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.

Ongoing oil rally propels stocks to gains

Stocks rose for the second consecutive week as first-quarter earnings reporting season began in earnest. The energy sector posted strong returns for another week, boosted by the continuing rally in crude oil prices. The price of a barrel of West Texas Intermediate crude, the U.S. benchmark, approached $70 midweek before moderating somewhat. However, consumer staples companies lagged, dragged lower by a steep drop in Philip Morris International shares. The tobacco company reported that its cigarette shipments declined more than expected and that its e-cigarettes gained less market share in Japan—a key market—than anticipated, weighing on other tobacco stocks.

The week began with something of a relief rally, as investors appeared to be heartened that the previous Friday’s air strike on Syria, conducted by the U.S., France, and the UK, was limited and did not provoke a response from Russia. T. Rowe Price traders noted that Monday’s trading was especially light, however, with fewer shares changing hands than on any day so far this year.

Strong economic data drive sentiment

The economic outlook also helped drive sentiment during the week. Stocks turned lower in late trading on Wednesday, which the firm’s traders attributed in part to remarks from St. Louis Federal Reserve President James Bullard. In an interview with CNN, Bullard stated that he was “getting concerned about the flattening yield curve,” and he noted that an “inverted yield curve [in which short-term rates are higher than long-term yields] is a powerful predictor of economic downturns." While the coming months will indicate if Bullard’s concerns are valid, the week’s economic data offered relatively little evidence that growth is slowing. Investors appeared to be encouraged by data showing that retail sales had increased in March, breaking a three-month streak of declines. Housing starts also rose, and a regional gauge of manufacturing activity indicated healthy expansion.

Investors focus on corporate earnings

For much of the week, however, investors seemed to turn away from the economic and political backdrop and focus on corporate earnings. The week brought earnings reports from 69 of the constituents of the S&P 500 Index, along with several hundred reports from smaller firms. As always, these reports brought a range of upside and downside surprises, although their overall tone may have weakened a bit later in the week. According to data and analytics firm FactSet, 80% of the S&P 500 companies that have reported quarterly earnings to date have posted earnings per share results that topped consensus estimates.

Treasury yield curve steepens late in week

The Treasury yield curve steepened toward the end of the week, reversing course after a recent flattening trend, as longer-term Treasury bonds experienced selling pressure. (Bond prices and yields move in opposite directions.) The strong retail sales and housing starts data released during the week, combined with higher oil prices, likely contributed to fears of inflation, which erodes bond prices. On Friday, the 10-year Treasury note traded with a 2.94% yield, which was near the top of its recent range.

Municipal bonds posted negative returns but held up better than Treasuries and the broad investment-grade debt universe. Demand for new bonds remained strong as deals coming to market were largely oversubscribed. However, increasing Treasury yields led to a lethargic secondary market, T. Rowe Price muni traders noted. Late on Friday, April 13, S&P Global Ratings downgraded its rating on Connecticut municipal debt to A from A+ amid concerns about the state’s growing debt and unfunded pension liability.

Pickup in investment-grade corporate issuance

Issuance of investment-grade corporate debt picked up, with several banks bringing new deals to market. However, the new bonds generated only lackluster performance, possibly because investors anticipate heavy new supply in May. High yield corporate bonds benefited from strength in equity and oil markets as well as inflows and limited new supply through midweek. However, notable flows out of high yield exchange-traded funds dampened sentiment toward the asset class later in the week.

U.S. Stocks1
Index

 

Friday's Close

Week's Change % Change YTD

DJIA

24,462.94

102.80

-1.04%

S&P 500

2,670.14

13.84

-0.13%

Nasdaq Composite

7,146.13

39.48

3.52%

S&P MidCap 400

1,900.03

16.13

-0.03%

Russell 2000

1,563.98

14.00

1.85%

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 modestly higher, as investors waded through a wave of corporate earnings reports and economic data. The week began with the market trading on thin volumes but remaining in positive territory. T. Rowe Price traders noted that markets were helped by an easing of geopolitical tensions as well as some renewed optimism about global trade after positive comments by U.S. officials on the North American Free Trade Agreement (NAFTA) and China. Midweek, mining and basic resource stocks were notable outperformers. Financial stocks were also strong toward midweek, but consumer goods and oil and gas companies were marked underperformers by the end of the week.

The pan-European STOXX 600 index logged another advance and climbed to a seven-week high on Thursday. By Friday, the index settled lower. Germany’s export-heavy DAX 30 index and France’s CAC 40 index also ended the week higher, rising on Tuesday to their highest closes since early February.

Weakening UK economic data

The UK’s blue chip FTSE 100 index on Thursday closed at its highest level since early February. The weakening of the pound provided much of the lift to the companies in the index, many of which are multinationals that generate the bulk of their revenue outside the UK. The pound fell on Thursday after Bank of England Governor Mark Carney lowered expectations for an interest rate hike in May. UK retail stocks dipped following a report that retail sales continued to be weak, falling 1.2% in March.

Bond yields mixed

UK government bond yields headed lower in response to news that the UK’s annual inflation fell to 2.5% in March, its lowest level in a year. Yields on short-maturity government debt ended the week lower, with the two-year gilt trading at a yield of around 0.85% on Friday. Core eurozone government bond yields increased on the week due to higher oil prices putting upward pressure on inflation expectations. The 10-year German government bond was yielding just over 0.60% on Friday after starting the week slightly over 0.50%.

European Union investors grow more confident

According to the widely tracked monthly fund manager survey by Bank of America Merrill Lynch, about 21% of fund managers expect improving growth for the European Union (EU), up from just 9% last month. A larger share of fund managers also expect inflation to climb. To be sure, T. Rowe Price traders pointed out, the growth in confidence comes from a relatively low base. Fund managers are most crowded into banks, industrials, and oil and gas companies, but sector conviction is near record lows, based on fund managers’ positioning between the most overweight and underweight sectors.

Japan

Japanese stocks rallied for the week. The Nikkei 225 Stock Average advanced 1.8% (383 points) and closed on Friday at 22,162.24. All of the major Japanese stock market yardsticks are lower for the year to date. The Nikkei is off 2.7%, the broad-based, large-cap TOPIX Index is down 3.7%, and the TOPIX Small Index has declined 3.4%. The yen was basically unchanged for the week and closed Friday’s trading at ¥107.70 per U.S. dollar, which is about 4.5% stronger than the ¥112.7 level at the end of 2017. The yen is Asia’s best-performing currency for the year to date.

First trade talks between Japan and China in eight years

Chinese and Japanese leaders gathered in Tokyo for high-level economic discussions for the first time in eight years this week. Neither Japanese Foreign Minister Taro Kono nor China’s Foreign Minister Wang Yi was willing to point at U.S. President Donald Trump’s protectionist trade policies as the reason for the talks, but it is clear that both countries depend on each other and the American market for trade. Bank of Japan Governor Haruhiko Kuroda said that protectionism is a significant risk to Japan’s economy that has the potential to stall Japan’s recovery and global economic growth overall.

Trump has criticized Japanese and Chinese trade and economic practices as unfair and damaging to the U.S. He has also threatened tariffs on Chinese exports. According to Kono, Japan has asked China to ensure free and fair transfers of technology and intellectual property. Steel overproduction was another topic of conversation, as the U.S. has imposed steel tariffs on both countries. Japan needs to tread carefully in the current trade discussions because, while China is its largest trading partner, the U.S. is number two and a significant military ally. Trump met with Prime Minister Shinzo Abe in Florida this week, and trade was certainly a topic of conversation. Japanese officials are worried that Trump will become critical of Japan for allowing the yen to weaken, which has benefited Japan’s exports.

Series of scandals hurt Abe’s ratings

Abe and other civil servants have increasingly been thrust into the spotlight for allegations of improprieties. Abe has repeatedly denied assertions that he helped a friend set up a veterinary school, and he has disavowed wrongdoing in conjunction with the sale of state-owned land to another friend. Many in the media suspect cronyism and a cover-up, which has significantly undermined Abe’s popular support and his chances to win a third term as prime minister in the September elections.

China

China’s first-quarter economic growth beats forecasts 

China’s economy grew faster than expected in the first three months of 2018 as consumer demand stayed strong and manufacturing rebounded, though activity is expected to slow in the coming months as Beijing presses on with its de-risking campaign and U.S. trade tensions possibly heat up.

Gross domestic product expanded 6.8% year over year in the first quarter of 2018, matching the previous quarter’s pace and exceeding the official 6.5% target. Consumption composed more than three-fourths of the quarter’s expansion as new growth engines such as online retail sales and investment in education rose sharply. By contrast, “old economy” growth drivers showed signs of slowing, evidence of the government’s efforts to cut debt at state-owned factories and local governments.

T. Rowe Price investment managers believe that China’s near-term outlook appears solid notwithstanding fears about a brewing U.S.-China trade war after a series of tit-for-tat tariff threats. The Chinese government’s ongoing deleveraging campaign poses a greater growth risk than tariffs, noted Hong Kong-based portfolio manager Eric Moffett. Earlier this year, China’s premier announced an annual economic growth target of about 6.5% for 2018, unchanged from 2017. However, the possibility that economic growth will disappoint is a risk because China can’t be aggressive about deleveraging without it affecting growth, Moffett believes. Regardless of headline GDP growth, China remains a fertile ground for individual stock picking, particularly in the local currency A-share market, Moffett added.

Other Key Markets

Commodity prices continue to surge as buyers anticipate more sanctions

Commodity prices surged this week amid elevated tensions between the U.S. and Russia following the U.S. decision to impose wide-ranging sanctions on Russian oligarchs, officials, and 12 related companies, including Rusal, one of the world’s largest aluminum producers. T. Rowe Price credit analyst Willem Visser said that he is now watching to see if other companies, especially large commodity producers and suppliers, will be hit by the sanctions.

Last week, aluminum prices spiked after Rusal was barred from selling its products in the U.S. and other markets because it is majority owned by two of the oligarchs on the U.S. sanctions list. Top exchanges also stopped accepting metal from Rusal. Aluminum prices on the London Metals Exchange have risen over 20% in the past two weeks as buyers seek alternative suppliers. Palladium and nickel prices have also surged as buyers worry that Norilsk Nickel, which supplies 40% of the world's palladium output, could be next to fall under sanctions. Since the announcement of the sanctions, nickel prices have risen almost 13% and palladium is 14% higher.

Mexican peso tumbles after Lopez Obrador consolidates lead

The Mexican peso tumbled this week after polls showed that the left-wing presidential candidate Andres Manuel Lopez Obrador is consolidating his lead ahead of the July 1 presidential elections. Many observers are placing the likelihood of his win at 70%, and T. Rowe Price portfolio manager Verena Wachnitz said she agrees with that estimate. Wachnitz said Lopez Obrador would not be a disaster, but a populist leftist government is uncharted territory in Mexico. We need to watch the future makeup of the congress, she said. On some issues, Lopez Obrador may get a working majority in congress and that could make his win a bit riskier for Mexican investments. In this week’s polls run by Reforma newspaper, Lopez Obrador drew 48% of support, while Ricardo Anaya of a right-left coalition gained 26% and Jose Antonio Meade of the ruling PRI polled at 18%.

Turkey calls snap elections

Turkey’s president, Recep Tayyip Ergdogan, called snap elections this week in a move to take advantage of enthusiasm for a military campaign against the Kurds in Syria and a still strong economy in an effort to reduce the risk that growing instability might undermine the government's popularity, hurt the economy, and increase tension with the U.S. and the European Union. If the early election confirms Erdogan’s presidency, it should reduce longer-term risks but may increase Turkish asset volatility in the coming months, as political uncertainties—even if limited—play out.

The Turkish lira has been a volatile currency this year and has fallen about 7% against the dollar. Fear that the Turkish economy is overheating and geopolitical tensions spreading broad risk aversion have weighed on the lira. Turkey's central bank is expected to raise rates later this month.

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