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.

Large-cap indexes reach new highs

Stocks rose for the week. The Dow Jones Industrial Average and the S&P 500 Index were the only benchmarks to touch new intraday highs, but the technology-heavy Nasdaq Composite performed best for the week. Trading volumes were generally subdued through Thursday as investors awaited the start of earnings reporting season, which kicked off Friday with the release of second-quarter results from several major banks. Stocks rallied into the close of the week, which some attributed to hopes for a repeat of the previous quarter’s upward earnings surprises.

Markets were generally flat early in the week, with the S&P 500 suffering only a brief sell-off on Tuesday morning after President Trump’s son released emails showing that he had had contact with a Russian lawyer before the election. Politics were also in focus in terms of the Republican health care bill. T. Rowe Price traders noted that the announcement later Tuesday that the Senate was delaying its August recess to deal with health care helped the market recover from the email revelations.

Markets rise on Yellen's dovish tone

Attention on Wednesday shifted to the Federal Reserve. Fed Chair Janet Yellen’s semiannual testimony before Congress struck a generally dovish tone, according to the firm’s traders. Yellen signaled that the Fed was in no rush to tighten monetary policy, and offered reassurances on the current state of the economy. Investors may also have been relieved that she avoided repeating the reference she had made in late June to asset prices as being "somewhat rich." 

The bank earnings released Friday offered both positive and negative surprises, but the group as a whole moved lower in early trading. Disappointing economic data may have been to blame, with retail sales in June falling for the second straight month. Investors may also have been discouraged by continuing weakness in core (less food and energy costs) inflation, which rose only 0.1% for the month. T. Rowe Price Chief U.S. Economist Alan Levenson notes that four consecutive months of subdued core inflation may complicate the Fed’s plans to raise interest rates. Indeed, in her Wednesday testimony, Yellen referred to weak recent inflation readings and stated that “monetary policy is not on a preset course” but that "the Committee will be monitoring inflation developments closely in the months ahead."

Treasury prices rise on soft inflation data

The soft inflation data helped U.S. Treasuries produce positive returns for the week. Municipal bonds also posted positive absolute returns but trailed Treasuries. With a heavy new issuance calendar setting the pace of the week, yields rose along with global rates. The heavy calendar had a spillover impact, increasing activity and demand in the secondary markets.

The investment-grade corporate bond primary calendar was very active early in the week. With U.S. banks slated to begin reporting earnings on Friday, their non-U.S. peers sought to take advantage of the healthy tone and issue bonds in advance of the expected near-term supply increase. The energy sector bounced following recent pressure. Away from financials and energy, technical conditions continued to drive sentiment. Spreads (the additional yield relative to Treasuries of comparable maturities) moved very little during the week.

Stabilizing oil prices help high yield market

The high yield market traded in an orderly fashion as recent weakness seemed to have abated, at least temporarily. Stability in oil prices helped the overall tone of the market given the heavy presence of energy issuers in the segment. However, traders noted that most investors seemed biased toward putting money to work in non-commodity sectors given the recent weakness in oil. New issuance was muted this week, and credit spreads narrowed marginally. Spreads for securitized sectors (residential and commercial mortgage-backed securities, as well asset-backed securities) were all marginally tighter during the week. Issuance of asset-backed securities (bonds backed by assets such as credit card receivables and auto loans) has surged to $129 billion this year, up from $100 billion at this time last year.

U.S. Stocks1

 

Index

Friday’s Close

Week’s Change

% Change YTD

DJIA

21637.74

223.40

9.49%

S&P 500

2459.27

34.09

9.85%

Nasdaq Composite

6312.47

159.39

17.26%

S&P MidCap 400

1765.32

18.98

6.41%

Russell 2000

1428.16

12.17

5.37%

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 stock indexes rose for the week, as investors moved back into equities following signs that the major central banks would not move as quickly to tighten monetary policy as once thought. Along with Fed Chair Yellen's comments, Bank of England (BoE) Deputy Governor Ben Broadbent said he’s not ready to vote for higher interest rates, even though he sees building pressure to do so. There is reason to see the BoE's Monetary Policy Committee moving in that direction, he said, and added that “It is a bit tricky at the moment to make a decision.” On the news, the pan-European Stoxx 600 Index ended the week higher, recording one of its biggest weekly gains in two months. The German DAX and the French CAC 40 both ended the week higher as well.

UK wages continue to fall

Despite a rise in the UK employment rate (for citizens age 16 to 64) to 74.9%, the highest since 1971, according to Office for National Statistics, real pay, including bonuses, fell 0.7% in the three-month period ended in May. Poor nominal wage growth, hobbled by an acceleration in inflation, portends a weaker outlook for consumer spending. T. Rowe Price traders said the lackluster inflation elsewhere in Europe did little to push the case for tighter policy and plays into the narrative of central banks struggling to balance stubbornly low inflation against strong growth.

Bonds sell off

The yield on 10-year German bunds rose to above 0.6% by Thursday’s close on reports that European Central Bank President Mario Draghi was planning to speak about the reduced need for monetary stimulus in the eurozone at the Fed's Jackson Hole Economic Policy Symposium in August. After falling on Wednesday in react to Broadbent's comments, UK 10-year government bond yields rose to above 1.3% at Thursday’s close.

Japan

Japanese equities rallied for the week, recouping almost all of the declines during the prior two weeks. The widely watched Nikkei 225 Stock Average advanced almost 1.0% (190 points). For the year to date, the Nikkei is up 5.2%, the broad-based TOPIX Index is ahead 7.0%, and the TOPIX Small Index has advanced 11.9%. The yen strengthened versus the greenback, ending above ¥113 per U.S. dollar, which is about 3.2% stronger than ¥117 per dollar at the end of 2016.

Prime Minister Abe’s approval rating tumbles

Prime Minister Shinzo Abe’s popularity fell to an all-time low, and his ruling Liberal Democratic Party (LDP) lost more than 50% of its seats in the Tokyo Metropolitan Assembly election. According to a newspaper poll, about 36% of the Japanese public supported the prime minister, while more than half disapproved, which was the lowest approval rating since Abe became prime minister in 2012. The poll suggests that recent scandals and the introduction of new legislation have hurt his popularity. Voter turnout was sharply higher in the recent election for Tokyo’s assembly, and Abe’s party wound up with 23 seats, the smallest number in the capital during the last five years and about half the number before this election. Tokyo Governor Yuriko Koike’s party (Tokyo Citizens First) landed 79 seats in the 127-seat assembly.

Abe said he is willing to make leadership changes in an attempt to rebuild popular support. Speaking in Stockholm after the G20 meeting, Abe promised to “reshuffle the LDP leadership and the Cabinet members early next month.” He added that the core structure would likely remain intact and that Abe would likely retain Deputy Prime Minister Taro Aso, among others.

Inflation remains tepid

According to the Sankei Shimbun (a Japanese daily newspaper), the Bank of Japan (BoJ) is planning to lower its current fiscal year inflation forecast ahead of the central bank’s July policy meeting. The revisions are due to a lack of progress in price hikes and lackluster wage growth. Sankei sources say the central bank intends to keep the 10-year government bond yield target at around 0%. Wage increases in 2017 were approximately 2.3% for large companies and slightly less than 2.0% for smaller firms. The BoJ is also likely to offer a more optimistic assessment of the economy in light of improving exports and production resulting from strong external demand. Corporate profits are rising, and the unemployment rate has fallen (the ratio of open jobs to applicants hit a 43-year high in May). However, there is still no evidence of upward pressure on prices.

China

China June trade data point to gathering global recovery, solid GDP report next week

Surprisingly strong June trade data from China were the latest indicators pointing to a resurgent global economy. China’s exports rose 11.3% in June from a year earlier, marking the fourth straight monthly gain, the government reported. Meanwhile, China’s imports surged 17.2% from a year ago, leaving a trade surplus of $42.8 billion. Both the export and import figures exceeded analysts’ forecasts and May’s gains.

June’s trade data showed continued buoyant foreign demand for Chinese exports as well as resilient demand on the mainland for overseas goods, even as Chinese officials have tightened policy and taken steps to reduce debt. Analysts scrutinize trade data from China, the world’s largest exporter, for clues about the strength of global demand, though in recent years Chinese officials have sought to reduce the economy’s dependency on exports. Export declines weighed on China’s growth in the past two years but have recovered this year thanks to strong demand from the U.S. and Europe.

After a relatively strong first half, most analysts see China’s economic activity slowing for the rest of the year. Given tightening in monetary conditions and a cooling property market, a slowdown in economic activity will probably materialize later in 2017, according to T. Rowe Price sovereign credit analyst Chris Kushlis. China has officially targeted annual economic growth of about 6.5% this year, down from 6.7% in 2016. Over the longer term, a faster-than-expected growth downturn, a crackdown on financial risk leading to a credit crunch, and a renewed pickup in capital outflows are among the key risks for China’s outlook, Kushlis believes. 

Other Key Markets

Brazil’s markets rally after former president’s conviction, labor reform passage

Brazil’s stock market and currency rallied after Brazil’s former president Luiz Inácio Lula da Silva was sentenced to nearly 10 years in jail for corruption and the country’s legislature passed the first labor reform package in 70 years. If Silva’s conviction is upheld by an appeals court, he will be ineligible to run in the 2018 presidential election, thereby removing one of the country’s strongest leftist candidates and lessening the likelihood that the country will return to the populist policies that many believe helped create its current economic woes.

T. Rowe Price portfolio manager Verena Wachnitz said that the ratification of the conviction could take a year or more, but a second conviction would eliminate a tail risk and increase the probability of a market-friendly outcome in October 2018. It is obviously too early to cry victory, she notes, but this is a necessary first step for that positive scenario to materialize. Brazil’s senate approved labor reform legislation, which is a show of support for the government’s reform agenda despite President Michel Temer’s waning popularity. This is the first labor reform in 70 years and is crucial to the government’s efforts to pull the economy out of recession. The reform loosens Brazil’s rigid labor code, and its proponents say it will create jobs.

Temer wins early battle against corruption charge

Lula’s indictment came the same week President Temer won an early victory in his effort to avert a corruption trial. The constitution and justice commission of the lower house of Brazil’s congress rejected a report recommending that lawmakers accept the indictment, which charges Temer with passive corruption. A full session of the lower house will now have to vote on whether to accept the indictment. Two-thirds of the lower house must vote to approve the charge for it to move to the Supreme Court.

Bank of Canada raises rates for first time in seven years

The Bank of Canada increased interest rates to 0.75% from 0.50% Wednesday. It is the first time in seven years that the bank has raised rates. The bank expects economic growth of 2.8% this year, and inflation remains below its 2.0% target.

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