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 finish higher after up-and-down week

Stocks closed higher following a week of seesaw trading. The Nasdaq Composite Index outperformed, while disappointing results from Goldman Sachs, IBM, and Johnson & Johnson weighed on the narrowly focused Dow Jones Industrial Average. The smaller-cap indexes, which typically see larger swings, outperformed for the week but continued to lag for the year to date.

The week brought the first significant round of first-quarter earnings reports, which are generally expected to show the best rise in overall corporate profits in several years. Anticipation of Netflix’s earnings seemed to boost broader sentiment on Monday, according to T. Rowe Price traders, although the stock dipped a bit and then recovered after the media giant reported after the close of trading that it had missed revenue expectations while surpassing earnings estimates. Goldman Sachs’ miss on Tuesday, along with lighter-than-expected revenues from Johnson & Johnson and negative guidance from health care services firm Cardinal Health, combined to push the indexes back lower.

Wage gains put pressure on profit margins

Even as earnings reports flowed in, uncertainty about tax reform and other economic and political issues managed to steal the spotlight on occasion. The firm’s traders noted that the release of the Federal Reserve’s Beige Book—an anecdotal summary of economic conditions—seemed to push stocks into negative territory on Wednesday afternoon. The report indicated some concerns that economic activity was being restrained by uncertainty about fiscal policy, as well as only minimal inflation pressures. The Beige Book simultaneously indicated a pattern of solid wage gains, suggesting that firms might be swallowing the higher costs. Scott Berg, a manager of global growth equities at T. Rowe Price, observes rising wage inflation has implications for corporate profit margins—a challenge that may be currently underestimated in the market. Rising wage pressures will separate out those companies that are able to defend margins by exercising pricing power in the coming months, he notes.

Tax reform promises help equities but have little impact on bond yields

On the positive side of the ledger, assurances from Treasury Secretary Steven Mnuchin on Thursday afternoon that tax reform plans were progressing appeared to drive a late rally. Mnuchin’s comments eased concerns that Trump’s fiscal agenda is floundering, the firm’s traders observed.

Renewed faith in tax reform did not feed through into higher Treasury yields, but this may have been partly due to investors seeking a “safe haven” in the wake of the Paris attack on Thursday evening (see below). Long-term yields, which had decreased significantly in previous weeks as fiscal stimulus expectations waned, remained near their five-month lows as Treasury prices stayed in a tight range. The municipal market benefited from a light new issuance calendar for the week, according to T. Rowe Price analysts.

Investment-grade market absorbs bank supply

Investment-grade corporate bond investors focused on new issuance as the much-anticipated supply from U.S. banks hit the market. The asset class was resilient overall despite some equity weakness. Broad market themes noted by T. Rowe Price traders include a gradual reduction in appetite for new issues amid rising geopolitical risk, along with lower U.S. rates tempering demand from investors in Asia.

The high yield market was quiet with limited participation as the week began, but new issues were met with robust demand when trading activity returned to normal. Sector performance was somewhat mixed. More volatile bonds underperformed, most notably in the utilities and energy sectors. In the supermarkets segment, Rite Aid bonds traded lower on news that the Federal Trade Commission may sue to block its merger with Walgreens.

U.S. Stocks1

 

Index

Friday’s Close

Week’s Change

% Change YTD

DJIA

20547.76

94.51

3.97%

S&P 500

2348.69

19.74

4.91%

Nasdaq Composite

5910.52

105.37

9.80%

S&P MidCap 400

1719.17

36.46

3.63%

Russell 2000

1381.39

34.66

1.92%

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

The major European indexes were mixed for the week. Earnings season in Europe has provided a lift in the markets, according to T. Rowe Price traders. Crude oil prices slipped about $2 per barrel at midweek, however, leading to softness in energy stocks.

All eyes were on France during the week as the first round of the French presidential elections on April 23 appeared poised to provide early indications about the future shape of the European Union. Market consensus suggested that presidential candidates Emmanuel Macron and Marine LePen were likely to poll the highest but with neither winning more than 50% of the vote. As a consequence, the markets were expecting that the two will vie for the presidency in a second-round election on May 7.

Mixed reaction in France

The CAC 40, the French blue chip benchmark, underperformed the broad pan-European Stoxx 600 index. The suspected terrorist attack Thursday evening on the Champs-Elysees in Paris, which resulted in the death of a policeman and two others wounded, further weighed on French stocks. In contrast, business activity in France grew at its fastest pace in almost six years, according to IHS Markit’s purchasing managers’ index—a sign that businesses may have a more positive longer-term view about the country’s economy. French government bonds sold off slightly during the week, with the yield on 10-year French government debt rising to around 0.94% by the end of the week.

UK stocks lower

Notably, the UK blue chip FTSE 100 Index was on track to end the week with its worst weekly performance in five months. UK retail sales posted the biggest quarterly drop since 2010, with price inflation across a wide range of sectors being cited for the decline. UK government bond yields temporarily diverged from international peers on Tuesday as Prime Minister Theresa May called a snap general election to be held in June. The yield on 10-year gilts fell to 1.01% on Tuesday before tracking Treasury yields upward later in the week.

Japan

Japanese blue chip stocks posted steady gains throughout the week, after dipping to a multi-month low the previous Friday. The Nikkei 225 Stock Average climbed 1.6% (285 points) and closed at 18,620.75. For the year to date, the Nikkei has declined 2.6%, the broad-based TOPIX Index is off 2.0%, and the TOPIX Small Index is 0.1% lower. The yen was relatively unchanged for the week, closing slightly above ¥109 per U.S. dollar, about 6.8% stronger than ¥117 per U.S. dollar at the end of 2016.

Global demand drives export and import growth

Japan posted solid export growth in March versus the year-ago period as manufacturers recorded solid gains in many regions. Japanese exports grew 12% to ¥7.2 trillion (~$66 billion), according to the Finance Ministry. Export growth to China was especially robust, rising 16% overall. The monthly gains were powered by 37% and 40% growth in the scientific/optical instruments and autos segments, respectively. Shipments to the U.S. also expanded for a second consecutive month. Meanwhile, Japanese imports climbed nearly 16% to ¥1.4 trillion, powered by higher crude oil prices. Japan has been importing more fuel for power generation since the nuclear accident in 2011. Of Japan's 42 operational reactors, three are currently operating and five or six more are set to come back online in 2017. Prime Minister Shinzo Abe views the trade data as encouraging and a sign of economic growth. The International Monetary Fund (IMF) raised its 2017 gross domestic product growth forecast for Japan to 1.2% from 0.8%.

The Reuters Tankan sentiment survey strengthens

The monthly Reuters Tankan sentiment index for manufacturers rose in March to its best reading since August 2007, thanks to improving global demand. The confidence across Japanese manufacturers was led by strength in the food, machinery, and metals segments. However, the outlook for the next three months is somewhat less sanguine, with the index expected to slip due in part to political issues and their associated risks to global trade. The service sector gauge reached a three-month high, reflecting the solid global economic recovery and the improving exports environment, but it is also expected to slide back to +26 over the next three months.

China

China economy accelerates in 2017, but slowdown still looms

China’s economy grew strongly in the first quarter of 2017, but the growth spurt came as the government stepped up stimulus spending, a tactic that will likely worsen China’s long-term growth risks.

Gross domestic product rose a better-than-expected 6.9% from January to March, China’s statistics bureau reported last week, lifted by credit and infrastructure spending and a booming housing market. The first quarter’s advance follows the previous quarter’s 6.8% pace, marking China’s first quarter-on-quarter acceleration in seven years. Other economic data showed surprising strength: Gauges of retail sales and industrial output surged more than expected in March, while fixed-asset investment in items such as buildings and factories picked up more than forecast in the first quarter.

The latest data offer a positive backdrop for China’s leadership, which is gearing up for an important leadership transition at a twice-a-decade Communist Party Congress meeting in November. But they also reinforce China’s continued reliance on credit-fueled investment in property and infrastructure, measures that will likely increase debt and bad loans at a time when the government is increasingly alarmed about financial risks.

Indeed, growing weaknesses in China’s financial system resulting from fast credit growth is a key risk for the global economy, the IMF said in its April World Economic Outlook. “Risks to medium-term growth appear more clearly negative…because policy support in the United States and China will have to be unwound or reversed down the road to avoid unsustainable fiscal dynamics,” the IMF warned. The IMF’s caution is echoed by T. Rowe Price sovereign credit analyst Chris Kushlis, who maintains that China’s steady misallocation of capital and other structural factors will likely cause economic growth to grind lower in the coming years. China needs to push market-driven reforms through to its economy and financial system, but reform expectations after November’s Congress are highly uncertain, Kushlis believes.

Other Key Markets

Erdogan gains sweeping power after Turkish referendum

Recep Tayyip Erdogan won a narrow victory in Turkey’s constitutional referendum that effectively ends the parliamentary system of democracy and gives him control over parliament, the judiciary, and all government ministries and that could keep him in power for life. The lira fell about 1.7% against the dollar during the week. Erdogan has said that a concentration of power is necessary to prevent instability, but the opposition parties have challenged the result and European election monitors said the referendum did not meet international standards. T. Rowe Price London-based sovereign analyst Peter Botoucharov notes that the completion of the referendum could reduce short-term political uncertainty as well as pressure on rates and foreign exchanges, but sociopolitical and economic risks remain in place. The likely extension of the state of emergency and re-imposition of the death penalty could have an effect on private capital flows.

Nine killed in Venezuela unrest; GM ceases operations after plant seizure

Governments across South America have condemned the violence sweeping Venezuela amid mass protests in which demonstrators demanded early elections and denounced the government. Nine people have been killed. General Motors said that it had stopped operations in the country after local authorities seized its plant, which employs more than 26,000 workers.

S&P downgrades El Salvador after missed pension debt payment

S&P downgraded El Salvador’s sovereign credit rating to “selective default” on Friday, meaning that the country has chosen to default on a specific issue but will continue to pay its debt obligations. The government missed $28.8 million of payments due between April 7 and April 10 to a local pension fund after the country’s congress—split between the government and main opposition party—failed to approve a budgetary allocation to fund the payment.

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