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.

Early-week relief rally propels U.S. stocks higher

A particularly strong performance on Monday, in what T. Rowe Price traders characterized as something of a relief rally, led to a positive week for U.S. stocks as many major benchmark indexes reached record highs. Monday’s burst of optimism came after the initial reports of damage from Hurricane Irma were not as severe as some pre-U.S. landfall estimates had projected. Also, North Korea did not test another missile during the previous weekend, as many observers had expected. However, the country did launch a missile over Japan near the end of the week, which markets shrugged off. Stocks across the range of market capitalizations enjoyed similarly strong performance for the week.

Technology bellwether Apple announced the 10th anniversary version of the iPhone on Tuesday. Apple’s press event had little impact on the broader technology sector, and the company’s stock declined modestly on the day of the introduction before recovering to finish the week little changed. Apple shares had gained almost 40% in 2017 through the beginning of the week.

August CPI data strong

On Thursday, the Department of Commerce reported that the consumer price index (CPI) rose 0.4% in August, breaking a recent string of lower-than-expected monthly inflation readings. T. Rowe Price Chief U.S. Economist Alan Levenson says that August’s solid CPI number supports the Federal Reserve’s view that the recent inflation soft patch was transitory. Levenson now believes that the Fed is likely to raise interest rates at its December policy meeting.

The inflation data also pushed yields on Treasury bonds higher (see below), supporting bank stocks. Higher long-term interest rates allow banks to generate more interest income from lending, helping to boost their profits.

Treasury yields rise as safe-haven demand wanes

U.S. Treasury yields increased, with much of the selling pressure coming at the beginning of the week as demand for safe-haven assets like Treasuries waned after North Korea did not test-fire a missile over the weekend and the damage from Hurricane Irma appeared to not be as severe as some expected. (Bond prices and yields move in opposite directions.) The strong August CPI report compounded the sell-off, particularly in shorter maturities that are more sensitive to increases in the benchmark federal funds rate, by boosting the odds that the Fed will raise rates at its December policy meeting. Prices of fed funds futures contracts at the end of the week showed that traders were pricing in an approximately 50% chance of a rate hike in December.

The investment-grade corporate bond market benefited from a healthy balance of new issuance and strong demand. Insurers were notable outperformers early in the week as they rebounded from pre-Hurricane Irma selling pressure. The high yield market was primarily focused on new issuance. Crude oil rose above $50 a barrel for the first time since early August before giving back some of the gains, creating some volatility in below investment-grade bonds from issuers in the energy industry.

Municipal bond yields followed Treasury yields higher, leading to modestly negative returns for munis. New York City issued over $850 million of new municipal debt in the week’s largest deal. T. Rowe Price municipal traders noted that demand for the newly issued New York bonds was very strong, particularly for longer maturities.

U.S. Stocks1

 

Index

Friday’s Close

Week’s Change

% Change YTD

DJIA

22,268.34

470.55

12.68%

S&P 500

2,500.23

38.80

11.68%

Nasdaq Composite

6,448.47

88.28

19.79%

S&P MidCap 400

1,754.10

36.16

5.73%

Russell 2000

1,431.63

33.15

5.63%

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 equities ended the week higher, as auto and technology stocks gained and favorable economic news provided a lift for key indexes. The pan-European Stoxx 600 index closed on Thursday (September 14) at its highest level since early August. Eurozone statistics agency Eurostat reported that wages in the region rose 2% year-on-year in the second quarter, when the eurozone grew at its fastest pace in two years. T. Rowe Price traders noted earlier in the week that while eurozone purchasing managers’ indexes came in a bit low, the results were still comfortably expansionary.

Geopolitical events weigh

North Korea’s launch of yet another missile late in the week had a muted effect on European stocks. Banks and mining stocks headed lower, reflecting some shifting by investors out of riskier assets into safer havens.

On September 15, a morning rush hour explosion at a southwest London Underground station, labeled by police as a “terrorist incident,” dragged down travel and leisure stocks most notably, though a broad swath of sectors tumbled following the explosion.

UK stocks slump 

The pound reached a 14-month high against the dollar at the end of the week, a key factor in the wilting performance of the FTSE 100 index of blue chip UK stocks, which slipped to its lowest levels in four months. The FTSE 100 tends to slump when the pound strengthens because multinational companies in the index tend to generate much of their revenue overseas.

UK government bond yields spiked, as the central bank turned more hawkish and new figures showed inflation rose steeply. At its September meeting on Thursday, the Bank of England's (BoE) Monetary Policy Committee (MPC) voted by a majority of 7-2 to keep its policy rate unchanged at a historic low of 0.25%. However, the BoE took a hawkish tone in its accompanying statement and warned that it could hike rates more rapidly than previously expected: “All MPC members continue to judge that, if the economy follows a path broadly consistent with the August Inflation Report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations.”

Earlier in the week, figures from the Office for National Statistics revealed that headline inflation for August reached its highest level in five years, rising to 2.9% year-on-year, up from 2.6% the previous month. The yield on 10-year gilts climbed to 1.23% by Thursday’s close, the highest level since early August.

Japan

Japan’s equity markets rise for the week…

The major Japanese stock market benchmarks posted solid gains for the week. The widely watched Nikkei 225 Stock Average closed the week at 19,909.5, advancing 3.29% (635 points) versus the prior week. For the year to date, the Nikkei 225 is up 4.16% (795 points). The broad-based TOPIX Index rose 2.85% (45 points) for the week and has gained 7.92% (120 points) for the year to date. The TOPIX Small Index added 3.18% (67 points) to last week’s close and is now up 16.52% (308 points) since the beginning of 2017. The yen closed the week at 110.66 versus the U.S. dollar, a gain of 2.54% against the prior week. However, the yen has declined 5.44% against the dollar for the year to date.

…as investors appear to take North Korea tensions in stride…

Japanese markets were rattled after North Korea’s detonation on September 3 of what experts believe was a hydrogen bomb. Tensions were high heading into last weekend on expectations of more provocation from North Korea timed to coincide with celebrations of the country’s founding day on September 9. However, markets breathed a sigh of relief as the weekend passed relatively uneventfully, and improved risk sentiment helped drive a strong rally in Japanese equities early in the week. Typically aggressive North Korean rhetoric surrounding a new round of United Nations sanctions failed to unnerve investors, who appear to have become somewhat inured to the hyperbolic saber rattling emanating from Pyongyang. The unexpected North Korean missile launch over Japan on Thursday resulted in only a temporary hiccup, and markets resumed their rally on Friday, showing the extent to which regional tensions may already be priced into valuations. 

…and the economic recovery chugs ahead

Despite the heightened geopolitical tensions, Japan’s economy remains in the midst of a moderate but durable recovery, having expanded for six straight quarters thanks to sustained job gains and a rebound in global trade. Data showed that machinery orders in Japan advanced 8% in July over the previous month, beating expectations of a 4% increase. July’s industrial production declined 0.8% versus June but gained 4.7% year over year, both of which were in line with consensus expectations. A look at the level of industrial output shows the profound consequences of past declines—even with the sustained economic gains in recent quarters, industrial production remains about 13% below its peak in 2007.

China

China’s economy unexpectedly slows in August; growth in investment falls to 18-year low

China’s latest batch of monthly indicators showed that the country's economy unexpectedly slowed in August, offering more evidence that it has entered a slowdown after a sluggish July. August industrial output and retail sales slowed from July’s pace and trailed economists’ expectations. Both readings marked their slowest pace of growth this year. Meanwhile, fixed-asset investment in urban areas—a closely watched gauge of construction activity—rose a weaker-than-forecast 7.8% for the eight months ending in August, lagging the pace of the year’s first seven months and marking the slowest growth rate since 1999.

The unexpected slowdown in all three key indicators last month showed that China’s economic activity likely peaked in the year’s first half. China’s gross domestic product rose a surprisingly strong 6.9% in the first and second quarters, raising expectations that the economy would cool in the second half of 2017 as tighter monetary policies and a property sector slowdown took hold. Until recently, China’s loss of growth momentum has been fairly modest, notes T. Rowe Price sovereign analyst Chris Kushlis. Nevertheless, Kushlis expects downward momentum in China’s growth trajectory will pick up over the rest of 2017 as the government presses ahead with tightening measures in the financial system.

Other Key Markets

Brazil’s Temer indicted again

Brazilian President Michel Temer was indicted on corruption-related charges for the second time in three months. This indictment—like his last—was not expected to result in a trial because of his strong support in Congress. A vote of the lower house is needed to move the indictment to the Supreme Court. Chief Prosecutor Rodrigo Janot has alleged that Temer led a political corruption racket and sought to obstruct justice by authorizing the payment of hush money.

Qatar spends $38.5 billion to support economy amid Gulf row

Qatar allocated $38.5 billion in financial reserves to support its economy as political tensions with its Persian Gulf neighbors persist, according to Moody’s Investors Service. Qatar’s trade, tourism, and banking sectors have been hurt the most since the United Arab Emirates, Saudi Arabia, Egypt, and Bahrain severed diplomatic and trade links with Qatar in June after alleging the country supported terrorism. Since then, Qatar’s stock market has lost about 15% of its value, hitting a 52-month low this week. Moody’s warned that the diplomatic dispute has created uncertainty throughout the Gulf region and could hurt the credit outlook of all countries involved.

Bahrain prices $3 billion bond issue; demand hits $15 billion

The Kingdom of Bahrain priced a $3 billion three-part bond issue with a 7.5-year note yielding 5.25%, a 12-year maturity at 6.75%, and a 30-year bond at 7.5%. Demand for the bonds topped $15 billion. Bahrain is rated BB- by S&P and BB+ by Fitch. Both agencies have a negative outlook on Bahrain.

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