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Global Markets Weekly Market Review – Week 34, 2020

Global markets were mixed this week following inflow of both economic data, geopolitics and various activities on markets across the globe. The week’s performance was highly uneven, however, with growth stocks forcefully reasserting their dominance over value shares and large-caps handily outperforming small-caps.

United States

The major indices ended mixed in what T. Rowe Price traders characterized as a week of generally light summer trading—at least in the context of the market’s recent volatility. Nevertheless, the week was notable for the S&P 500 Index hitting record intraday and closing highs on Tuesday. By common definitions, this marked the fastest recovery from a bear market in history.

The Wednesday release of the Federal Reserve’s minutes from its July policy meeting appeared to weigh on sentiment somewhat, with some investors perceiving a more downbeat tone on the economy than expected, along with less forceful assurances of further monetary stimulus. Concerns also remained over the lack of progress on a new fiscal stimulus program. A Trump administration official said there may be a bipartisan path to a pared-down USD 500 billion relief bill, however, and Senate Majority Leader Mitch McConnell said a bill to support postal services may provide a negotiating window for broader stimulus.

Europe

European shares weakened on worsening U.S.-China relations and growing concerns that a resurgence in coronavirus infections could derail an economic recovery. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.81% lower, while Germany’s Xetra DAX Index fell 1.06%, France’s CAC 40 slipped 1.34%, and Italy’s FTSE MIB declined 1.66%. The UK’s FTSE 100 Index shed 1.45%.

The net long position in euro futures climbed to a record level of more than USD 30 billion in the week ended August 11, according to the U.S. Commodity Futures Trading Commission. During the week, the euro reached its highest value relative to the dollar since May 2018, partly on the view that the eurozone economy would recover faster from coronavirus lockdowns than the U.S.

Asia

Japanese stocks posted losses for the week, with the Nikkei 225 Index falling 1.58%. The yen continued to strengthen against the U. S. dollar, although it remained below its recent peak in late July.

Japan’s Cabinet Office released on Monday its first estimate of GDP for the first fiscal quarter, ended June 30, 2020. The government reported that Japan’s economy suffered its largest contraction on record as companies experienced the full impact of the global pandemic. GDP fell 7.8% in the quarter, which equates to 27.8% on an annualized basis, largely due to steep declines in exports and domestic consumer spending. The contraction was the sharpest since the government began keeping comparable records in 1980.

Mainland Chinese stocks ended the week slightly higher as President Donald Trump’s postponement of a six-month trade review assuaged concerns about deteriorating U.S.-China ties. Some observers believe that the White House is seeking more time to allow China to increase purchases of U.S. farm and other exports in order to burnish the optics of the trade deal. However, tensions remained on low boil as the U.S. announced more restrictions on Huawei Technologies, making it difficult for the Chinese telecoms giant to maintain production beyond September without a supply of advanced chips from the U.S. or Taiwan. Longer term, the Trump administration’s actions to restrict the access of Chinese companies to U.S. semiconductor technology will likely remain a source of tension with the U.S. and spur Beijing to foster its domestic technology capabilities.

The renminbi edged up 0.4% versus the U.S. dollar to close the week at 6.922 per dollar. In credit markets, the yield on the sovereign 10-year bond increased 3 basis points (0.03%), aided by expectations of a quickening recovery amid signs that China has largely succeeded in containing the coronavirus. Monetary officials left the loan prime rate (LPR)—a reference rate for new bank loans—unchanged for the fourth straight month, as expected. China’s top five banks announced a major change to how mortgage loans are priced on August 25, when mortgage interest rates will switch to floating rates linked to the LPR. The move was reportedly ordered by Beijing and was likely undertaken in order to cool a buoyant property market.

Other Key Markets

  • Turkey – Turkey’s central bank left its benchmark interest rate unchanged at its Thursday monetary policy meeting, bowing to reported demands from President Recep Tayyip Erdogan to keep rates steady despite downward pressure on Turkey’s currency, the lira. A higher interest rate tends to make a country’s currency more attractive than the currency of a country with lower rates, with all other factors equal. The lira hit record lows against the U.S. dollar earlier in August.
  • Brazil – Brazilian stocks rebounded later in the week after media reports said that President Jair Bolsonaro has no plans to fire Guedes and that Guedes does not intend to resign. The Bovespa Index, a benchmark for the country’s stock market, finished the week little changed. However, the currency market’s worries about a potential loosening of fiscal discipline continued, with the real falling to its lowest levels in three months before recovering some of its losses after Brazil’s central bank intervened in the market to buy the currency.
Sources: Barrons (Dow Jones & Company), Bloomberg Quint, The Economist Europe & Brazil Business Post, Edward Jones Financial Reports