Global Markets Weekly Update

Global Markets Weekly Update

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.

First 1% market decline in 109 trading days

Tuesday marked the first time in 109 trading days that the S&P 500 Index closed down 1% or more. The decline came amid uncertainty over whether Congress would pass a new health care law, concern over the pace of central bank interest rate increases, and anxiety around the reflation trade. Renewed worries about North Korea's pursuit of a more muscular nuclear program appeared to add to investor nerves.

No resolution on ACA repeal vote

Stocks steadied on Wednesday and Thursday and waffled on Friday with no resolution to the closely watched vote on the health care bill before the market close. Many analysts suggested that the Trump administration's difficulty in successfully negotiating with a Republican Congress to replace the Affordable Care Act (ACA) amounted to an early test of its ability to shepherd other domestic initiatives through Congress, including substantial infrastructure spending and tax cuts. After weeks of negotiations, the president told fellow Republicans on late Thursday that he was done bargaining and that if the bill failed to pass, he would move on to his other agenda items. On Friday, after the market closed, the Republican House of Representatives withdrew the legislation, acknowledging that it did not have sufficient support to pass.

Economic data mixed

Existing home sales fell 3.7% in February on a sharp decline in condos and a slight decline in single-family home sales. However, new home sales rose 6.1% in February, as a fall in the median price for new homes seemed to have spurred demand. Weekly jobless claims rose by 15,000 to a seven-week high of 258,000. Durable goods orders rose 1.7% in February. Core capital goods orders fell by 0.1% last month on continued weakness in business investment.

Bonds: Yields trend lower

Analysts continue to think that the Federal Reserve is on track to raise interest rates twice more this year, and Fed officials said little to dispel that outlook in various speeches. T. Rowe Price Chief U.S. Economist Alan Levenson believes the Fed will likely raise rates an additional two times this year, though the pace of increases will depend on economic growth and inflation projections. The latest Reuters poll projects the U.S. 10-year Treasury yield at 2.90% in 12 months, with the highest forecast at 3.50%. 

Intermediate- and long-term Treasury bond yields finished lower for the week. Municipal bonds posted positive returns and outperformed Treasuries and the broad fixed income market. Investment-grade corporate bond issuance was lackluster, with only a handful of new deals announced. However, the technical picture for high-quality corporates remained healthy overall. High yield market participants seemed to lack conviction this week, and outflows from the asset class continued. At the sector level, energy was a notable underperformer as oil prices fell amid supply concerns after U.S. reserves reached a record high.

U.S. Stocks1

 

Index

Friday’s Close

Week’s Change

% Change YTD

DJIA

20596.72

-317.77

4.22%

S&P 500

2343.98

-34.25

4.70%

Nasdaq Composite

5828.74

-72.26

8.28%

S&P MidCap 400

1696.92

-36.67

2.29%

Russell 2000

1356.29

-36.75

0.07%

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

Major European indexes began the week marked by low volatility and low volumes as investors seemingly awaited more information on key events, including televised debates between candidates running for office in the upcoming French elections and Brexit news, as well as a crucial health care reform vote in the U.S. On Wednesday, European stocks fell to their lowest point of the week, with banks (many of which have operations in the U.S.) hit hardest following a sharp sell-off in U.S. stock markets. A terrorist attack outside of the British Parliament building also hurt sentiment. On Thursday, the Stoxx 600 pan-European index rallied after three days of consecutive losses, with bank, travel, and retail stocks buoyed by stronger economic data reports. According to T. Rowe Price traders, early on Friday, markets were largely muted again, and there wasn’t a discernable “risk off” move due to the U.S. health care reform vote delay. 

Eurozone growth strengthens

During the first three months of the 2017, the IHS Markit purchasing managers’ index (PMI) rose at its quickest pace in more than five years, according to data released Friday. As the eurozone’s economy continues to strengthen, expectations are rising that the European Central Bank may begin to moderate its stimulus measures. T. Rowe Price traders said that the strong PMI numbers from France and Germany seemed to have calmed investors, at least for the time being, about the prospect that upcoming European elections could result in further market disruptions. 

UK inflation rises

UK government bonds sold off early in the week, as data showed headline inflation in Britain had reached its highest level in more than three years. Annual inflation for February hit 2.3%, according to figures published by the Office for National Statistics on Tuesday, driven in part by a rise in transport costs. The inflation number was higher than the forecast of 2.1% and marked the first time that inflation had exceeded the Bank of England’s 2% target since 2013. The yield on 10-year gilts increased to a five-week high of nearly 1.3% on the announcement before slightly decreasing later in the week.

Japan

Despite a solid rally on Friday, Japanese stocks declined in the four-day trading week (the Japanese market was closed on Monday). The widely watched Nikkei 225 Stock Average fell 1.33% (259 points) and closed at 19,262.53. For the year to date, the Nikkei is up 0.8%, the broad-based TOPIX Index has gained 1.7%, and the TOPIX Small Index is up 4.2%. The yen continued to strengthen, closing slightly below ¥111 per U.S. dollar, about 5.1% stronger than ¥117 per U.S. dollar at the end of 2016. 

BoJ meeting minutes reflect modest optimism

The Bank of Japan (BoJ) minutes from its January 30–31 policy meeting showed that board members were mostly bullish that consumption and retail prices would trend higher, although the pace of achieving the central bank’s inflation 2% target could be slow. Several BoJ policy committee members expressed doubt that the core consumer price index, excluding fresh food, will reach the 2% goal in the current three-year projection period ending March 31, 2019. Even the most optimistic members remained worried about wage growth, which will mark its fourth year of gains in 2017. 

At a conference on Friday, BoJ Governor Haruhiko Kuroda affirmed, “There is no reason to reduce the level of monetary accommodation in light of current economic and price developments…It’s unclear whether inflation will reach our 2% target before my term ends next April.” Many analysts expect core consumer prices to rise in February and inflation to approach 1% later this year. 

Yen gains as U.S. dollar weakens

Steady yen appreciation against the U.S. dollar over the past two weeks is partly the result of U.S. dollar weakness in response to concerns relating to the Trump administration's ability to enact domestic spending and tax programs and uncertainty about the path of U.S. interest rates. Japan’s trade surplus for February, ¥813 trillion, was well above the forecast. Exports rose 11%, while imports gained 1%. The preliminary Nikkei-Markit PMI reading showed that growth in manufacturing orders fell to a three-month low in March. Production slowed due to weakness in new orders and softer demand from abroad. Input costs inched higher, but prices for finished goods declined. 

Japan’s fiscal 2017 budget

Japan’s fiscal 2017 general account budget is expected to be approved by the House of Councillors, according to the Jiji Press. The fiscal year runs from April 1, 2017, to March 31, 2018. The ruling Liberal Democratic Party leaders and the Democratic Party (the largest opposition party) agreed on Thursday to vote in a plenary meeting of the chamber on Monday.

China

China's economy faces mounting downside risks as growth slows, warns OECD

China’s economic growth will gradually slow in the next two years, but an increasingly frothy housing market and rising corporate debt are among the risks that could destabilize the economy, warned the Organization for Economic Cooperation and Development (OECD) in a recent report. 

China’s annual economic growth will hover above 6% for 2017 and 2018 as stimulus measures and consumption offset a decline in industry and slower investment growth, the OECD forecast in its latest survey of China. However, soaring property prices in many cities and leveraged investment in asset markets “magnify vulnerabilities and the risk of disorderly defaults,” the research group added. Furthermore, excessive leverage and mounting corporate debt “compound financial stability problems” despite tax cuts for state-owned enterprises. As a result, “risks to the above projection are tilted to the downside,” the OECD said.

The OECD was the latest group to highlight the risks stemming from elevated home prices in China, which continued to march higher in February, according to a survey of 70 mainland cities. Bubble-like conditions in the housing market have drawn more concern from officials, who have lately tightened mortgage rules in several cities.

However, China’s government is toeing a fine line as it attempts to cool housing prices while trying to minimize the broader fallout from a property market slowdown. China’s property market remains critical to overall growth, amounting to between 10% and 20% of overall gross domestic product, estimates T. Rowe Price Sovereign Credit Analyst Chris Kushlis. Though housing inventory and new housing starts have slowed in recent years, property investment as a share of China’s GDP remains quite high, he notes. Over the long term, China’s growth remains on a structural downtrend as the economy develops, its working population shrinks, and the returns on investment decline, Kushlis believes.

Other Key Markets

Brazil hit by meat boycott

The European Union and 20 countries, including Saudi Arabia and China, have temporarily banned beef and chicken imports from some manufacturing plants in Brazil, the world’s largest beef and poultry exporter. The boycotts came after allegations that about 40 companies had been involved in illicit activities, such as bribing inspectors to approve the sale of spoiled meat and adding chemicals to mask poor quality. The scandal followed a two-year investigation by Brazilian federal police, which resulted in 21 plants being forced to suspend exports. T. Rowe Price London-based Latin American Equity Analyst Martin Baylac said the scandal has been “significantly exaggerated and now threatens decade-long commercial relations in one of Brazil’s most competitive export sectors.” While the Brazilian government is rushing to convince buyers that sanitation oversight is sound, Brazilian meat suppliers are scaling back production. “There will be near-term implications for prices, domestic demand, and profitability, but we don’t expect more serious longer-term consequences on the back of this,” said Baylac.

Mexican stocks hit all-time high

Mexican stocks hit an all-time high on the back of the weaker peso, which has helped exporters. The continued strengthening of the U.S. economy, which benefits Mexican manufacturers, along with stabilization in oil prices and more dovish comments from the Fed over the pace of future interest rate increases are also helping sentiment toward Mexican stocks.

Russia surprises markets with rate cut

Russia surprised markets by cutting interest rates for the first time in seven months as inflation stabilized near a five-year low and growth showed signs of improvement. Russian policymakers cut their benchmark rate by 0.25 percentage points to 9.75%.

Fitch downgrades Saudi Arabia

Fitch downgraded Saudi Arabia's credit rating to A+ from AA-, citing the continued deterioration of public and external balance sheets, the significantly wider-than-expected fiscal deficit in 2016, and continued doubts about the extent to which the government can implement its ambitious reform program.

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