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.

Stocks mostly lower after volatile week

The major benchmarks ended mixed after a volatile week and unusually high trading volumes in advance of the Fourth of July holiday. As it has in recent weeks, the technology-heavy Nasdaq Composite Index experienced a much larger swing than the large-cap benchmarks, this time to the downside. Smaller-cap stocks, which are typically more volatile, were modestly higher for the week.

After beginning the week on a quiet note, market volatility kicked in Tuesday, with sharp declines in technology shares resulting in the worst decline for the S&P 500 Index in over five weeks. T. Rowe Price traders also noted that the Nasdaq broke below its 50-day moving average for the first time in seven months. The tech sector’s weakness was due in part to news that the European Union was fining Google parent Alphabet $2.7 billion for antitrust violations, but the weakness was widespread, with semiconductor shares also falling sharply. News that Senate Republicans were delaying the vote on their health care replacement plan accelerated the sell-off, according to the firm’s traders, as it pushed back and further complicated efforts on tax reform.

Strength in bank stocks helps offset tech weakness

Volatility continued throughout much of the remainder of the week. Financial stocks provided a lift to the benchmarks, thanks in part to comments from global central bank officials suggesting that higher interest rates are on the horizon—banks generally profit from higher rates and lending margins. Banks got a further boost from the Federal Reserve’s Comprehensive Capital Analysis and Review, which cleared nearly all major banks to return more capital to shareholders. As a result, several banks announced higher dividends and share repurchases. The lift from financials was offset by a continued drag from technology shares, however. The highly publicized FANG stocks—Facebook, Amazon, Netflix, and Google (Alphabet)—all fell sharply again on Thursday and moved below their 50-day moving averages.

Yields on U.S. Treasuries increased in reaction to the tightening comments from global central bank officials. An uptick in oil prices and dollar weakness also pushed yields higher. (Bond prices and yields move in opposite directions.)

Illinois faces downgrade to junk status

Municipal bonds declined in line with Treasuries as investors awaited Illinois’ budget deadline. As the end of its fiscal year approached on June 30, Illinois appeared to be mired in a political impasse that could lead to the state’s general obligation debt being downgraded to below investment-grade, or junk, status—something that has never happened to a U.S. state. Several other states also scrambled to reach budget deals during the week, but Illinois stood out as it appeared headed for a third straight fiscal year without passing a full-year budget.

Moody’s Investors Service and S&P Global Ratings downgraded Illinois’s general obligation debt to the lowest investment-grade level after the state’s regular legislative session ended on May 31 without a budget, and the ratings agencies warned that further downgrades were likely if a deal wasn’t reached by the end of June. Legislators met during the week in a special session to try to solve the impasse. Illinois has continued to service its debt during its fiscal crisis but faces higher lending costs if its bonds are downgraded to junk.

Energy bonds outperform as oil prices move higher

Risk sentiment in the investment-grade corporate bond market began to shift following comments from Fed Chair Janet Yellen about U.S. asset valuations becoming somewhat elevated. European Central Bank (ECB) President Mario Draghi also contributed to the uncertainty by saying that the central bank may reduce its bond purchases. However, bank bonds advanced thanks to the Fed’s positive outlook on the stability of the U.S. banking system. The energy sector also outperformed as oil prices recovered somewhat from recent weakness.

The high yield market began the week with light volumes as investors appeared to be somewhat cautious. The market had a muted reaction to news of the potential deal between Comcast/Charter Communications and Sprint. The energy sector outperformed on the back of higher oil prices, with buying across the ratings spectrum as last week's increase in U.S. crude reserves was smaller than expected. Below investment-grade funds reported inflows.

U.S. Stocks1

 

Index

Friday’s Close

Week’s Change

% Change YTD

DJIA

21349.63

-46.70

8.03%

S&P 500

2423.41

-14.89

8.24%

Nasdaq Composite

6140.42

-124.83

14.07%

S&P MidCap 400

1749.75

5.39

5.47%

Russell 2000

1417.05

1.45

4.55%

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 started the week on a positive note. Bank stocks were higher, following the European Commission's and Italian government's decision to liquidate two struggling Italian regional lenders using up to €17 billion of Italian taxpayer money. T. Rowe Price traders said the bailout was a positive for the sector and a signal that there is an appetite to clean up insolvent banks to increase overall confidence in the market.

Shift in tone from central banks sparks sell-off

European stocks and bonds sold off at midweek, however, following hawkish comments from the ECB and the Bank of England that apparently sent a signal to many investors that quantitative easing and record-low interest rates could be ending soon. Ten-year German bund yields climbed to their highest levels in three months.

Tapering to begin in the fall?

Kenneth Orchard, a T. Rowe Price fixed income portfolio manager, believes that the ECB could announce a tapering of its bond-buying program at its October meeting. He notes that while eurozone growth has accelerated and unemployment continues to fall, inflation still remains weak. The ECB, he observes, targets inflation, not growth, and, consequently, a potential rate hike could be pushed further back to 2019. The European Union’s statistics office reported that underlying inflation rose to 1.2% in June from 1.0% in May, but headline inflation eased to 1.3% from 1.4% a month earlier. Orchard points out that the ECB has already taken its foot off the accelerator—the final round of low-cost loans to banks was offered in March, and in April, the ECB reduced the pace of its monthly bond-buying program by €20 billion to €60 billion.

Japan

Japanese equities generated mixed performance for the week. The Nikkei declined 0.5% (99 points), the TOPIX Index was roughly unchanged, and the TOPIX Small Index posted a small gain. For the year to date, the Nikkei is up 4.8%, the TOPIX Index is ahead 6.1%, and the TOPIX Small Index has advanced 10.8%. The yen modestly strengthened during the week versus the greenback, ending near ¥112 per U.S. dollar, which is about 4.2% stronger than ¥117 per U.S. dollar at the end of 2016.

Flash manufacturing PMI dips

As reported in the Nikkei Asian Review, the Nikkei Japan flash manufacturing purchasing managers’ index (PMI) fell to 52.0 in June from 53.1 in May, marking a seven-month low. Although slowing, the PMI reading remained above 50.0, the dividing line between expansion and contraction—the reading has been above 50.0 for 10 consecutive months.

A recent Reuters survey showed more evidence of Japan’s economic recovery. Japanese manufacturers’ confidence rose in June, and the service sector sentiment climbed to a two-month high. The monthly Reuters poll, which mirrors the Bank of Japan’s (BoJ) quarterly Tankan survey, points to a modest improvement for the quarter. It also supports the BoJ’s rationale for upgrading its recent assessment of current economic conditions. While wage growth and household spending remain lackluster, recent indicators of business activity point to export and factory output growth.

China

Data point to economic strength

Two pieces of data pointed to ongoing strength in China’s economic activity, indicating that growth remains resilient despite expectations of a slowdown later this year.

China reported that its official PMI unexpectedly rose to a better-than-expected 51.7 reading in June from 51.2 in May as manufacturing accelerated on strong overseas demand. June’s increase marked the 11th consecutive month that the manufacturing PMI remained above 50. Meanwhile, nonmanufacturing PMI—which measures the services sector activity—also ticked higher. Earlier in the week, China reported that profits at industrial companies in May rose 16.7% from a year earlier, surpassing April’s increase. Though May’s surge in industrial profits was compared against a low level last year, it still indicated strength in the country’s industrials sector. Taken together, the data showed that China’s economy ended the first half of 2017 on solid footing, which should allow its government more room to deleverage the financial system and curb other risks ahead of a landmark leadership transition this fall.

While China’s growth continues to look stable, it is actually plateauing, believes T. Rowe Price sovereign debt analyst Chris Kushlis. Over the past year, Chinese policymakers have stepped up efforts aimed at reducing financial system excesses, for example by cracking down on off-balance sheet investments and raising the cost of short-term funds. On the other hand, China has also shown a willingness to loosen policy to avert an unwelcome slowdown. China’s economy will likely reverse course at some point—though it typically takes several rounds of monetary policy easing followed by tightening before it gets there, Kushlis notes.

Other Key Markets

Brazil’s markets look past Temer indictment

Brazil’s stocks and the real rose for the week, shrugging off news that Brazil’s prosecutor general had indicted President Michel Temer on charges of “passive corruption” and accused him of taking—through a former adviser—$150,000 in bribes from JBS, the world’s largest meatpacker. 

To send Temer to trial, Brazil’s lower house of congress would have to muster a two-thirds vote to ratify the charges against him. Verena Wachnitz, a T. Rowe Price portfolio manager, is not concerned that the charges against Temer will be ratified because he has enough support to block the move. Of greater concern is that pension reform will be delayed as Temer and congress focus on the indictment. That reform is crucial to Brazil’s continued economic recovery as it emerges from its worst recession in history.

Wachnitz will be watching how fast Temer is able to gather support and get a vote put through congress. Her view on Brazil remains unchanged, although political risk remains high with elections next year. Eventually, the reform will have to happen because the fiscal path is unsustainable, she believes. If reform does not happen under this government, it will have to happen under the next one. Brazil’s anticorruption probe “Lava Jato” has been far-reaching. Many senior politicians and business leaders have been jailed and billions of dollars reclaimed in settlements. Still, this is the first time in the country’s history that a sitting president has faced criminal charges.

The most recent changes come as the country works to emerge from two years of recession. On Thursday, Brazil’s central bank cut its inflation target after consumer prices dropped sharply. Brazil’s inflation rate is at a 10-year low of 3.6%.The bank lowered its inflation target to 4.25% in 2019 and 4.0% in 2020 from its current 4.5%.

1
Dismiss
Tap to dismiss

Subscriptions/Watch list

Unsubscribe All
OK

Manage your watched Funds and Insights subscriptions here.

OK

Change Details

Congratulations! You are now registered.

Begin watching and receiving email updates for:

Ok

Sign in to manage your subscriptions and watch list.

Register

Download

Latest Date Range
Download Cancel

Institutional Content

I have read and agree to the terms and conditions
Confirm Cancel

This content is restricted for Institutional Investors use only. We were not able to validate your status as an Institutional Investor with the information you provided at registration.

Please contact the T. Rowe Price Team with questions or to revise your status.

1-800-564-6958

You will need to accept the Terms & Conditions again.

Ok

You have updated your email address.

An activation email has been sent to your new email address from T. Rowe Price.

Please click on the activation link in order to receive email updates.

Ok

You have an existing account

Click OK to view your subscriptions and watch list.

OK

Confirm Cancel