weekly gain in more than two years. Both gauges rebounded from multiyear low levels from the previous week. Sentiment was boosted after China’s cabinet issued a document earlier in the week detailing measures to boost consumer spending on the mainland. Buying by China’s state-controlled funds also supported the market, according to media reports.

Meanwhile, the ever-escalating U.S.-China trade battle loomed in the background as President Trump announced another round of tariffs on Chinese imports (see above). T. Rowe Price Fixed Income Portfolio Manager Andrew Keirle estimates that the next tariff cycle will subtract between 0.3% and 0.5% from China’s annual gross domestic product (GDP). Moreover, the latest U.S. tariffs jeopardize China’s ability to meet its growth targets and could shake confidence in the country’s business environment. In response, China has lately pressed on with various stimulus measures in an effort to restore growth to Beijing’s 6.5% GDP target this year, Keirle believes. 

Other Key Markets

Russia

Russian stocks firmed during the week. The gains were supported in part by rising oil prices, which stemmed in turn from increased Middle East tensions and expectations that U.S. sanctions on Iran would soon significantly reduce Iranian crude supplies on world markets. The ruble also benefited from these developments, as well as an unexpected interest rate increase on September 14. The Russian central bank had been in a rate-cutting cycle since 2014, reducing its key interest rate by 975 basis points (from 17% in December 2014 to 7.25% in March 2018) in view of a falling inflation rate and to support the economy due to U.S. sanctions and falling oil prices. But this previous Friday, the central bank lifted its key interest rate for the first time since 2014, from 7.25% to 7.5%, in an effort to control inflation and support the ruble. Year-to-date through the end of the August, the ruble had fallen about 14.5% versus the U.S. dollar.

Early in the week, the Russian government cancelled a debt sale scheduled for Wednesday, September 19, in order to help stabilize the debt market. According to T. Rowe Price Sovereign Debt Analyst Peter Botoucharov, the government’s coffers are in decent shape at present because the rebound in oil prices from early-2016 lows has contributed to a large current account surplus and the accumulation of foreign exchange reserves. However, Botoucharov acknowledges that the threat of additional U.S. sanctions remains high, as Congress is considering and developing several pieces of legislation that could target individuals, state institutions, state-owned banks and corporations, and even new government debt issuance.

Turkey

Turkish assets were volatile, especially the lira, whose rally following the central bank’s massive 625 basis point interest rate increase on September 13—which lifted its key interest rate to 24%—proved to be short-lived. President Recep Tayyip Erdogan’s suggestion that certain Isbank Board members who belong to an opposing political party should be “looked into” by the authorities weighed on the lira early in the week. Investors were also cautious ahead of Treasury and Finance Minister Berat Albayrak’s unveiling of a new Medium-Term Economic Program on Thursday.

In light of the lira’s pronounced sell-off this year—the lira was down nearly 43% versus the dollar through the end of August—investors are closely assessing the details of the program and their potential impact on the Turkish economy and Turkish assets. According to Botoucharov, the three-year plan acknowledges the economic slowdown and proposes economic targets—such as for GDP growth, inflation, and the current account deficit—that are more realistic than what the government previously projected. Another plus is that the plan offers at least a degree of fiscal adjustment through reduced government expenditures. However, Botoucharov believes that the plan has its flaws, such as the lack of specific measures for helping the corporate sector and for helping banks that are saddled with substantial nonperforming loans. He also believes that a fast, V-shaped economic recovery in 2020­­–2021—a key assumption of the plan—is unlikely.

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