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 stay on winning streak as earnings season continues

Stocks recorded solid gains and continued their advance into record territory as the flow of major third-quarter earnings reports picked up and entered its second week. Stronger-than-expected results from IBM helped the stock surge nearly 9% on Wednesday, providing a particular boost to the narrowly focused Dow Jones Industrial Average. Johnson & Johnson also beat expectations, giving another lift to the Dow as well as the overall health care sector. Financials also outperformed as higher interest rates boded well for bank lending margins. Consumer staples gave back some of their previous week’s gains, while energy stocks fell alongside oil prices late in the week as data showed an increase in U.S. inventories.

As evidenced by a steep (if temporary) decline in General Electric’s stock following its report of a drop in earnings on Friday, not all of the week’s earnings reports were greeted favorably on Wall Street. It also appeared likely that the overall pace of earnings growth was likely to slow considerably in the third quarter, following double-digit advances in the first half of the year. Data and analytics firm FactSet is currently anticipating earnings for the S&P 500 as a whole to have grown under 2% for the quarter on a year-over-year basis. Disruption from hurricanes in August and September seems to have been at least partly to blame for the slowdown, however, and investors appeared to look forward to a rebound in profits growth in 2018.

Senate budget resolution boosts expectations for tax cuts

As has often been the case in recent months, political developments also swayed markets. T. Rowe Price traders noted that anticipation that Congress would pass a budget resolution boosted sentiment as early as midweek, and the Senate’s passage of legislation on Thursday evening seemed to give a boost to the market when trading opened Friday. The nonbinding legislation had no immediate impact on the budget, but it did open the way for Senate Republicans to eventually pass tax reform along party lines.

Expectations for stronger economic growth also appeared to fuel the week’s equity gains. Manufacturing signals remained solid in the face of the recent hurricanes, and weekly jobless claims fell to their lowest level since 1973, when the U.S. labor force was roughly 60% of its current size. Housing permits and starts declined more than expected in September, but existing home sales rose and surprised on the upside. 

Bonds: munis remain in high demand

The positive economic data and hopes for further stimulus through tax cuts sent Treasury yields higher. (Bond prices and yields move in opposite directions.) The rise in yields also weighed on the municipal bond market, but strong demand helped the segment manage to produce positive returns for much of the week. T. Rowe Price analysts noted that the market for intermediate-maturity bonds was particularly competitive due to the scarcity of intermediate-maturity bonds for purchase—a pattern that is expected to continue given the supply calendar.

Higher rates and supply factors were the primary drivers of sentiment in the investment-grade corporate bond market throughout the week. T. Rowe Price’s traders observed that investors demonstrated patience in the secondary market amid anticipation of new supply. The primary calendar was active but manageable, as healthy demand from domestic and overseas investors provided technical support.

The high yield bond market traded with a quiet but positive tone. Portfolios with moderate cash balances and the light primary calendar caused buyers to be more active than sellers. Hospital bonds bounced on news that lawmakers were making progress on a package of fixes for the Affordable Care Act but retraced the gains when President Trump appeared to back away from a bipartisan agreement he had been supporting.

U.S. Stocks1

 

Index

Friday’s Close

Week’s Change

% Change YTD

DJIA

23,328.63

456.91

18.04%

S&P 500

2,575.21

22.04

15.02%

Nasdaq Composite

6,629.05

23.25

23.15%

S&P MidCap 400

1,833.49

14.34

10.52%

Russell 2000

1,508.78

5.85

11.32%

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 stocks ended the week flat to slightly lower, with the STOXX Europe 600 Index pan-European Stoxx 600 index dropping to a three-week low before recovering most of its losses following the U.S. Senate’s latest steps toward implementing tax reform (see above). Positive economic data from China (see below) spurred mining and commodity stocks, and bank stocks also showed some strength as the week closed. The German DAX index, which is heavily weighted in major multinational companies, touched an all-time high during the week, and the French CAC 40 Index surged to its highest level in five months.

As the quarterly reporting of corporate earnings began in earnest, T. Rowe Price traders noted that the early signs from earnings season in Europe were not particularly encouraging, with several large corporations revealing somewhat lackluster results.

Spanish tensions continue

Spain’s central government said it would move to suspend Catalonia’s autonomy following its bid for independence. Spain’s IBEX index lagged most of its European counterparts. However, T. Rowe Price traders noted that market reactions so far have remained fairly muted.

UK bonds rally

UK government bonds rallied after comments by Bank of England (BoE) officials raised uncertainty about whether the central bank will hike rates in the near term, despite inflation rising to its highest level in five years. In testimony on Tuesday, several members of the BoE’s Monetary Policy Committee questioned the need for imminent rate increases. However, Office for National Statistics figures published during the week showed consumer price inflation for the year through September was 3.0%, the highest since 2012. The yield on 10-year gilts finished Friday at 1.33%, down for the week. On the economic front, UK unemployment held at its lowest point in more than 40 years, although wage growth continues to lag inflation. T. Rowe Price traders noted that the latest economic data reinforced market sentiment that the BoE would likely increase rates in November.

Japan

Japanese stocks powered higher for the week and posted 14 consecutive daily gains, the longest stretch in approximately 30 years. The widely watched Nikkei 225 Stock Average inched higher on Friday and gained 228 points (1.1%) for the week, closing at 21,457.64. For the year to date, the Nikkei is up 12.3%, the large-cap TOPIX Index is ahead 14.0%, and the TOPIX Small Index has gained 20.7% after a modest six-point weekly decline. The yen weakened and closed above ¥113 per U.S. dollar, which is about 3.1% stronger than its ¥117 per U.S. dollar level at the end of 2016.

Abe is forecast to win Japan’s national election on October 22

Recent polls suggested that Shinzo Abe’s Liberal Democratic Party (LDP) has a significant lead going into the national election on October 22, setting the stage for the most one-sided election result in many decades. Many anticipated that a new center-left party, the Constitutional Democratic Party of Japan (CDPJ), which has pledged to bring “bottom up” democracy to Japan, was likely to be Abe’s core opposition. The CDPJ has replaced Tokyo Governor Yuriko Koike’s Party of Hope as the opposition leader. However, both were expected to win only a small slice of the vote on Sunday. The CDPJ is against Abe’s attempts to revise the U.S.-drafted, postwar pacifist constitution and remove the ambiguous nature of the military—the central tenet dividing the left and right wings—suggesting that voters who are unhappy with Abe are seeking a more liberal alternative to the LDP.

Japan’s economy continues to improve

The Bank of Japan (BoJ) upgraded its assessment of economic conditions, due in part to strengthening exports, consumer spending, employment, and construction, which it believes are in long-term growth trends. In a quarterly report from BoJ Governor Haruhiko Kuroda, the central bank revised its assessment of four of nine regions upward and maintained a positive assessment on the other five.

The report comes on top of the recently released Tankan survey showing that big manufacturers' confidence was at its highest level in the past 10 years, thanks to strong global demand and the weak yen.

China

China reports buoyant third-quarter economic growth

China’s economy grew a robust 6.8% in the third quarter, providing welcome news for the country’s leaders who gathered for a weeklong Communist party congress to map out policy for the next five years.

Though growth in the latest quarter slowed from the first half’s 6.9% pace, it all but assures that China will meet its 2017 target of about 6.5%. Days earlier, the head of the People’s Bank of China stated that [economic] “momentum is expected to continue in the second half,” which some analysts took to mean that China’s economy could expand as much as 7.0% for the rest of the year. Other indicators accompanying the quarterly data underscored the strength of the Chinese economy. September retail sales surged 10.3% from a year earlier, though the pace of growth slowed from the first-half’s gain. Industrial production, a key barometer of manufacturing, rose 6.6%, and fixed-asset investment increased 7.5% in the first nine months of 2017.

In painting a rosy picture for the economy, the latest data offer China’s leaders more leeway to downshift to slower and more sustainable growth and implement reforms. Much of this year’s growth has resulted from the government putting off difficult reforms, such as clamping down on debt and cutting excess industrial capacity. Though delaying such reforms has helped ensure strong short-term growth, it also increases the risks for a prolonged slowdown in China further down the road, economists believe.

In his opening speech to the 19th Communist Party congress, China’s President Xi Jinping called for stricter regulation of banks and parts of the financial system to contain risks arising from a surge of borrowing by companies and local governments. But in a notable omission, Xi didn’t mention his predecessor’s pledge to double China’s gross domestic product between 2010 and 2020—which some economists viewed as a sign that China would focus less on hard economic targets and more on the quality of growth in the coming years.

Other Key Markets

NAFTA talks intensify; negotiators agree to push into 2018

Despite growing differences, the U.S., Canada, and Mexico agreed to extend NAFTA negotiations into 2018. Talks grew more tense in this fourth round as the U.S. proposals were considered unacceptable by its Mexican and Canadian negotiating partners. NAFTA’s fifth round is scheduled for November in Mexico City. T. Rowe Price Sovereign Analyst Richard Hall said that there is a low probability that the sides will come to an agreement before January, at which time the talks will likely be put on hold until after the Mexican presidential elections, scheduled for July. Hall now thinks that there is a significant chance that the agreement will be abandoned.

Obrador presidency may threaten energy reform

T. Rowe Price Fixed Income Manager Mike Conelius returned from the previous week’s International Monetary Fund meeting with a much more negative view on Mexico. While Conelius believes that more reasonable voices will prevail in terms of NAFTA, he has become worried about the impact of Andrés Manuel López Obrador, the current front runner in the Mexican presidential polls, on the economy. Obrador, a leftist with nationalist leanings, is the former Mexico City mayor and has twice been a presidential runner up. Conelius notes that he is concerned about what Obrador may do in pursuing his own version of populism in terms of energy reform, which is very important for whether the government attempts to use PEMEX, the state-owned oil company, as a development tool.

Candidates enter Mexican presidential race as tensions flair

More than 85 candidates have joined the Mexican presidential race as tensions flair and parties splinter in the aftermath of the U.S. election, two earthquakes, and escalating violence. The ruling centrist Institutional Revolutionary Party of President Enrique Peña Nieto, who is barred from seeking a second term, has yet to pick a candidate. This election will be the first time candidates can run for president without being affiliated with a political party. To run officially, candidates will have to gather signatures representing 1% of the electorate.

Brazil’s Temer survives another corruption charge

Brazilian president Michel Temer will not be tried by the country’s Supreme Court on corruption-related charges after a congressional committee voted that the president should not face trial on allegations that he discussed bribes in a recorded meeting. The charge stems from the broader “Lava Jato” investigation. In August, Temer survived a separate indictment.

T. Rowe Price managers note that strong economic growth and Federal Reserve tightening does not have to send emerging market bonds into a taper tantrum. In an interview with The New York Times, Samy Muaddi, an emerging markets bond manager, observed that the effect of increased rates on emerging markets is dependent on the reason for tightening. If rates are rising because “the U.S. is adding 200,000 jobs a month, that’s wonderful for emerging markets,” Muaddi said, noting that rising rates because of economic growth is far different from rapid rate increases to combat runaway inflation.

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