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.

Indexes end mixed as earnings season enters second week

The major equity market indexes finished with modest gains for the holiday-shortened week. Stocks registered sharp gains on Tuesday, which saw the S&P 500 Index record its best one-day advance since November. Consumer staples stocks led gains within the S&P 500, while energy, industrials and business services, and real estate shares lagged. Smaller-cap stocks trailed large-caps.

The second week of fourth-quarter earnings reports drove much of the market’s movements. Goldman Sachs fell on Wednesday after reporting mixed results, while rival Morgan Stanley rose on Thursday after beating estimates. IBM fell sharply in early trading Friday, after providing guidance that disappointed many analysts. A one-time charge related to the recent tax reform bill led to a sharp decline in earnings for Citigroup, reported Wednesday. This and other earnings declines in the financials sector led data and analytics firm FactSet to drastically reduce its estimate of overall earnings growth for the S&P 500 Index, to a decline of 0.2% versus an advance of 10% estimated the week before.

U.S. Treasury yields rise as government shutdown looms

The policy environment also returned to the forefront and appeared to limit the market’s gains. With federal spending authorizations set to expire on Friday evening, congressional officials scrambled to pass a bill to keep the government funded. The prospects for passage of a compromise measure that would attract enough Democratic votes in the Senate fluctuated but seemed to grow dimmer as the week progressed. The House passed a bill along party lines on Thursday, but the trading week ended without any action in the Senate.

The prospect of a government shutdown beginning Saturday morning diminished the appeal of U.S. assets, pushing the U.S. dollar lower and Treasury yields higher. (Bonds prices and yields move in opposite directions.) Municipal bonds outperformed Treasuries, helped by restrained supply due to light issuance during the shortened holiday week. Investors continued to focus their interest on longer-dated issues, according to T. Rowe Price analysts.

Corporate bond market issuance exceeds estimates

Conversely, new issuance in the investment-grade corporate bond market accelerated after the holiday weekend. By the end of trading on Thursday, total volume of close to $50 billion had hit the market, far exceeding early estimates. Banks dominated the primary calendar, but the deals were met with healthy demand. The secondary market initially saw credit spreads—the extra yield over similar-maturity Treasuries—expand in anticipation of pending issuance. This early widening was mostly erased by the end of the week, however.

Sentiment in the high yield market was mixed, with investors mostly focused on new issuance. Although demand for the asset class has been generally strong, some of the new deals received tepid interest, with higher intermediate- and long-term yields putting some pressure on interest rate-sensitive issues with lower coupons. There was very little movement in spreads, although high yield funds reported modest outflows.

U.S. Stocks1
Index

 

Friday's Close

Week's Change % Change

DJIA

26,071.72

268.53

5.47%

S&P 500

2,810.30

24.06

5.11%

Nasdaq Composite

7,336.38

75.32

6.27%

S&P MidCap 400

1,979.19

13.22

4.14%

Russell 2000

1,597.56

5.59

4.04%

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, boosted by rising technology and industrial stocks, a lift in corporate sentiment, and upbeat economic growth data from China. The European STOXX 600 index was marginally higher, recording a 0.5% gain. Germany’s blue chip DAX 30 advanced just over 1%. The French CAC 40 and Spain’s IBEX 35 also gained for the week. The UK’s FTSE 100 managed to stay in positive territory despite some downbeat economic news.

A strong euro tempered some of the equity gains. Eurozone central bankers were raising alarms about the euro’s strength, calling it “a source of uncertainty” and unhelpful. Despite a trend of broadening eurozone economic recovery, December’s consumer price index (CPI) showed that inflation was slowing somewhat. Eurozone CPI came in at 1.4%, with core CPI stubbornly staying at 0.9%. UK inflation dropped back to 3%, and the core inflation was a slightly softer-than-expected 2.5%.

Bond yields stable

Yields in most government bond markets were little changed for the week, except in Portugal, where bonds sold off, pushing the yield on 10-year Portuguese debt to around 2.02% by Thursday’s close, despite the lack of market-moving news coming from the country.

Japan

Japanese stocks post modest gains

The large-cap Japanese stock market benchmarks gained for the week, while small-cap stocks edged lower. Following the sharp runup in the first trading week of the year, the Japanese stock market benchmarks have been little changed for the past two weeks. The widely watched Nikkei 225 Stock Average gained 0.65% (154 points) and closed at 23,808.06. Year-to-date, the Nikkei is up 4.6%, the broad-based TOPIX Index has gained 4.0%, and the TOPIX Small Index has advanced 2.0%. The yen was modestly stronger for the week and closed Friday’s trading at ¥110.6 per U.S. dollar, which is about 1.8 % stronger than ¥112.7 per U.S. dollar at the end of 2017.

Japanese manufacturing activity near a four-year high

The MARKIT/Nikkei Japan Manufacturing Final Purchasing Manager’s Index (PMI) recorded a December seasonally adjusted reading of 54.0. For the month, new manufacturing orders accelerated from November’s 53.6 level, which marks 16 consecutive months of expansion. (Readings below 50.0 indicate contraction.) Although the December PMI figure was revised slightly lower from the preliminary reading, it stood at the highest level since February 2014.

Machinery orders indicate stronger business spending

Japan’s Cabinet Office reported that core orders for machinery, a forward-looking indicator of capital spending, expanded 5.7% in November from 5.0% growth in October. The series is a notoriously volatile yardstick of business expenditures that excludes orders for ships and from utilities. Many observers believe that capital spending can continue to expand because of the rise in corporate profitability, low interest rates, and a focus on labor-saving technologies.

Economists divided on when the BoJ will adjust interest rates

A recent Reuters poll suggests that 40% of economists expect the Bank of Japan (BoJ) to raise its long-term interest rate targets this year. Although the majority expects no changes from the central bank, the speculation of a rate hike is growing as Japan’s economy enjoys a steady, albeit moderate, expansion. The poll shows that respondents generally believe that the BoJ will continue to affirm its target of purchasing ¥80 trillion in bonds annually, although actual buying has been at about half that pace recently. Of the 36 economists that responded to the poll, 13 said the government would declare an end to deflation in 2018, eight said in the first half of 2019, and the rest did not expect the government to say that it had arrested deflation for the foreseeable future.

China

China annual GDP rises for the first time in seven years in 2017

China’s economy expanded more than expected in the final quarter of 2017, helping the country deliver faster annual growth for the first time in seven years, though the government’s pledge to prioritize higher-quality growth is expected to lead to a long-term slowdown.

China’s gross domestic product (GDP) increased 6.8% in the fourth quarter of 2017 from a year earlier, the country’s National Bureau of Statistics reported, the same pace as the previous quarter. For the year, China’s GDP rose to 6.9%, up from 6.7% in 2016 and marking the first annual growth uptick since 2010. The full-year growth pace easily beat Beijing’s annual target of around 6.5%. Much of last year’s growth pickup stemmed from growth in exports, as a broadening global recovery drove demand for Chinese goods. However, infrastructure spending and continued credit growth also played a role as government officials sought to maintain economic stability ahead of a leadership transition last fall.

Though China’s economic performance consistently beat forecasts in 2017, analysts believe growth is already slowing, as Beijing has started cracking down on excessive lending and other financial risks. An antipollution campaign that started last fall targeting industries across the country is also expected to curb growth in 2018. Such measures have helped reduce investors’ biggest worries about China over the past year, believes T. Rowe Price Portfolio Manager Gonzalo Pangaro. Moreover, while investors have lately focused on the stellar stock performance of China’s top Internet companies, lost in the discussion is that the companies generated outstanding earnings, adds T. Rowe Price Portfolio Specialist Chuck Knudsen. In fact, current valuations in China do not fully capture several more years of expected strong growth driven by more diverse businesses, new revenue streams, and a growing opportunity set in the mainland, Knudsen believes.

Other Key Markets

Montreal round of NAFTA talks seen as critical test of U.S. support for trade agreement

After his trip to Mexico this week, T. Rowe Price Analyst Richard Hall said that the first half of 2018 will be critical for Mexico, as both domestic and external risks will peak. In expectation that the NAFTA talks will be constructive, the Mexican peso rallied to a six-week high against the dollar. Hall said the week’s Montreal round will be the critical test of whether President Donald Trump is willing to leave NAFTA. Hall will be closely watching for signs that the U.S. softens its approach on the more polemic issues, such as regional-content requirements and the sunset clause. He will also be watching to see if the parties agree to extend the schedule of negotiating rounds beyond March. The first would be a bullish sign that the Trump administration is interested in a deal, while the second would be a tacit admission that negotiations are unlikely to conclude before the Mexican presidential election seasons gets underway. It would also mean that the U.S. administration would accept the postponement of negotiation until a new Mexican administration is in place.

Hall notes that the populist Andrés Manuel López Obrador is clearly in the lead. While Hall expects that lead will narrow as the election approaches, in the divided Mexican electoral field, even 33% of the vote may be enough for him to win. Hall said he believes an Obrador victory would not be a positive for investors in Mexico, but that the new president would have to operate within institutional constraints.

Bulgaria plans to join ERMII

Bulgaria plans to join the European Exchange Rate Regime II (ERMII), which could result in its adoption of the euro in 2020 or 2021. Bulgaria will thus become the first country to join ERMII since the last wave of entrants between 2005 and 2006, when Estonia, Latvia, Slovakia, and Slovenia entered. T. Rowe Price Sovereign Analyst Peter Botoucharov notes that the country’s economic momentum is positive, and Bulgarian assets should now be compared with those of the latest ERMII entrants. He believes that the country also benefits from its long-standing currency board arrangement, which has been in place since 1997. The lev was fixed to the deutschemark in 1997 and then to the euro in 2001.

Croatia and Romania are also expected to apply. The European Commission expects that Bulgaria’s economy will grow by 3.8% in 2018 amid strong domestic demand and helped by a faster disbursement of European Union (EU) structural funds. The country joined the EU in 2007, and as of 2016, living standards have risen 53%. Even so, Bulgaria remains one of the EU’s poorest member states. ERMII was set up in 1999 to ensure that the exchange rate fluctuation between the euro and other EU currencies does not disrupt economic stability in the eurozone and to help other countries prepare to adopt the euro.

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